Testy Tuesday – More Allies Join The Bear Side
Posted by zmann on February 13, 2007
Markdown Monday?…It certainly was!!!
Oil Got Cracked On Ali Naimi’s Dovish Comments… Crude fell $2.08 to $57.81 during the regular NYMEX session after Saudi Arabia’s oil minister said that the oil markets look much healthier than a few months ago and that further production cuts from OPEC probably wouldn’t be necessary at the March meeting. $60 is now officially a hard ceiling as the Saudis have signalled their willingness to let prices drift lower. Crude has weak support between $57 and $57.25. Below that and it has room to quickly travel to $55. Ali Naimi sent a clear message that Saudi is done carrying the burden for the rest of the cartel.
…Natural Gas Fell $0.60 to $7.23 In Sympathy With Oil, Warmer Forecasts… Yesterday’s action put a pretty good dent in the technician’s charts. Next tests are $7 and later $6.50. This week I’ll be satisfied if gas closes below $7.25 after Thursday’s gas storage report. Warning: watch out for a pretty good bounce if we don’t knife through $7 before Wednesday. In that case I’ll be trading some quick call positions in KWK, SWN, and/or CHK.
…And The Stocks Actually Fell Too. XLE down 0.9%, XOI down 1.3%, XNG down 1.1%, and OIH down 1.3%. Well, they couldn’t hold up forever. The OIH looks especially vulnerable now as Major and E&P company Cap Ex budgets are expected in aggregate to be off slightly. This may be the last year of double digit price increases the service guys get away with (more on this later). As to the drillers, I think they’ll be lucky to pull off a flat year for day rates.
$30? Have I lowered my $45 target based on today’s action? No, I haven’t, but Sanford Bernstein & Co. has! Zman and I have finally converted a proper research firm to our point of view! According to a research report published today: “Oil could fall to $40 a barrel or even as low as $30 as speculative investors sell their positions and spare production capacity increases.”
“We believe such speculative activity created perhaps the biggest artificial distortion of a market since the technology bubble of the late 1990s,” analyst Ben Dell of New York-based Sanford said in a 67-page report entitled: “Energy investing: Beware the Ides of March.” “Timing when the good times will be over is difficult but we fear that the collapse could be dramatic.”
Comment: I’m glad to see someone else thinks:
- OPEC spare capacity is on the rise (is there any question of this?)
- the increase in Non-Opec production is accelerating (ditto because Putin likes greenbacks, euros etc)
- demand growth is vastly overrated,
- too much speculative (funny) money is invested in crude oil “which he argued could eventually lead to a stampede out of the market”, ” $17 B to $70 B in the Goldamn Commodity Index in 5 years and they lost 16% in 2006!
- Berstein concluded by saying that such a decline in oil would hurt energy producer’s stocks (I’d just add that valuations are running at multi-year highs as well…even more detrimental if the price of what you sell hits the discount rack.
- Finally I’d add that E&P costs are out of control. Here’s an excellent article from the Houston Chronicle and Cambridge Energy Research on the matter.
Service Cost Inflation Is Unsustainable. I often talk about the rapid rise in service and drilling costs but CERA put pencil to paper and created the Upstream Capital Cost Index described in the preceding link. Suffice it to say that it tracks everything E&P companies pay to get oil and gas out of the ground and sold from bits to mud to rigs. I’ve written about advancing LOE per unit costs which are squeezing returns for the E&P’s but I’ve seen no better account of the complete picture of the cost pressures producers are facing than the following index which has is now reflecting parabolic annual increases. Somethings’s got to give. Either: 1) the service companies’ profit growth (and profits) will decline, 2) E&P’s will reduce activity, or 3) prices must spiral higher. I’m betting on outcomes 1 and 2. One thing is for certain: The bubble like growth displayed in the following chart never lasts. Not for tulips, trains, plains, radio, cellular, or the Internet did it last and this time, “it won’t be different.”
Early Commodity Price Indications: Crude & natural gas both down a few pennies after yesterdcay’s steep selloff.
Holdings Watch: Still Scaling Into My Spring Put Positions. I’m looking for a bounce in oil and gas as we head into what will be the biggest inventory reports of the year this Wednesday and Thursday. From there, as long as commodity prices don’t completely recoup today’s losses (hard to fathom but possible none the less), I’ll be adding the third 20% tranche to my Spring put positions. Current 40% positions include BP, BHI, EOG, HES, SLB, BTU, VLO, and TSO. For more details on those positions click here. Other potentials include: MUR, PBR, PTR , SU, COP and on the gas side CHK, SWN, KWK, and APC. Note: I’m not even thinking about February options at this point as I’d have more luck at a pai gow poker table in a Macau casino.
CFTC Data Shows Net Gas Contracts Remain Short (Barely) Despite Recent Rally. While the shorts have run for cover during the recent rally long positions have declined steadily as well. At present, non-commercial shorts outnumber the longs by a few thousand contracts but the rapid decline in long and short positions show traders indecision at present. If gas prices soften up with the arrival of warmer temps I’d expect the remaining 76,000 long contracts to be cut in half by the end of March, much like occurred last year. This should put extreme pressure on gas to fall towards (and through) the $6 level.
Odds & Ends.
KWK CEO Says Economics Are Fine At $4 Gas. With F&D costs of just over a $1/mcfe and low operating costs KWK‘s CEO seemed unconcerned about high natural gas inventory levels and an almost inevitable slide in gas prices that will happen this Spring. I could almost hear Aubrey at CHK screaming at his television.
PTSG – Holding up like a champ through a choppy day for the sector. If you bought in at the original $0.90 I can’t see how you don’t at least take the profits off the table above $1.30. I mean, that’s just greedy. Besides, after this week I expect a slide in commodities to put pressure on portions of the energy sector, single digit midget asset plays included.
Analyst Watch – HANS from buy to hold at Goldman and JP Morgan, GRP to buy at B of A.
Exxon Continues To Trade Near Five Year Highs of Forward Multiples. Using consensus estimates which continue to fall on a weekly basis, the shares of XOM continue to trade near their all time high stock price. The Street shrugs this off as a function of the comapny’s incredible cash flow generation and its ability to repurchase roughly 7% of the average trading volume on a daily basis. But is it cheap? No and the buyback will fade as crude and gas prices retreat. So my question to you is, does XOM, which trades at a premium to all of its peers, deserve to trade at near peak forward multiples in a declining (or at least flattening) oil price environment?
Looking at the above chart, you can knock a few points off of the last bar and you get the picture for COP and CVX as well. The majors are looking expensive to forward earnings and they look more expensive for each month crude trades below $65. In COP‘s case you’ve got a next to zero production profile behemoth that’s more leveraged to gas than any of its peers…not good going into Spring with full gas inventories.
Congrats to Neil on a great call on DO! Which got knocked for 6% following the special dividend. That comes on the heels of a great call on TSO over the last couple of weeks. Thanks Neil, nice plays.