zman’s Energy Brain

oil, gas, stocks, etc…

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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.

Phil Said this Best But Here It Is For Those Of You Who Don’t Read His Daily Wrap Up:

$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:

  • worldwide crude inventories are at record highs all-oecd-regions.JPG,
  • 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 WatchHANS 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.

26 Responses to “Testy Tuesday – More Allies Join The Bear Side”

  1. GGas said

    Spring Shorts: Love the list. Particularly BTU. Coal is due for a good hit. I might also suggest LNG as a good spring short. Ive got some June Puts out there. $50M /qtr burn rate. No revenue in sight.

  2. zmann said

    Absolutely agree on Chenierre. Unreal how well that beast has performed.

    Also, should have added SJT as a pure play on falling gas as well but the spreads are pretty wide so you’ve got to either time it very well or be a true believer.

  3. GGas said

    Im a believer. Gas cycling is coming soon. Those with gas in storage will go for it while prices are a bit ripe.

    Also, was thinking about your gas forecast. Do you account for wind as well as CDD? The wind in the NE was pretty strong last week as opposed to the week before. Makes an impact on the gas pull.

  4. zmann said

    GGas – nothing that complex. I’ve tried everything from humidity to snow coverage to wind over the last several years and nothing seems to show consistantly better results over time. Of course, it is only a survey.

    AMEX trading offline.

    Why is TSO running so hard this morning. Don’t see an upgrade. Could be a good opportunity to add to puts here.

  5. zmann said

    CNBC just spotlighted CERA Week 2007. They talked about the 50%+ growth in costs since 2004!. Sorry, they reported the 50+% growth in costs, with no analysis, just a flat statement…heh, it’s CNBC.

    The point is, a lot of big money is at that conference and CERA is showing them in no uncertain terms the massive inflation in service and drilling costs its new index reveals. When you look at LOE/mcfe you don’t get as clear a picture because production fluctuates and companies have timing issues and many more things impact it. With CERA’s new index it cuts away all the noise so investors can clearly see a pattern which is not sustainable. This is bad for the OSX/OIH and the big cap service names: take your pick from leader SLB to laggard HAL.

  6. zmann said

    The oil rally is attributable to a bump in the IEA’s demand growth forecast for 2007. These guys adjust it shortly after the US releases quarterly GDP. And they haven’t been very good at it lately, overestimating all of last year.

  7. I love when there is a rally based upon suspect numbers, mainly demand growth from the IEA. They say oil prices are too high, but out of the other side of their mouth revise demand numbers up.

    Something has to give here soon.


  8. jon said


    I was wondering what HANS (analyst watch) had to do with energy. Are they getting into the ethanol biz too? 😉

  9. zmann said

    Sane – Exactly my thoughts re suspect numbers. These guys revise constantly and the market gets whip-sawed. They’d do better to point out that curde inventories will be rising through at least the second quarter of 2007. Many analyst models show this which would seem to conflict with their higher expectations for crude in 2007 but what are ya gonna do?

    Jon – no just seeing if guys are paying attention. The analysts aren’t as their rating activity has dried up despite a string of misses among the E&P names. Good catch. I’d send you a “thumbs up rebel” t-shirt but the guy on the front wants a royalty now. LOL.

  10. jon said

    Well, HANS does make “energy” drinks…

    OK, seriously, the other day someone was looking for a chart of the current month’s crude price. Here’s one that is updated every minute.

    Every month the link needs to be updated to point to the current contract, now set to “H7”.

  11. zmann said

    Massive pump on oil began at 1 on the dot EST as traders eye a close above $59. Still holding off on additional puts before inventories tomorrow. The consensus heating oil inventory looks too low given the weather.

  12. Raj said


    What is the Bloomberg consensus on the oil inventory numbers?


  13. Oil Pro said


    Any advice on RIG before the earnings ?

  14. zmann said


    up 600K crude
    up 2 mm gasoline
    down 4 mm bbs distillate – this looks really low again given 1) the really cold weather last week and 2) the number of consecutive weeks of cold which will lead to refills at the distributor and residential levels.

  15. zmann said

    Oil Pro

    I wouldn’t touch it on the short side until after earings. That’s not really specific to them but instead just my preference to stay away from the high end rig guys who are a little more insulated from short term downdrafts in commodity prices. The flipside to that argument is that they won’t enjoy the same kind of dayrate advance of the last 5 years this year. This deceleration could be already factored into analyst thinking though. So again, I’m sticking to the onshore guys where the signs of a slow down are already starting to show.

  16. nltd said

    Guess I should have seen today’s crude move coming and tried a few strategic calls…I thought it might go sideways today and jump on the draw numbers. Guess they wanted a running start this time…on the way to $60(or+)! If they hold $59 (+) today and pump like the dickens for two days on distillate and nat gas draws they might get there…

    Do you think your $60 hard ceiling will hold, Z? (Wouldn’t blame you a bit if you refused to answer. Kind of a loaded question, eh?)

  17. zmann said

    NTLD – that’s $70 Billion goldman plated question isn’t it?

    1) Today’s close below $59 is somewhat negative for the bulls who couldn’t keep it up despite the IEA’s 278,000 bopd demand bump (which is suspiciously close to the amount of surplus crude the Saudis said would be on the market in 2Q07 yesterday)

    2) We’re set up for an easy beat on heating oil tommorrow. But I think everyone’s on to this underestimate and over-withdraw game as was seen last week with the bigger than expected distillate draw and subsequent sell off in crude.

    3) Saudi’s comment from yesterday is a lot more important thant the IEA’s demand forecast today and will, as such, have longer lasting effects. The Saudis are done cutting back. In fact, they’re raising deliveries to Asian refineries for March.

    4) Weather is warming up. This also will become the theme shortly and outlast IEA’s statement today.

    In summary, we may blow through the $60 level tomorrow especially since they halved the distance to the goal line today but it will be a short lived excursion unless more geo-pol news hits and we go through $61. Then you’re next stop is $65 before weather kills demand in the shoulder season.

    I know I dodged the question but the end effect is I think we’re lower by next week. As part of job security traders can switch from bulls to bears faster than I can type this and with warm temps approaching and a $10 rally just having taken place you can bet that the upside is more limited than the downside right now.

  18. WDKING said

    Hey Z,

    I’m sure you have already mentioned this somewhere (great post on XOM) are they reading your page?

    I think they need to shift the chart slightly to the left one peg to 35$-40$ and they would be bang on!

  19. zmann said

    I’d be happy with $40-45 for a year end 2007 exit. I’ve got several E&P company readers but somehow I think I’m a little below the radar for XOM’s bedside reading! LOL! Somebody send ’em the site…it’d give them a good laugh for sure.

    Someone, was it Eric…asked about the geo-pol premium in oil right now. I’d say $15/barrel would come out it if we all just decided to get along (experts think it generally ranges from $10 to $20). I’d say there’s definitely $5 for Iran right now and if we get through Spring without dropping bombs there that’sw another strike against $60 oil.

    My long term forecast and it’s just a ball park is $50 to 55 for an average NYMEX this year.

  20. Joe said


    Sorry to jump ahead, but what is your estimate for gas withdrawl on Thursday?



  21. zmann said


    Working on it. Bigger than last week. Gas should track heating oil tomorrow. I think we get a bigger than expected number but I’m not sure it’ll be big enough to keep crude up. So Wednesday gas tracks heating oil. This Thursday is a little more important than previous Thursday’s for gas as a really big number would throw us well in YoY storage deficit which could hold prices up for another week or two.

  22. zmann said

    NEW YORK, Feb 13 (Reuters) – A fire in a crude distillation unit at Valero’s 210,000 bpd Delaware City, Delaware, refinery on Tuesday — the second fire at the plant in five days — has been extinguished, the company said.

    “At approximately 12:44 p.m. (ET) today, the Valero Delaware City refinery experienced a small fire in the plant’s crude unit,” the company said in a release. “Valero refinery personnel responded quickly to contain and extinguish the fire. There were no injuries.”

    Last Friday a fire broke out at the refinery’s hydrocracker unit, the company said.

  23. nltd said


    Thanks for your lengthy (hedged) reply! If I didn’t know better I’d think you were a trader! Ha!

    Definitely hear you about limited upside vs. down. Timing, as always, seems to be the crux of the problem…was thinking of going over to the dark side (calls) only for the very near term. Also hear you how fast the boys can change hats. . .seen that enough!

    Thanks again,

  24. zmann said


    I have nothing against calls whatsoever. If we get a huge (5+ mm barrel) heating oil withdrawal tomorrow you can bet I’ll be grabbing some quick calls on CHK, SWN, KWK, EOG as I think nat gas rallies on the news and maybe gets pushed higher the next morning(at least until Thursday inventories). Then it really needs a giant (250+ Bcf) number to get gas over the $8 hump.

  25. zmann said

    PTSG up another 10%. Meanwhile BQI falling to sub $4. Thinking its time to punt some of the former to pick up some of the latter.

  26. Antonio said

    Very nice site! Good work.

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