zman’s Energy Brain

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Wednesday – Inventories Set To Disappoint, But Any Rally Will Be Brief

Posted by zmann on February 14, 2007

Oil Rallied As The International Energy Agency Boosted It’s Oil Demand Forecast, Then Nudged Higher By VLO Refinery Fire. March crude rallied $1.25 to $59.06 yesterday as the one two punch of forecast higher global oil demand and yet another oil industry fire boosted prices. Spot gasoline shot up $0.08 to $1.62, more than reversing the prior day’s slide and continuing the rally that began with crude’s advance in mid January. The refiners, including VLO which had the fire, soared. Some takeaways from yesterday’s action:

  • The Impact of IEA’s Demand Forecast Will Be Fleeting…The International Energy Agency revised its estimate of growth upwards by 273,000 bopd in 2008 to 1.55 mm bopd for total demand of 86 million bopd. The increase was primarily the result of a revision to Chinese demand.
  • …But Saudi Arabia’s “Healthy Oil Market” Will Have A More Lasting (and bearish) Impact. Saudi signalled they are done curtailing production (they even mentioned increased shipments to Asian refiners in March) which sort of defangs the OPEC hydra.
  • VLO reported a small fire at a refinery in Delaware (the second in a week)… The company said it contained and extinguished the small fire but no timetable for resumption of operations has been announced. Also remember that VLO expects to restart its larger Texas City refinery next week which was damaged by fire January 28th.

Holdings Watch: Energy stocks rose more on a $1.25 increase in crude than they fell on it’s $2 decline the day before. Do that long enough and you get this. A state of denial remains in effect until further notice. Oh, we’ve got a few of the more daring research shops looking into the impact of lower commodity prices and ever escalating service costs on E&P cash flows but their clarion call is not yet widely heard. At the bulge bracket firms, energy remains near the top of the recommend list where a recovery in commodity prices, not production growth or cost curtailment, is key to their continued predisposition towards Buy ratings.Here are the estimates from Bloomberg’s weekly survey:

  • Crude – UP 0.6 to 1.6 million barrels (to ~10% above the 5 year average). While the weekly number here remains less important that heating oil (and increasingly this time of year, gasoline) unless it significantly misses the mark in either direction the magnitude of supplies must begin to put pressure on crude, especially as we enter the shoulder season.
  • Gasoline – UP 2 million barrels. Gasoline inventories are already well above the five year range and the rebound in wholesale prices should quickly abate if we, as expected, get the ninth consecutive build in inventories.
  • Distillates – DOWN 4 to 5 million barrels. I think this number could be a lot bigger than this, but even with a 8 mm barrel draw (not inconceivable) distillate storage would remain slightly above the 5 year aveage.
    • Oil weighted HDDs soared to 332 last week versus 282 in the week before when the withdrawal of 3.7 mm barrels also exceeded estimates. Unless there is a marked increase in refinery utilization and it’s directed towards distillate production I don’t see a number as small as the predicted 4 mm barrel pull.
    • Moreover, those secondary and tertiary stockpiles have to be refilled after this many consecutive weeks of cold weather.

We Could See A MUCH BIGGER WITHDRAWAL From Heating Oil Inventories (so wait to see what happens before taking on new positions). 2003 was very similar to this year in that the winter like weather got off to a late start. In the second half of January oil weighted degree days crossed the 300 mark and draws on distillates quickly grew from nothing to 3 mm barrels , then 6 and finally 10 million barrels. None of those degree day readings surpassed this past week’s 332. So again I’m being careful and waiting for the post inventory exhaustion to set in. If the number is over 5 million barrels it may provide the impetus for a jump to $65 but I think it will be short-lived. Next week’s early read on degree days shows a marked warming trend.


Odds & Ends:

From The EIA’s Natural Gas Page: Beginning with the March 2007 issue, (data reported for January 2007) of the Natural Gas Monthly, EIA will present more timely natural gas production data (collected on the Form EIA-914, “Monthly Natural Gas Production Report”), that will result in changes to data elements and table formats. The impact of these changes is discussed at:

Comment: Better late than never no longer applies. Halleluja. Data reported in March will be for January. That’s one month better than current reporting. One caveat: timeliness = less accurate/specific data. They’re cutting out some state level detail and the oil well gas (casinghead) vs gas well gas split. You’ll have to wait for the EIA’s Gas Annual for that.

Analyst Watch: Very quiet. DO PT upped from $90 to $118 at FBR.

20 Responses to “Wednesday – Inventories Set To Disappoint, But Any Rally Will Be Brief”

  1. Henry said


    great perspective on the distillate drawdown potential



  2. zmann said

    I wish, Accuweather made a little mistake this morning:

  3. zmann said

    Thanks Henry.

  4. nltd said


    That red really is pretty isn’t it?


  5. zmann said

    RED = LOL

    RIG quarter was pretty good. Solid beat bottom and top line. Backlog looks strong and cost pressures remain under control. I don’t think it was good enough to justify some of the lofty price targets that are on the Street at present.

    While nothing matters prior to inventories this morning this is one that will either fade fast with a downturn in oil or pop $2 if the HO # inspires a crude rally over $60.

  6. zmann said

    PTSG – drifting higher, now $1.48. Smoke ’em if you got ’em. Normally I’d bang the table about “Too far too fast; Must take half off table” However, this time I’d say the stock may be in for a pretty nice rally. Their acreage with XOM in Barnett is likely to grow and the potential is literally enormous relative to their current book reserves (none in the Barnett at present) not to mention in their other plays which look interesting.

  7. zmann said

    Not Enough To Support Crude!

    Crude: down 0.6
    Gasoline: up 2.6
    Distillate: down 3 mm vs 4-5

  8. Wow relatively small distillate draw vs weather.


  9. zmann said

    Crap – draw in gasoline of 2 mm bls. The CNBC weather girl said the number wrong but the headline across the bottom was right. That changes things a bit. Those guys need to get someone who can read!

    The draw in gasoline has got oil trapped between a bearish HO # and a confusing, unseasonably large pull in gasoline. Looks like blending components fell markedly. Imports down a bit but not enough to explain this.

    No action until crude decides which way to go

  10. I have seen this a couple of times before with blending components. It causes a large swing either way. A slick way for the refiners to jack up their crack spread. They usually do this when gasoline stocks start getting high ( Which is where they are now ) to prevent a crack spread breakdown. Though weather could be attributable to blending component decline d/t a lot of it being trucked or barged in and / or product cycling d/t life-spans of blending components.


  11. zmann said

    Good thoughts Sane. How short of life are we talking about? I thought it was at least 3 months, no?

  12. zmann said

    PTSG just got their first big fund family holder: 2mm shares (6.5% of outstanding) at Wellington.

  13. Oil Pro said


    Thoughts on BHI puts or are u waiting out tomorrow’s number and earnings before taking any additional puts

  14. zmann said

    Oil Pro,

    Yes, just to be safe. Rig got drilled despite the good numbers so you’ve got to be asking yourself, with regard to service and drilling, what’s the next catalyst. It’s not higher prices, it’s unlikely to be a surge in drilling in the US or abroad. So what drives these guys higher?

  15. Yeah 3 months at least, but if you look at per say ethanol; water / condensation is ethanol’s worst friend. There might be cycling d/t water issues. Just a thought though to try to explain the sometimes wild swings in blending components.


  16. zmann said

    Thanks Sane, I’ll take a closer look in tonight’s post. Honestly I was pretty shocked by the whole report. Have you seen the API’s version this week? API showed a much smaller withdraw in both gasoline and distillate. The only explanation I can come up with for the seemingly small distillate draw is that customers were able to top off their tanks as recently as early January and they’re holding off on refills as long as possible.

    Nat gas making a run on the 7.12 low from Monday. Break that and it’s $7 test for sure. The number tomorrow will be big for sure but traders are looking through the valley. I’ll have some production charts tomorrow as well as my usual estimate for the storage number.

  17. Yeah I agree, probably a lot of topping off in early jan d/t prices being at a low then. I think people are watching prices more now d/t the market insanity for the last 2 1/2 years. Back in 03 prices were still pretty calm compared to now. I am also wondering if gasoline exports were up d/t high inventory levels.

    As for nat, I can see the other side of the weather valley from here around Chicago. We are staring in the face of the mid 40’s to 50’s mid next week.


  18. nltd said

    Hi all

    Been off doing errand for daughter. Very interesting activity today. Hear you about HO topping off…have some experience with propane delivery, similar deal. We buy as big of tank as possible (legal) or what we have room for, fill at summer low, if have to use a lot early watch for deal…savvy local dealers will watch out for customers to promote loyalty. THEY will call and let you know when better price prevails for topping off. They also of course try to optimize their own supply price…and if they’ve managed to keep their customers’ and their own pretty full to now…they’re smart enough to sit tight, knowing as this plays out prices should fall…same game as us, but at the pointy end of the stick. IF they screw up, they’ll get caught with low tanks, a late cold spell, and have to fill up at whatever price prevails. Of course I’m talking pretty small guys. I’m sure big distributors probably hedge in the market, too..

    Tomorrow should be intriguing as well, I’m sure. Good luck with your numbers Z.

  19. zmann said

    N – Interesting activity? That’s one thing to call it. I call it me losing money. I’ve been down in my analyst hole all day grumbling at the dichotomous action in oil and the stocks and trying to explain away a few concerns. Thanks for the luck on the numbers tomorrow. It’ll probably be a quick note since my wife wants to go out to dinner for some reason.

  20. fioricet said


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