zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for February 15th, 2007

Thursday – Oil Review & Gas Preview

Posted by zmann on February 15, 2007

Indications: Oil up $0.04 Natural Gas up $0.02 (and meaningless until after inventories)

Oil Review: All Categories Show Withdrawals: Gasoline Bigger Than Expected, Heating Oil Less. The result was an initial WTF? from traders as oil began a five minute ill fated rally which quickly failed to levels below the prior day’s lows. Crude settled down $1.06 to $58.00. Street consensus estimates in bold with comments in italics

  • Crude – Estimate: UP 0.6 to 1.6 million barrels. Down 600,000 barrels. We remain well above the five year average for this time of year. The downtick inventories this week was attributable to a modest rise in refinery utilization which was partial offset by higher imports and domestic production. I see you cheating again Opec.

020907-crude-chart.JPG

  • Gasoline – Consensus Estimate: UP 2 million barrels. Actual: down 2 million.
    • 1) Three-quarters of the decline was attributable to consumption of blending components. In past years this activity has occurred at the beginning of the switch to increased gasoline production in preparation for the driving season some 3 months away. Said switch is actually a misnomer since we’re talking about a few percentage points change in the ratio of gas vs distillate production.
    • 2)This was the 2nd week of higher prices on the wholesale level. Many gas stations are only keeping the bare minimum of gasoline on hand, and in many cases they are opting for weekly refills to keep their inventories at only 10% of capacity. Anyway its forces them to continual mark their inventories to market and avoids the losses many of them suffer with rapid swings in wholesale prices. When they see prices start to recover many of them bump up their minimum inventory a bit and that could explain some of the unseasonal timed draw on stocks. I’d also note that many consumers are doing the same thing with their cars getting five bucks at a time. If they see prices start to creep up maybe they get $10 to buy a little time.
    • Cash gasoline prices rose another penny on the news after an $0.08 increase on Tuesday over the Valero fire. This rally won’t last.

gasoline-020907.JPG

Closing comment on gasoline. So why are the refining stocks doing so well right now? The short answer is that although the recent (last summer) cracks are probably not going to be that lucrative again for quite some time the companies are cash flowing nicely and product prices have taken a strong bounce over the last four weeks. That HOC valuation looks way out of line but I’m not going there this week and as for the rest I’ll wait for a clear signal from crude.

  • Distillates – DOWN 4 to 5 million barrels. I think this number could be a lot bigger than this. Actual: Down 3 million. OK, so I was right last week and am happily wrong this week. Heating oil fell a nickel on the news.

heating-oil-020907.JPG

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Note: If we get average withdrawals from distillate inventories through winter’s end we still don’t break the mid point of the preceding chart.

Valentine’s Day Massacre For The Shorts. There’s nothing worse than having all of the commodities from oil, to heating oil, to natural gas and even coal fall while the underlying issues for your entire portfolio of put options go against you. Ok, there are worse things but I really hate it when that happens.

The Street continues to love the stocks; fundamentals be damned. Yes earnings estimates are coming down due to lower commodity prices and higher operating costs and yes valuations on a total enterprise value per Mcfe continue to climb (more on that soon), and yes production growth continues to be a problem and yes the best crack spreads for a good while are the ones in the rear view mirror. What was my point? Oh, right. buy, Buy, BUY.

oil-stocks-vs-oil-vs-the-dow.JPG

Gas Storage: Expecting The Biggest Withdrawal Of The Season. This should come as a surprise to no one since last week’s mega HDD number of 267 deserves a mega withdrawal to match. In the East Consuming Region we had extreme and ubiquitous cold and while the western region enjoyed a slight break from the blizzards of the last few weeks stories of well freeze ups should bolster withdrawals there as well.

  • My Estimate: 245 Bcf. Biggest of the season and driven by the eastern region. I went back through the decade looking for a colder period in the east and stopped in January of 2000 when the region saw it’s largest ever storage withdrawal of 171 Bcf. Degree days then were a whopping 1,243 vs this week’s even more massive 1,325. I’d think twice before going against the gassy names tomorrow at least until inventories are reported as there could be substantial upside to my estimate.

hdd-vs-gas-021407.JPG

  • Street Consensus: 252 Bcf.

So the over/under is 250 Bcf. Beat the number and gas makes that long awaited run on $8. Even if it makes it, the current forecast makes today’s number the season’s peak for withdrawals. Then it’s time for the hangover. If we miss the number to the downside, then we shoot back through $7 and the hangover is much more painful. Either way, nothing about the pre report trading matters so don’t be fooled by it.

One last thing, we’re due some better comps in coming weeks as there was some late season demand last year. However, this week is up against a tiny withdrawal in the year ago period. This means that for a time, however brief, we are boldly surging into YoY deficit territory which the media (you know who you are and how conflicted you must be) will only be too happy to highlight every 15 minutes.

Odds & Ends

No picks this morning and only maybe after inventories. Stocks are on steroids with the broader market. Take heart though. This weekend I’ll endeavor to find a few good longs which is a sure sign of a top.

Earnings today: BHI (sell the initial dooms day response), COG, XEC, ECA, NXY

Kathmandu Gets 1st Snow In 63 Years. Now that Exxon has embraced global warming can we at least change the name to something more descriptive? We’ve got snow piled up to record levels in New York and now it’s sleeting in Nepal? Global warming seems off the mark. Even Rapid Climate Change is hard to grasp since no one has that kind of attention span. I propose Geographic Climatic Transference Syndrome. It simply means you’ll get weather unlike any you’ve ever experienced, it may be bad but it may mean you can ditch the snow tires. It’s also a catch all so the media doesn’t have to stop running stories about it’s when the headline doesn’t match the their desired outcome.

Analyst Watch: ACI PT cut from $45 to $41 at RBC.

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