zman’s Energy Brain

oil, gas, stocks, etc…

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Waiting Wednesday

Posted by zmann on February 21, 2007

Oil Inventories Postponed Until Thursday. Gas Inventory Report To Arrive At Usual Time. April crude is indicated off another $0.50 after a $1 tumble yesterday. Natural gas continues to rally into what is likely to be the last of the 200 Bcf withdrawals of the season (more on that tomorrow).

  • I’m still looking for oil to test $55 before it’s able to to muster a small bounce. Then downward to the lower $50s.
  • Gas should soften up next week, especially if next week’s pull from storage is less than half of this week’s (which I’m betting it will be).

Earnings Watch:

  • TK and GMR after the close. Talk about priced for perfection its at all time highs but earnings numbers are expected to fall from $1.70 to $1.07 for the former and from $1.71 to $0.72 for the latter. Lower rates, lower volumes. Guidance here is crucial. I’ll be taking some $50 March puts for a buck on TK and some April 35 on GMR which is up 10% in the last two days. Both will be 20% opening positions. Also will take a few TOPT $5 calls or puts tomorrow morning depending on the results tonight.
  • BRNC – announces Thursday and has already been downgraded by everyone on the Street on the expectation of reduced onshore drilling activity. While I expect activity to fall as well it hasn’t yet and is in fact increasing. Ratings may have come down here but estimates have not and BRNC trades at a mere 6x forward earnings (cheapest driller I can find). I’ll be taking the April $15 calls (20% opener) before the report. Normally I’d say that the cheap get cheaper in a falling commodity price environment but with activity remaining high I’m suspending that rule here.


NXY Watch: The chart is on the brink. It’s unlikely they will be able to post better than expected production guidance in coming months as their growthy, long lead time projects have been well telegraphed. They have set the bar very high for 2007 (50% production growth) but given their high forward multiple relative to their peers they are likely to trend lower in the current falling commodity price environment.

CFTC Report Shows Marked Increase In Natural Gas Short Position Last Week. After a brief bounce towards equilibrium at the start of the month, the shorts reasserted their bearish sentiment last week. Concurrently, the longs continued their 5 month long exodus from gas reaching the lowest level as a percent of total contracts in 8 months. (click on the graphs below to open in a new window)
cftc-quad-022107.JPG

Longer term a large net short position could provide the impetus for a rally. Historically, the pendulum swings much further into short land before this occurs. These reversals usually occur when longs represent as little as 15-20% of outstanding, non commercial contracts. With the longs at 45% of total we’re not there yet.

…But For Now The Slide In Net Contracts May Bode Poorly For Gas Prices. In the last two instances where the net position plummeted from high to low levels (2001, 2003) gas prices fell substantially once the net position tipped into short territory. Looking at the chart below you can see that there is not a simple relationship between gas prices and net contracts. However at the extremes the CFTC data would seem to be predictive of significant moves in gas. If the net long position spirals toward the low end of the range again (15-20%) it would suggest that gas prices will come in (to the $5.50-6.50 range).

cftc-single-long-022107.JPG

Odds & Ends

SPR Refill To Commence This Spring. Secretary Bodman said the U.S. will start purchasing 50,000 bopd to begin refilling the 11 million barrels sold from the SPR to refiners in the wake of Hurricane Katrina. As the secretary said, this shouldn’t have any impact on crude prices.

In a never ending attempt to support oil every time prices start to waver BP said it shut in its 47,000 bopd Northstar oilfield in Alaska after discovering a pinhole sized leak in a gas line. No word yet on a repair time line but BP will likely take their time as they’ve stated they have some other facilities upgrades to do during this outage.Analyst Watch: VLO PT upped from$79 to $82 at FBR.

Dykstra Picks HAL. When investing becomes entertainment you’re near the end of a bull market. First Mad Money, then Fast Money, now Sports Money?

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54 Responses to “Waiting Wednesday”

  1. zmann said

    AM. Any thoughts on BQI? Watching it drift lower.

  2. zmann said

    VLO reports latest fire will keep Texas refinery offline for weeks.

  3. zmann said

    Henry Hub off $1.11. There’s a good chance a huge amount of gas came out of storage as the spread between HH and NYMEX slammed shut.

  4. zmann said

    PPP downgraded to hold at BS, OMM (tanker) from buy to hold at Lazard

  5. Attacking Mid said

    Regarding BQI as I see it, we have a convergence of events which have driven the price down:

    1) About 40 million shares hit the market starting in January as a byproduct of last year’s Canwest purchase of the minority interest in Oilsands Quest. It is speculated that many OSQ shareholders have been selling for tax and profit-taking reasons. That should be coming to an end, and recently in fact, I’m not seeing the consistent blocks being offered as in past weeks.

    2) Yesterday, BQI announced the issuance of about 5 million “flow through” shares, which are Canadian tax – advantaged shares offered to large investors at a premium. Not being one to lean to heavily on market manipulation conspiracy theories, I won’t speculate on what might have gone on. However, IIRC, the share price dropped significantly right around the last FT share issuance.

    3) The steady decline has caused significant technical damage to the stock, and the traders are probably not touching it with a ten foot pole right now. They’ll be back in a heartbeat at the first signs of life.

    Fundamentally, things look as rosy as ever. The Feb PR reported additional drilling successes, though the drilling is being slowed somewhat by many boulders in the ground. The next PR is scheduled for early April after the winter drilling program ends.

    The flow-through share offering was a surprise, and IMO is a very positive sign. The capital is required to be used for exploratory purposes (to maintain the tax advantages to the investors), and this possibly means that additional acreage is being considered.

    When will this stock start rising? I cannot predict, though I’ll be truly surprised if it’s not back in the $5’s by mid April. I’m sitting on a pile of April $5 calls, though am currently buying the July’s. October’s just became available, and a patient investor might do well with those. At this low share price, one might consider going with the $2.50’s – I would if I wasn’t so cash poor at this time. If choosing the options rather than the shares, you must be a patient buyer. I have accumulated most of my contracts by sitting on the bid and waiting for an impatient seller to come along.

    Best regards,

    AM.

  6. zmann said

    From Dow Jones:

    Crude oil inventories are expected to build by about 700,000 barrels, according to the mean of nine analysts’ forecasts. Distillates, which include heating oil and diesel, are expected to fall by 2.8 million barrels.

    Gasoline inventories are seen building by about 100,000 barrels, according to the analysts’ average.

  7. zmann said

    Thanks AM – still watching…waiting for a little bottoming action.

    Oil up on technicals or did something blow up somewhere? You can ask that question every other day and it never gets old.

  8. Attacking Mid said

    “…waiting for a little bottoming action”

    You and me both, pal! $3.80 has been holding for several days. I’d like to think that’s the bottom, but then, I thought $4.70 might have been the bottom a month or so ago ;^ )

    AM.

  9. zmann said

    AM – Thought you’d taken a permanent vacation from this space. Glad to know you’ll never leave. LOL. Don’t get me wrong. I think this is the low (or very close). I just want to see it trade sideways a bit so that small rallies shake out the last of the unfaithful. V-shaped rallies are rarely good. And I think it needs to “bottom” for a bit so I’ll save the TVM and just wait until it starts “trickling” back up. I could be wrong and miss it but I like it as an asset play / IRA holding.

  10. Attacking Mid said

    I hit quite a losing spell last month, so I’ve taken a little break from trading. Right now, I’m just sitting on my speculative plays. Can’t seem to get a grasp on the oil stocks lately, so I’m just staying away at the moment.

    I’m still reading all your excellent writings, just haven’t had much to contribute.

    Best of luck,

    AM.

  11. Rob said

    Just looking into BQI, why don’t they have any sales? When do they planing on selling anything? They do have plenty of cash, but it still worries me that they don’t currently sell anything.

    They are in a temp oversold condition, but not the lowest seen this year.

    Zman I think the projections for -700,000 oil is way low. Should be a nice selloff in oils the rest of the week.

  12. zmann said

    I commented on this yesterday and really should do a write up on it but John Hess continues to bang out of his stock. Another 10,000 sold on the 20th from his personal account. Several thousand shares sold almost every day for months now.

    Now I know that people sell for lots of reasons and only buy for one. And I know that John still holds A LOT of shares. But this reminds me of the start of the selling from the home builders a couple of years ago. As the stocks went higher and higher the sales got bigger and bigger. Not actionable, just something to keep in mind.

    AM – sorry about the back luck string – I’m sure I helped with that. 😦 . Need a symbol for “deer in headlights”. Talk about right on the commodity (down) and flat stocks for 6 months.

  13. zmann said

    VLO up 3% in another example of the only industry in which you get rewarded for screwing up. Crash a plane, see what happens to the stock. Burn up a refinery and you get the opposite effect. Burn up 3 and you got a genuine rally on your hands despite that fact that we sit atop record stock piles of gasoline.

  14. zmann said

    Rob –

    I’ll let AM, the resident expert on oil sands and BQI speak to that.

    As far as the 700,000 barrel build you may be right with all the refineries suddenly not consuming crude. The market is swept up in refinery fire fever right now and that may last a while, despite inventories. Otherwise I’d agree with you completely.

  15. zmann said

    Trades:

    Sold half xom 75s and half BHI – profitable and they may just run things a little too far for my liking.

    Added TK Apr 50s for $1.60.

  16. tom2oc said

    Holy Cow Z! OIH up 1.3%. I thought it was it yesterday for the oil sector and once again it rises from the dead. As it is testing 20MA resistance right now I’m putting this on my priority list tomorrow after inventories for a short entry conditions permitting. This move today is very surprizing and suspect I would think.

  17. Lance said

    Hi Zmann,
    I saw you on Phil’s stockworld. I’m new to all this. Wondering where – other than your blog – I can find the data (and charts if available) on the long and short non-commercial contracts for commodities. Is this info readily available? Is such a thing available for regular equities (rather than just commodiites)?

    Thanks
    Lance

  18. zmann said

    New contract is dead set on breaking $60, going against weather. I’d still say that the important to is $60. A $1 came off for contract rollover so to be fair it should $61 but this isn’t about fair. If we punch through $61 I think you’re going to get a small rally, say to $65 before the fundamentals trip up prices. Of course, a smaller than expected draw in HO and / or a good build in gasoline tomorrow will reverse today’s move.

  19. Rob said

    Tom,

    On OIH & the rest of oil, don’t they call it a bear trap?

    🙂

  20. zmann said

    Welcome Lance – feel free to ask as many ?s as you like. Keeps me on my toes and I always learn something in the process!

    The Commitments of Traders data is available here for the most recent week:

    http://www.cftc.gov/dea/options/deanymelof.htm

    and here for archives:

    http://www.cftc.gov/cftc/cftchistoricalcot.htm

    and I highly recommend you read the following backgrounder before putting any money to work based upon conclusions you, I, or anyone else might have from the data:

    http://www.cftc.gov/opa/backgrounder/opacot596.htm

    As to charts, I build my own and I don’t think the CFTC has any of theirs.

    As to stocks, sorry, this only for the commmoditities. As far as CFTC data goes I mainly stick to gas (it being a local market) but the oil data can be useful as well. For instance, right now, the non-commercial traders (spueculators/hedge funds) are short WTI crude. Not a big vote of confidence. By itself I wouldn’t care but it’s one piece of a big puzzle. If they get too bearish, I start getting bullish as the short position becomes future buying (covering) potential.

    Anyway, welcome aboard and ask away!

  21. tom2oc said

    Over 140 it could have been. This looks like a trend reversal follow-through move after the hammer printed yesterday. Hard to believe but got to tell it like it is when trading on TA. Inventories tomorrow will either confirm it or negate this move today and I see a big move tomorrow because of this. If inventories are bullish, it will make OIH fly to test 140 in no time and if inventories are bearish, I expect it to test 132 in no time too. Heck maybe the perfect time to go both ways. You should ask Phil to cook a 2 way strategy on this. Equal size of 135 puts at 2.40 and 140 calls at 1.75 for a bearish bias? Ideal would be for OIH to trade at 137.50 just before inventories. Heck, you’ve seen AAPL running?

  22. zmann said

    Tom

    Me too! I still think the OIH tops out at 140 but the moves in the group don’t look scared at all. Instead very resilient action. Still the same down a little with down oil, up a lot with up oil action. Frustrating but over time it continues to drive an increasing wedge between stock prices and oil & gas prices.

    So either the Street is more comfortable in an environment where companies must grow unit sales (production/utilization/bits/mudd etc) without the aid of increasing prices or a reconciliation must occur. At present, you’re just seeing multiple expansion, which is what happens at a top when everyone gets complancent.

    I’m holding off on further trades (save from maybe raising a little cash) until after the report tomorrow and will probably do nothing until next week unless the numbers are well outside the band tommorrow.

  23. zmann said

    Tom – excellent explanation and as a fundy guy I probably only understood half of what you just said! ;-> I’m going to get you to start vetting my trades if you’re willing!

  24. tom2oc said

    LOL! Better check those trades out today because I might get my bullish confirmation after FOMC minutes or later this week and whenever this happens I delete all my blog favorites list to concentrate on trading not to miss any minute of what might be the biggest 2 month rally of all times. And if this breakout over COMP 2500 is negated later today or this week, heck we might go back to 2450, 2400 and then fail it so I expect to be trading a lot whatever happens. This is VERY VERY crucial time for the market. We are ahead of a HUGE move.

    Just fooling and blogging around today while waiting for confirmation or not and trading lightly. Other than few calls on AAPL that finally went back above waters and a VIP short from earlier which is cooking very nicely I’m all sideline and ready to go! Glad I missed that 2400/2500 bull/bear fight. Oil might be very interesting too. I can’t see how this is not going to melt down in coming days with warming weather. But got to trade with the chart and not the fundies!

  25. Rob said

    This “rally” is less justified by the movement in XOM today. With less than 11M shares traded so far and lagging XLE, OIH, oil, they perma-bulls of XOM don’t believe it. My GUESS is that we’ll sell off just like the beginning of this year in the next two weeks.

  26. zmann said

    ROB – good point on the volume…very lackluster indeed.

  27. Attacking Mid said

    Rob – BQI is a speculative exploratory play. They have HUGE acreage leased, and have drilled about 150 holes so far. The initial core samples have been very promising.

    Investing in BQI is speculating on a potential discovered resource. Odds are good that BQI will never make a sale, as it’s likely they will be swallowed up by a much larger company such as Shell, Suncor, BP, China (eeeeeek!), etc. once the resources are proved.

    Significant progress toward this end is expected this year. On the flipside…. they could start hitting more dry holes and deem the whole thing non-commercial. Such is the nature of speculating.

    I am betting fairly heavily on this company based on:

    1) Huge upside potential due to the amount of oil that could POTENTIALLY be discovered.

    2) Early drilling results appear quite promising.

    3) Management is excellent with significant oilsands experience.

    This stock is pretty simple…. either they discover significant recoverable resources, or they don’t. If they do, this stock will go up significantly. If they don’t, this stock will be worthless.

    AM.

  28. tom2oc said

    ROB you’re on something. I looked at XOM and this looks quite bogus to me. If it goes below 74.30 I will confirmed and downtrend in oil patch will resume. I’m dreaming the oil crooks succeed in raising OIH to 137.50 before inventories though. That would be real sweeeeet!!

  29. nltd said

    Z

    Just a snapshot thing…with USO up 1.30, XOM up only .22.

    Yeah, I’d say they don’t believe it.

    Is it likely they just took advantage of the March/April contract difference today to get an extra effective pump going, probably hoping to use inventory tomorrow to ramp it a little more, knowing winter is running out on them. . .hmmm. Add in the Brits throwing in the towel…

    N

  30. Rob said

    Tom, can I get a subscription to your blog/site then? (wishful thinking)

    AM so BQI is kind of like CMKX, the Canadian diamond company that was “naked shorted” for so long? Only BQI doesn’t appear to be naked shorted, but both are (were) speculative plays per se.

  31. zmann said

    AM

    – what’s the burn rate and cash pos on BQI?

    N

    – other than the fact that most but not all of my putters are up and all of my callers are up today’s action was technical, somewhat meaningless, and yes, they used the expiration to choke an extra dollar out trading and get the CNBC weathergirl to say “oil’s over $60” repeatedly like a coocoo clock

  32. tom2oc said

    Rob, LOL! I run no blog presently. Got to be concentrated on this market! And today on AAPL longs from few days ago and VIP shorts from this morning which have been cooking nicely all day… Now we just need the oil crooks to pump OIH to 137.50 just in time for inventories. That would be a dream come true! GO OIH!!! Higher!!!

  33. WTF? The weathergirl? Oxymoron; weather doesn’t appear to be on oil’s side 😛

    I agree with rob’s bear trap staement

    -SaneO

  34. zmann said

    Just got from Citi a mid Jan Report: (shipper rates were actually higher than they are now)

    If you thought 4Q sucked for the tankers (down 30% YoY), 1Q to be down 50% based on lower rates. Since that report Suezmax and Aframax are down substantial whereas they had held those rates flat with 1/17/07 levels (the day before the report)
    Then:
    VLCC: $33,700; Suezmax: $52,000; Aframax: $59,500
    Now:
    VLCC: $34,180; Suezmax: $46,590; Aframax: $54,920

  35. zmann said

    BP says Northstar field to return to service. There’s one notch against oil.

  36. zmann said

    The nice folks at SeekingAlpha (and via them YahooFinance) have offered to pick up the site on a daily basis going forward starting today. Manners everyone. 😉 Sane, thankyou for use acronyms and I really hope you’re wrong.

  37. zmann said

    Oil up 2%
    VLO up 3.5%
    BP flat – that’s what you get for actually getting things running again. When oil rolls over, BP will test $60.

  38. Attacking Mid said

    z – BQI’s pretty well capitalized – sitting on about $40 mil cash and burning a bit over $1 mil per month. That burn rate is increasing with more rigs operating. Also, apparently the new flowthrough shares (which will bring in about $25 mil) are to fund a summer drilling program which has not been approved, but shouldn’t be a problem.

    Management has stated that by next fall, the anlaysis should be far enough along to make commercial viability determinations. If things go as hoped, they will be looking for JV partners to take over operating phases. So….. running out of cash doesn’t look like a viable problem at this point. I really wonder if the JV’s will really happen or if a buyout might occur. Would be about a $2-3 bil buyout IMO.

    AM.

  39. Didn’t Barely Pumping say they were also restarting texas city?

    -SaneO

  40. mike said

    ZZZ – Did you pull the trigger yet on BRNC april 15’s in light of today’s action? Also, does oil breaking 60 change your position on oil puts – are you still in any March puts?

  41. zmann said

    AM

    Do the logs look the same as what SU and ECA and the bigger boys are working on. Sorry to be a pest but it’s easier to trouble you for the answer while I sit here and try to be witty.
    —————————————————————-
    Sane

    Saw that somewhere I think or was it the Imperial kanook facility I saw?
    —————————————————————
    Mike

    Great question. No b/c I got busy typing – Still like the trade but I reiterate 2 things: 1) I won’t take more than a 20% position (% of ultimate dollars I put in one issue) and 2) commodity price action is pretty much irrelevant in front of tomorrows inventory report(s).

    Not really. It does make me a bit pissed that I didn’t get the CRR calls from the other day. No matter what, everybody needs more proppant. Estimates are too low there. I am taking April’s now as the IV collapses post earnings season pretty quickly on the Marchs. Still got some XOM, BP, BHI, and SLB March putters but cut the BHI (too late), XOM (just right) in half today.

    Longer term, we’re headed into the shoulder season with full crude and products inventories (especially gasoline). I don’t see how this move lasts but just on technicals and some short covering we could see a spike to $65 especially if you get a big HO draw which is possible. That 2.5-2.8 their espousing seems a bit low but not too low. These late season draws, after the weather settles down can be surprisingly large and so I’m for the most part just waiting for the warm up to hit.

  42. mike said

    ZZZ so are CRZO, PTSG & others simply a hedge against your puts? I’ve never tried trading both sides of the market (but I’ve also had some significant drawdowns and sweatouts!)

  43. dave said

    ZMAN: why not the mar 35 puts on GMR ?

  44. zmann said

    Mike – essentially yes. From time to time you’ll see I go long the gassy E&Ps CHK, SWN, KWK which are all good companies.

    PTSG is a special case. A gamble with big upside potential .

    Check out XOM not buying this move, moving back into the red but still on light volume. I’d say the powers that be are keeping their powder dry.

  45. Attacking Mid said

    The initial core samples showed high saturation rates and thick depths – higher and thicker than typical in Alberta deposits currently in production – though I can’t quote any numbers off the top of my head. However, those were only a few (24 IIRC) cores that were taken from an area that Shell had drilled and found bitumen back in the 70’s. In other words, they started drilling where they were most sure they’d find bitumen. On a side note, Shell knew there was bitumen up there 30 years ago, but of course, it was deemed non-commercial in that era.

    I don’t know why it takes so long to get lab results, but apparently it takes months. That’s why the official results from this current drilling season won’t be ready until next fall.

    This next PR will include drill results from previously unexplored areas. If they are able to report finding bitumen in most of those cores, I would expect to see the excitement start to rebuild in this stock, as that would be significant further confirmation of what is speculated.

    AM.

  46. zmann said

    BTU soaring nearly 5% after speaking at the Morgan Stanley basic materials conference today. I’m holding off on more until I get through the presentation and probably into next week. Small position but that move was unexpected (at least by me), may add, may quit that one.

  47. mike said

    zzz – Then, if we rode PTSG up close to 1.4 & are out do you think this is a dip to buy back in?

  48. zmann said

    Dave – because I like to sleep at least a little a night plus I’ve got buddies I like to go to Vega with. ;->

    It’s true that’s where the leverage is at but if they say something like yes, 1Q stunk but charter rates are doing better than expected, well, there’s no time to recover from a thing like that.

    Honestly, I usually don’t do earnings plays but these guys (the tankers) are running fast and seemingly contrary to rates. Another way to play is FRO or OSG where, according to Citi, there is a higher chance of an earnings miss.

  49. zmann said

    Mike – if you did that then sit back and relax for a bit. Wait out the inventory numbers this week at least and brag about it on the weekend.

  50. tom2oc said

    Holy cow! I might get my 137.50 tomorrow before inventories. Unbelievable these oil crooks. But I like them today!

  51. mike said

    zzz – thanks (but I’ll have to brag fast b/c I’ve still got Mar. oil puts that could eat my profits tomorrow!)

  52. tom2oc said

    Gee, now I regret not having told you that this triangle on BTU was bullish looking from what I saw after looking at the chart after reading your bearish comment on it. My bad! This thing is going up to test 48 resistance it looks like.

  53. dave said

    Zmann:

    thanks….the apr were better priced in the AM…now the mar look better.

  54. zmann said

    TK – in line, maybe a penny light. Revenues were higher than expected but that’s a bit of a murky issue. Costs look a bit high but the stock’s not trading, waiting on the guidance which wasn’t in the 6k.

    GMR up on special $15 dividend and bump to the annual dividend. Talking about making acquisitions.

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