zman’s Energy Brain

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Thursday – Dueling Inventory Day

Posted by zmann on February 22, 2007

Zero Hour = 10:30 EST. Simultaneous oil and gas inventories. Both represent what is probably the last gasp for real winter demand before we enter the lull of the shoulder season (although maybe I’m being a bit hasty as March is still a winter month). To the numbers:

Oil inventory expectations from a plethora of surveys in bold:

  • Crude: up 700,000 barrels. Not such an important number unless it comes in way out of line. I’ll be watching imports more closely for clues as to Opec’s compliance discipline.
  • Gasoline: up 100,000 to down 900,000 barrels. This number is a crap shoot this time of year. Witness last week’s “unexpected” 2 mm barrel draw attributable to increased consumption of blending components, not an increase in demand or decrease in imports or throughput at refineries. Try predicting that!

The important thing to know about gasoline right now is that it’s becoming increasingly important as we head towards the driving season (about 3 months from now)…and we’ve got lots of it. Click here to see how-full-inventories-are.JPG . Once the discombobulation caused by multiple refinery snafu and pipeline breaks are behind us gasoline should settle down given the shear volume of it on hand.

  • Distillates: Down 2.5 to 3.5 mm barrels (I think most are around 2.9). Oil-weighted degree days were still pretty high at 299 and I’d remind readers that the potential still exists for a much larger “end of season” or “top off the tanks” series of draw downs. Prices are pretty robust and will remain so until traders are convinced we will end the season above the midpoint of the 5 year range.

I think we’ll either get a big draw now or it gets drawn out over the next two months. I wouldn’t be at all surprised to see a 3.5 mm barrel pull today.

It’s the potential for a home wrecker-sized withdrawal that keeps me from adding to energy sector put positions right now.

2003-ho-example-3-022207.JPG

Last of the Big Kahuna Gas Draws For The 2006/2007 Winter.

  • My Estimate: 210 Bcf.
  • It Was Still Cold Last Week. Last week’s gas-weighted heating degree days of 246 were off recent peak levels but were still 23% above normal and were still the second coldest week recorded this winter in the East consuming gas region.

gw-hdd-vs-storage-022207.JPG

  • Consensus Estimate: Still had not seen one by time of publishing
  • The over/under is likely to be 200 Bcf. If the report is over 200 Bcf (pretty likely) gas may get a little breathing room. Way over and we break $8 in a rally that will quickly run out of steam. Under 200 Bcf and we start punching daily new lows until we get to $7, then it’s back to closely scrutinizing the forecasts for March.
  • Next Week We Should Fall From Triple to Double Digit Withdrawal Territory. My estimate: 90 Bcf (+/-10) . With HDDs falling to 166 the immediate impact will be a much smaller withdrawal.
  • February 2007 Was A Big Demand Month, As Februaries Go. The five year average withdrawal for February is 573 Bcf, so assuming I’m close to the mark this week and next and assuming average demand in the final four days of the month, February demand should total roughly 700 Bcf. Here’s what the math on the month looks like:

feb-gas-table.JPG

This would yield February ending storage of 1,718 Bcf (the fourth highest Feb end reading in history).

  • Finally No Matter What March Throws At Us, Trough Storage Will Still Be Pretty Comfortable. So what does March look like?
    • The five year average withdrawal for March is 227 Bcf.
    • Going back to 1994 the high and low for March demand are 522 and 142 Bcf respectively.
    • Trough storage generally occurs around the end of March +/- two weeks. Average trough storage is just over 1 Tcf.
    • Based upon my estimate for February end storage of 1,718 Bcf: So an average March yields trough storage of 1,491 Bcf. This is pretty much in line with my 1.4 to 1.5 Tcf in storage and should serve to put a damper on gas prices.
    • The wickedly cold scenario yields storage of 1.2 Tcf which still doesn’t support current $7+ gas prices! To be honest if March forecasts start looking like that kind of an Arctic beast I’ll go long CHK, SWN, KWK and a few others while I wait for April.

Odds & Ends

Analyst Watch: nada.

New Holdings Watch:

  • TK – penny miss to par depending on who you ask. Estimates ranged from $0.98 to $1.24 with 13 analysts posting numbers. Costs look pretty high but guidance given on the conference call this morning will guide written opinions later today and tomorrow.
  • GMR – In line with estimates. Announced $15 special dividend that was well liked by Street in after hours trading sending the stock up 10%. This is why I don’t do earnings plays and why I always scale into position (and why I shy away from front month contracts).

Great Bloomberg article on the rising cost of hydrocarbons.

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35 Responses to “Thursday – Dueling Inventory Day”

  1. Interesting tidbit about the drop in oil in early January. Apparently Goldman lightened up the weight of oil in their commodity index. Hmmmm…. Why are they lighting up?

    http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=E7424C3E-17A4-1130-F506D65A74D17A1D

    -SaneO

  2. zmann said

    If you want to get really conspiratorial, note that they lowered the weighting last summer (not the normal time to rebalance) but good enough to give oil a tumble and gasoline prices.

    I saw somewhere that they’re selling the GSCI to S&P now after having grown assets from $17 B to $70 B. Buy low, sell high.

  3. I remembered when they lightened up on gasoline, caused for a nice tumble in gasoline futures. I am wondering if they are weighting back up in gasoline again d/t the increased spread between gasoline and oil during a low demand season?

    I love a good conspiracy theory 😛

    -SaneO

  4. Rob said

    Sane, Love the mega-man avatar.

    Zman, I think you forgot to mention how many flights were cancelled last week with the distillate numbers. Same with gasoline, that winter storm through the midwest and northeast kept a lot of people inside. Granted they did need to keep their houses warm. I am expecting less of a draw.

  5. zmann said

    Rob – Great points! Feet of snow = no driving to be sure. On the crude side I’m thinking refinery utilization will be flattish and so its up to imports. But I think prices hinge, at least for now on the size of the HO draw. Unless the other numbers are just whack.

    I also forgot to mention BRNC which is up 3% this morning despite the miss. This may have a ways to run now.

    The tankers are up on in line numbers but really on the huge cash dividend at GMR.

    As usual, none of it matters until after the numbers.

    Anybody see/hear a gas storage consensus number?

  6. Thanks Rob….

    Fond childhood memories…….. Oh my thumbs hurt just thinking about it 😛

    Yeah the storm is a good point. I barely went anywhere last week d/t snow and stuff.

    -SaneO

  7. zmann said

    CNBC from Platts:

    crude up 1.1
    gaso down 1.3
    distillates down 2.9
    refinery utilization up 0.4% to 87% (seems unlikely)

    consensus gas: 229 Bcf. So maybe the under for gas prices is 220 and over is 230 with little immediate change on a number in between.

    my 210 would definitely be considered bearish

  8. Lance said

    Zmann,
    Thanks for your help below.
    Will definitely read the backgrounder

    ————————

    zmann Says:
    February 21st, 2007 at 12:25 pm
    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!

  9. zmann said

    NXY continues to hang on by a couple of fingernails. Today’s numbers, if bearish, will crack that chart.

  10. zmann said

    223 Bcf – underestimated the East consuming region again. Pegged the Producing region and missed the West by 3 Bcf.

    Crude up 3.7 – need to check imports
    Gaso down 3.1 – need to check and see but I’m betting this is the result of refiner downtime and purchases by the likes of VLO to cover production. Also, bet it’s a big pull on the blending components.
    Distillate down 5 – see what I wrote this morning

  11. zmann said

    Refiners ran at 85.2% not the “expected” 87% – there’s your build in crude.

  12. 1.8 draw on blending components.

    -SaneO

  13. zmann said

    Thanks Sane – there you go. Over half is just a pull on blending to prepare for producing more gasoline.

  14. zmann said

    Imports were up 158,000 bopd vs the prior week. This is above the lows reached in November after the first round of Opec cuts.

  15. Rob said

    Can you explain what blending components are?

    The three stocks I watch, XLE, XOM and USO were bullish right after the report, are now flat to down a little, which explains this weeks inventory wasn’t that great.

  16. blending components are stuff they add to gasoline to reduce pollution, up the octane, etc…

    —SaneO

  17. mike said

    Did you ever pull the trigger on the BRNC April 15’s? What’s your take now?

  18. zmann said

    Mike

    No I got busy. If you didn’t do it I’d wait until you can get through the CC (on now) and slides. I’m not on it but will probably listen to the replay tonight. They missed by $0.04 after a one time item. Cash margins are off a bit but revenue continues to grow. I just need to see how they feel about growth the rest of the year and costs. If I had bought it yesterday I probably would have taken the gain and said goodbye given the miss and what I see as bearish oil numbers. However, I may decide to buy those Apr 15s again after listening to the call. They’re still a cheap stock and nothing appears to be broken. Hope that helps

  19. tom2oc said

    Gee, Mr. Market will always surprize us. I expected and was hoping for a good move today and only thing happening at the moment is range trading around the 137.50 line. Glad I stayed out after reading your post of this morning. Thanks. I’m staying out of OIH unless it goes over 140 to go long or below 135 to go short. Might be churning and reversing in that range for some time. Good luck!

  20. zmann said

    Tom – hear ya churn and reverse. I’m mostly fence sitting as well and getting through the TK call. I think it would be off on margins if it weren’t for the mongo dividend offered at GMR that’s got the shippers up today.

    Take a look at NXY for me on the TA. Thanks

  21. OilPro said

    Z,

    Thoughts on CHK before earnings ??

    Also anyone playing BOOM as an earnings play

  22. zmann said

    Oil jumping on the IAEA Iran report. Who is surprised by the fact that Iran is accelerating its nuclear program, not freezing it as requested. As I stated before, an oil price over $61 could easily get you a test of $65. If they do that further short bets are off while we wait it out.

  23. zmann said

    OilPro Re CHK – I got nothing to add. They’ve already announced production and reserves so there’s no surprise there. They’re extremely well hedged and even without, this Iran crap has even nat gas up. I guess I’m saying their shouldn’t be anything bad on the call. Analysts don’t even care about 20-30% LOE $/mcfe annual growth so how can you go wrong with the name for at least a quick pop? Given the strength in gas prices they might announce bigger than expected capex and production growth targets but I really don’t know.

  24. tom2oc said

    Hmm… NXY, weird chart. Not sure of your timeframe so I’ll look at all timeframe.

    Let’s start with the weekly for investment. Multi-year bullish consolidation range 45.5/64 going back to start of ’06. A move over 64 would be EXTREMELY bullish and good for $25 run over a year or so. Would wait for 64 to invest long term and would stay clear of it if while stuck in that long term range. This chart reminds me of RRC which if you recall I traded last fall. With the difference that RRC is now above the 30 range resistance making it a good long stock to buy for anyone beleiving that oil is going up in the next 2-3 years.

    The daily is for swing trades and it shows a bullish handle/flag that start forming when price touched the top of the above range in Jan. But the volume pattern does not confirm the bullishness of the price pattern. Squeezed between a rising 50MA and a declining 20MA. A move above 20MA at 61 would give best odds for a move to test 64 resistance once again. A move below 56.50 would negate the bullish handle/flag and would give best odds for some tradable downside on a swing basis. Overbought/oversold neutral right in the middle. Neutral at this moment.

    On the intraday timeframes I have a buy signal on the 1-5-10 minutes and a sell on the 30 and 60 but the daily is still a buy at the moment. This is for daytrading and it tells me to look elsewhere.

    Sorry for that neutral opinion on all timeframes but got to tell you the way TA tells me to see it. It’s a wait and see stock at this moment. Could go both ways. G/L

  25. tom2oc said

    Gee, by the time I finished the TA on NXY, I look at OIH and it’s flirting with 139! I might get that big move after all. This is nuts! Watch 140! If it goes above that line, it’s breaking out!!

  26. El Diablo said

    Please don’t ‘miss the forest because of the trees’. The same “buy high but sell higher” specualtive funds that are driving crude far outside fundamentals are doing the same in gold, copper, corn, real estate, and equities. The point is that due to this ‘capital concentration’, an Amaranth-type failure can have a tremendous ripple effect–margin calls on a wrong-way oil trade can lead to large liquidations of other commodities/equities. The only reason Amaranth did not cause the cascade was because they were primarily energy. If the next guy that’s wrong is part of a macro fund, there will be NOWHERE to hide.

  27. El Diablo said

    I forgot to add: congress will then act quickly and decisively to limit the amount of leverage that INDIVIDUALS can use.

  28. zmann said

    Thanks Tom – I was looking for a near term pull back. Same for TK if you get a chance?

    El Diablo – good to see you’re still lurking about. I couldn’t agree with you more. What do make of Goldman selling their commodity index after a huge 5 year run in assets and a 16% down year last year?

  29. Feds are talking about hedge fund regulation.

    http://www.marketwatch.com/news/story/investing-hedge-funds-should-limited/story.aspx?guid=%7BC0DA44D8%2DDA30%2D4CA3%2D8A22%2DFF51E0205FE6%7D

    -SaneO

  30. El Diablo said

    RE: Goldman selling commodity index–I don’t read much into it. Goldman is not interested in the ‘index’ business. I believe it was started there purely because there was a lack of widely-followed commodity indices. Their clout got the business off the ground, now they sell to S&P, which is focused on ‘operating’ indices. I don’t believe their action can be interpreted as any particular view on commodity markets, seems to just be a good business decision.

    RE: ‘specualtive capital concentrations’ A shakeout would separate true ‘hedged’ (very few) funds from ‘overly leveraged speculators that call themselves hedge funds’ (very many).

  31. zmann said

    No kidding. “Hedge” fund is the wrong name for what 90% of them do.

    It looks $61 or bust on crude…they can taste it.

  32. Speculation fund

    -SaneO

  33. unable to pop 61

    -SaneO

  34. El Diablo said

    Plus, we’re running out of “shortages”! In the past few years, we’ve experienced “shortages” (and dramatic price appreciation) of real estate-condos, flu vaccine, oil, nat gas, gasoline, oil tankers, drilling rigs, refining capacity, copper, corn, electricity, to name a few. The speculators love “stories” to drive prices. Only problem is that NONE of these “shortage stories” EVER materialized. Yet mainstream media can not get enough of these “stories”. The sheer number of these unsubstantiated “stories” also confirms the presence of excess speculation.

  35. tom2oc said

    Sorry Z, was busy. TK is bullish above 50 and bearish below it due to a breakout negation action.

    I was tempted to get puts on OIH when it flirted with 139 but then I remembered that tomorrow is Friday and with Iran back in play the oil crooks will probably party again tomorrow afternoon by pumping oil and profits for them. Used to be that the time to short oil was on the Mondays so I’ll wait for Monday. But no way I’m touching OIH on the short side above 140 though!

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