zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for February, 2007

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.”

cera-ucci.JPG

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.

cftc020607.JPG

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?

xom-21207-expensive.JPG

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.

Posted in Uncategorized | 26 Comments »

Markdown Monday?

Posted by zmann on February 12, 2007

Oil and Gas prices are off substantially in early morning trading today. No picks yet other than the usual as I’m expecting big withdrawals in both heaing oil and natural gas this week. In fact, if we do get a substantial pullback in the stocks, I’ll be looking to add covers with the XLE.

Crude Still Finding $60 To Be A Ceiling. Traders are sticking to the talk that a higher close for oil means … further higher closes for oil. The elusive closing trade above $60, if achieved, would make a run on $65 very likely this week. News of record snowfall in upstate NY will undoubtedly be trotted out as a sign of further massive demand every 5 minutes on CNBC but I still think oil hits $50 before $65 as winter is nearing its end and OPEC compliance will likely falter with the rebound in oil prices.

Opec Watch: From Saudi’s oil minister Al Naimi on Sunday,

  • “the world oil market is in “much, much better health and balance” now and if trends hold there will be no need for further production cuts or increases in supply when members of the OPEC meet next month
  • production is now 8.5 million to 8.6 million barrels a day – one million barrels a day less than it pumped around six months ago.”
  • Comment: Since September, OPEC has announced cuts totalling 1.7 mm bls. Oil has rallied on cold weather and little else. There is no evidence that Iran is willing to make good on it’s threat of using oil as a weapon. Instead, OPEC ministers are high fiving each other over this rally and there is no chance the remaining announced cuts will happen.

Oil Analyst Watch:  ‘With US petroleum demand showing stronger growth in recent weeks and with ongoing geopolitical threats to supply from Nigeria, Iraq and Iran, we think there is enough fundamental support already in evidence to spark a run to 65 usd or even 70 usd,’ said Citigroup analyst Tim Evans. Comment: One week of crude oil pulls out of the nine weeks and that’s strong demand? Wow, despite the fact that we’re thoroughly oversupplied it’s time for talk of $70 oil? Go figure.

Current Price Talk Is Too Bullish. One positive I would note is that when talk gets this bullish you’re due a downturn. Just before oil bounced from $50 to current levels, everyone CNBC could find to interview was saying $40 to $45 was the next stop for crude. We were too bearish then and they are too bullish now.

Elk Hills To Reopen Within Days. The closure of the Elk Hills prompted a $2 run last Thursday on statements that it would remain closed indefinitely.

Natural Gas: $8 remains the ceiling. This week will see the biggest withdrawal from storage to date but we still remain well supplied.

Holdings Watch: No new picks this week as both commodities are at inflection points. Moreover, analysts are sitting on their hands right now. That is to say they’re doing nothing but maintaining Buy ratings and telling investors the stocks are cheap.

Weather: Cold to maintain tight grip on northeast. NOAA’s latest forecast shows continues colder than normal weather through February 21. However the rest of country starting to see more normal temperatures.

  • Last Week was colder than expected. HDDs came in at 267 for last week versus the Climate Prediction Center’s early read of 254. Last week saw the biggest pulls from storage for both natural gas and heating oil but this week should see the biggest withdrawals of the season to date.
  • But early morning indications on oil and gas show hefty price declines. Traders are starting to anticipate the inevitable decline in prices as winter draws to a close.

Earnings I Care About This Week:

  • Monday: CRK,
  • Tuesday: XTO,
  • Wednesday: PVA, PQ, TOT, RIG,
  • Thursday: BHI, COG, XEC, ECA, NXY 

Analyst Watch: nada

Posted in Uncategorized | 9 Comments »

TGIF – Elk Hills Rally Overdone

Posted by zmann on February 8, 2007

No picks today – too much gaming going on with oil and gas prices.

Oil Rallied Hard On Elk Hills Fire. Oil was treading water yesterday until OXY announced that its Elk Hills field in California had a fire on Tuesday and that 95% of the field’s 120,000 boepd capacity would be shut in indefinitely (the field is 60% oil so this is only 72,ooo bopd) See table below. Crude rallied two dollars even or 3.5% on the news to close at $59.71. Interesting that buyers ran out of steam before they breached $60 but in electronic trading they have now shot through $60.40. I still think it’ll bounce off $60 in the regular NYMEX session and head lower again but only if OXY provides further details on a recovery schedule and if the Nigerian oil worker unions don’t re-threaten to strike.

elk-hills-on-fire.JPG

Why yesterday’s move in oil was a bit overzealous:

elk-hills-c.JPG

Even If It Is An Over Reaction The Rally May Continue Due To Short Covering And Technical Reasons. So we got a 3.5% rally in crude off a 0.45% disruption in U.S. total crude supply. If we hold demand and supplies flat from here it would take 58 weeks to eat through the current surplus over the five year average crude inventory level. However, a word of caution would be that a month of this outage would take you into deficit versus year ago inventory levels. Traders have been looking for oil to close over $60 and if it manages that tomorrow all sights will be fixed on the next juicy round number: $65. It’s bunk but that’s the way the barrel rolls.

This is very similar to the rally we got last August when BP announced it’s little rust problem at Prudhoe Bay. That rally was short lived despite the fact that a lot more produciton was affected. Prices ended up tumbling when the company released details on when the pipeline would be rerouted. Although this market is a little tighter thanks to Opec, I’d expect the same reaction here when OXY begins releasing time estimates.

He’s Got A Ticket To Ride, And He Don’t Care. Goldman Sets $69 Oil Price Target For 2007. From Bloomberg:

New York oil futures may rise as high as $71.50 a barrel this year and average 4 percent higher than in 2006 because producer investment is “significantly” short of requirements, according to Goldman Sachs Group Inc. The price of the benchmark U.S. crude, called West Texas Intermediate, may average $69 this year, an increase from $66.25 in 2006, Goldman economist James Gutman said at a conference in Hong Kong today.

My Comments:

  • Which producers would that be? The FSU is growing, China is spending cash all over Africa to make sure it grows, XOM is actually going to grow this year, etc.
  • OPEC has 3-4 mm bopd of spare capacity now.
  • True, capital budgets are mixed this year but oil sand s production will be rising as will West African volumes.
  • Even the long standing decline of US crude production has actually flattened and turned up over the last year.

U.S Crude Production – The Long Slide Appears To Have Stalled.
us-crude-production-graphs.JPG

  • I remember when analysts used to employ price decks that were below current levels. It’s conservative and let’s the user of their analysis judge the company based on the fundamental business, you know, production, costs, cash flow. Conservatism has gone out the window and, I might add, room for upside to GS’ estimates.
  • days-supply-crude.JPG

Not only are we near an all time high for crude inventories but we’re very near the high for this decade on days of supply (which takes into account demand). OECD inventories are near highs as well and the China/India per capita oil consumption growth card is not playing out as well as many in the industry portray.

    Natural Gas Review: Withdrawal: 224 Bcf. My estimate 230. Street 216.

    Gas actually backed off on the news since the report was roughly in line with estimates. While the next report will almost certainly be smaller I urge caution in the coming week for when considering adding to put positions. Also, traders are commenting about the large amount of selling that arrives every time gas makes any positive headway over the last several days. They surmise that if gas can break through the $8 ceiling that a wave of short covering would likely ensue driving prices significantly higher.

    Close Enough For Hand Grenades (Closer Than The Street).

    gas-sto-revu-020807.JPG

    Gas Inventories Are Still 19% Above The Five Year Average

    gas-storage-020807.JPG

    We’re Still On Track To End Storage North Of 1.5 Tcf! If you take the coldest 8 week period (late January to the end of March) over the last 14 years you get demand of 832 Bcf which would still leave 1,515 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). For more on my thoughts on the natural gas storage data click here.

    Odds & Ends:

    Oil Sands Watch: – FBR is voicing concerns over oil prices and their impact on oil sand economics. Wow, a voice of reason amongst all the perma bulls. Stocks impacted: CNQ BQI, SU, and ECA.

    Hugo Watch: I once said Chavez’ management of Venezuela was a textbook example of how not to run an oil country based on this chart and his various statements and activities. vz-vs-opec.JPG

    I’d like to revise that simply to “how not to run a country” since now there’s no meat or sugar in the grocery stores. When are the people there going to get tired of the blatant mismanagement of their country and toss this guy? Where’s the beef Hugo?

    For more insights into my stocks picks see Wendesday’s edition here.

    As Always, Thanks For Reading and Have A Great Weekend!

    .

    Posted in Uncategorized | 21 Comments »

    Thursday – Big Gas Draw Day But It Should Already Be Discounted

    Posted by zmann on February 8, 2007

    Oil…Third Strike And You’re Out! Oil was up $0.75 going into the inventory report and began a session long slide from there to close the day down $1.17 at $57.71. The drop may only be temporarily but this was not the big move through $61 many technicians were looking for to carry crude to $65.

    In T. Boone parlance I’ll say that I think we’ll see $55 before we see $60. At that point Opec starts squawking again but I think once the cold subsides in the northeast we test $50 again. Yesterday, the National Weather Service predicted that below-normal temperatures will persist in most of the U.S. through 2/20 so I’ll have to be a little patient. As we approach that date traders will unwind an avalanche of recently acquired long positions as the simple fact that the US is amply supplied for the driving season and crude in general takes sway from the weather.

    My quick review of yesterday’s oil numbers:

    • Crude – Expectation of a million barrel increase was met with a 400,000 barrel draw. The draw is explained by a combination of lower imports (9.547 mm bopd vs 9.967 mm bopd last week) and slightly higher refinery utilization. Crude inventories remain well above the five year average and the US market remains well supplied for current demand. Click on the chart below to get a better view.

    crude-020807.JPG

    • Gasoline – Expectation of a 1.4 mm barrel increase. The number came in at almost twice that with a 2.6 mm bls increase. I took additional puts on VLO and a first tranche of puts on TSO in the wake of this number. Despite the fact that demand continues to creep up (we’re running 1.8% ahead of year ago levels this week) and that refineries have been conducting more maintenance than usual gasoline stocks continue to build quickly. This much gasoline in storage this time of year has got to weigh on prices soon.

    gasoline-inv-020807.JPG

    • Distillates – Expectation: withdrawal of 2.6 to 3.3 million barrels. I said it could be much bigger and though it blew out the top end of the range with a 3.7mm bls draw it wasn’t the gargantuan number I was leary of. How the street arrived at smaller number than the preceding week can be explained by: 1) the fact that most analysts are leaving it to their research associates who do the simple degree day math, and 2) the fact that they want to low ball the number because sell ratings don’t generate trades (at least not as many as a coverage universe full of buys) let alone banking. In summary, Winter is nearing completion and there’s no shortage here.

    Distillate stocks remain well above the 5 year average. Note in the chart at right that East Coast stocks remain at levels 50% greater than a year ago!

    distillate-020807.JPG

    Natural Gas Inventory Day.

    It appears that $8 is the ceiling for the recent run in natural gas prices, much like $60 is turning into the top for crude. While I’m confident that today’s pull from gas storage will be the biggest of the season it will have to enormous (240+) to push gas above $8.

    • My Estimate: 230 Bcf. The producing and eastern regions saw the coldest weather of the season to date by far while the western gas region was only slightly warmer. Unlike last week, were the overall high degree day total misled analysts into overestimating demand, this week’s season high 258 HDDs will yield a season high withdrawal and the first breach of the 200 Bcf mark.

    020307-hdd-vs-bcf-table.JPG

    • Street Consensus: ??? Bcf. Sorry no news stories published so far with estimates. I’ll have to get it from CNBC this morning.

    Impact: anything over 230 Bcf and we may embark on a short lived rise over $8. The cold in January served to completely erode the YoY storage deficit and the transition between surplus and deficit has historically led to spiking gas prices. In this case gas is already up 18% in the last 3 weeks so most of the transition is already discounted into the price of gas. Last year March saw some late season sizable draws from storage so if they’re not repeated this year, our trip into YoY deficit status may be very brief…which should send gas back to $6 territory.

    Next Week It’s Unlikely Withdrawals Top The 200 Bcf Mark. Traders at the NYMEX are no doubt preoccupied with the cold in the northeast but I’d point out to them that this week has seen a veritable heat wave through the core of the producing region with temps hitting the mid 70s across Texas and reaching temps 20 degrees above last week well into the nation’s mid section and South Atlantic regions. Next week’s HDD tallies, when they arrive on Monday are sure to fall from the early read of 254. You’ll know by looking at the March natural gas contract which will be down if I’m right in pre market trading Monday. At that point, analysts, who are probably drooling another over the prospect of 220+ Bcf withdrawal next week will be forced to curb their enthusiasm.

    While it’s still pretty cool, the West and Producing Gas Regions are enjoying an extended respite from colder than normal temps.

    weather-map-020807.JPG

    Odds & Ends:

    Nigeria Watch: After agreeing to meet with two oil unions that threatened to strike last week, a move that would virtually shut down Nigerian production, Nigerian president Obasanjo skipped a meeting with them saying he had other more pressing matters of state. Smart. Meanwhile a French oil worker was kidnapped yesterday which should set the unions back on the strike path PDQ.

    PTSG Up 17% Yesterday As IPAA Attendance Announcement Is Announced. The key thing to remember here: Easy come, easy go. If I bought in at $0.90 when I originally mentioned this single digit midget on January 30th, I’d be very tempted to take the 41% gain and run for the nearest T-Bill, CD, mattress, etc. The potential is enormous but so are risks in investing in bulletin board listed pennies so go in with only your, well, mad money. They speak at the Independent Petroleum Producer of America (IPAA) small cap conference this morning just before the open. You can listen live or check out the replay of the webcast here.

    NFX Reports 4Q Brick.

    • Expected: $0.97 EPS, $530 million revenue.
    • Actual: $0.86 and $427 million. I gotta say I’m shocked the Street could be this far off. Some of the earnings miss will be forgiven since it’s based in part on the timing of hurricane related expenses from last year. However the top line miss is a Street blunder.
    • These guys have already announced timing related production delays and 2007 should be a much better year in terms of operating costs and production growth than 2006 (much of the bad news is behind them). In fact G&A and other cash costs fell on a YoY per unit basis. It was really just the LOE which jumped and that will come back down soon.
    • Reserves up 14% – all organic. 111% reserve replacement. Not a world beater but that wasn’t expected this year. All in finding and development costs surged to $2.18/Mcfe and I honestly don’t know if this big an increase was anticipated by the Street. I’d guess not. You can always tell if it will be perceived positively or negatively if the press release contains the calculation or if you have to do the math yourself. In this case I did the math. On the other hand, some of NFX’s peers like PXD are reporting F&D costs north of $3/mcfe ($18 / barrel).

    2006-nfx-fda.JPG

    • 1Q Guidance probably won’t please since it’s down sequentially:
    • 4Q production:67.9 Bcfe (81% gas),
    • 1Q Estimated production range of 59.4 to 66.2 Bcfe
    • Costs look much better however with LOE tumbling

    SFY Reports A 4Q Beat

    • Expected: $1.06 EPS, $156 mm revenue
    • Actual: $1.16
    • 2007: expect to grow production 7-10%, reserves 4-6%
    • Their ops in New Zealand are really declining pretty quickly and with the slowing growth of domestic production they’re estimating another sequential decline in production.
    • Costs appear well contained.
    • All in all, they just had a great year but it’s hard to get too excited about near term guidance. Just watching for now.

     AXC presenting at Scotia small cap conference 2/14. Very interesting company. More soon.

    MRO had a couple of sizable discoveries offshore Angola with TOT.

    Analyst Watch: APA upgraded by Opco to buy, SU cut to underperform by FBR, CNQ cut to hold at FBR (FBR taking the Canadian stocks down, probably over all the dire capex budgets and comments of late about weak prices). Note TLM got cut the other day.

    Other Stuff I’m thinking about right now. Coal is probably headed lower soon. I’ll have a piece out on coal over the next week or so but for now know that inventories remain high but coal prices ran up with natural gas prices. BTU and ACI should roll over here as coal comes in.

    Posted in Uncategorized | 24 Comments »

    Wednesday – It’s All About The O. HO That Is!

    Posted by zmann on February 7, 2007

    Oil: To Fall Or Not To Fall? Oil rallied again at the open and briefly touched $59.99 before quickly succumbing to profit taking to close up a whopping $0.14 at $58.88. In fact, it would have been down on the day but was saved by a last minute rally. Today the size of the distillate draw will determine if “the third time is a charm” or it’s “three strikes and you’re out.”

    Here’s the range of oil inventory estimates from a variety of surveys:

    • Crude – UP 1.0 – million barrels. No one really cares about this number now unless it significantly misses the mark in either direction.
    • Gasoline – UP 1.35 million barrels. Ditto the comment above on crude. See Note #1 below.
    • Distillates – DOWN 2.6 to 3.3 million barrels. CNBC will go with the low end which is from Dow Jones this week. The high is from PVM Associates who’re generally pretty good at predicting the weeklies. The simple math says the following:
      • Solely based on the degree days which were actually a hair lower than those of the prior week we’d get a lower number than last week’s 2.6 mm bls,
      • Refinery capacity is expected to be up a little (0.2%) so that adds back some heating oil while consuming a little crude,
      • But those secondary and tertiary stockpiles are getting pretty beat up by all the cold so you’ve had some refills already which could lead to a slightly bigger draw this week.
    • We Could Easily Get A MUCH BIGGER NUMBER Today. I can’t stress enough holding off on trades pre inventories. February is a very volatile month for heating oil and especially so in a winter season that didn’t see it’s first prolonged cold snap until January…like this year. A similar pattern occurred in 2003 and when the cold set in (a bit colder than we’ve seen of late to be sure but similar in both it’s timing and longevity) withdrawals quickly grew to as much as 10 mm bls per week even as the northeast started to defrost. Since I’m primarily short I hope I’m wrong. However, since I’m only a fifth scaled in I’ll also be happily take cheaper puts at higher stock prices.

      2003-ho-draw-down-example.JPG

      Today’s Go List: This is a list of candidates for PUTS if we get a distillate withdrawal of 2.7 million barrels or less. I’ve been pretty patient since crude bottomed in mid January and subsequently rallied $10. These positions, if activated will represent my second 20% (second toe) as I scale into my Spring put positions.

      Note: Call positions (for a quick trade) will be taken where indicated if the distillate draw is a monster (3.3+ mmbls) or crude stocks fall (unlikely but possible) or gasoline supplies decline (not in this universe fella).

      And If  Distillate Inventories Fall In The Middle My Range I Sit On My Hands And Watch The Direction Of Crude For A While. If the crude and gasoline numbers come in pretty much as expected and heating oil falls in the middle of the range the following trades, for the most part, get put on hold. There’s no reason to try and be a hero here.

      • BHI instead of the OSX or OIH puts, great correlation and it’s had a good bounce, and the premiums aren’t nearly as rich!
      • APA – a laggard that’ll really get hurt when oil turns. However, CALLS on a crude rally,
      • EOG – because their growth is largely from Trinidad where gas is still pretty cheap and they’re expensive. For some reason, despite being a very gassy large cap E&P, these guys are much more highly correlated with oil prices.
      • PTR and PBR. Take you’re pick since both suffer quite nicely if oil retrenches, but I prefer PTR‘s slow growth and China market syndrome potential to PBR’s ability to slap a short with massive exploration success at any moment.
      • BP their self sabotaging nature really hurts the bottom line. As a laggard, they’ll get hurt worse than their peers if crude quickly retreats.
      • SU not a big move up with oil after the BP takeout rumor dissipated, will fall with oil though. CALLS on a rally. Good for a two point pop on the call side should we get a big heating oil number that drives crude well beyond $60.
      • TSO – it just doesn’t get any better than the quarter they just had. Also, after the bludgeoning yesterday this one would make an excellent day trade for CALLS on a rally.
      • XLE and/or XOM – puts or calls depending on circumstance.

      Note #1: if gasoline stocks were to fall (inconceivable I grant you but if) then I’ll be scooping up nearest strike, OTM, front month CALLS on TSO, VLO, and/or SUN. These won’t be held any longer than it takes oil to jump from $60 to $65 on a gasoline draw. Again, Inconceivable!

      Note #2: Those of you that read my daily posts will note I left out a few of my favorite put candidates. Among those absent from the list above are HAL, SLB, HES, and MUR. The reasoning is simple. They are generally resilient and I’ll have more time to watch and confirm that they are actually going to respond.

      • In HAL‘s case, it’s viewed as too cheap to short and it is true that gas will help support it up here (as long as gas holds up).
      • SLB is the Mercedes of the group and has the multiple to match. It acts like XOM does for the majors – a safe haven when most energy screens are red plus it is a high quality name and I just get antsy about shorting any name with so much cache when Goldman is banging the “buy energy at all costs” drum on a weekly basis. I do have a small put position here now.
      • HES. Who am I to pick a top? It’s not overly expensive and the only thing I really begrudge them is that they don’t react to falling oil since everyone is so happy over the retirement of their once lousy oil hedges. Got a toehold here as well.
      • MUR. What can I say except expensive, disappointing on the guidance side and zero expectations from the street. This puts you in constant danger of an upgrade.

      Natural Gas Will Follow Heating Oil Today Because This Market Is Extremely Black & White Right Now. Odds are that natural gas will look to the size of the heating oil draw as if it for-tells the size of the gas pull tomorrow. I don’t care what heating oil does today, tomorrow’s natural gas inventory report should show the largest withdrawal of the season, bar none. I have more detail on it tomorrow but suffice it to say for now that gas weighted heating degree days shot the moon while heating oil HDDs backed off a bit.

      Odds & Ends

      Opec Watch:  Russian oil minister says “Gas Opec product of a sick imagination.” Dude, watch out how you talk about your boss!

      Earnings Watch:

      NFX – Expected $0.97 EPS and $530 mm revenue later today. Stock’s been overly beat up of late.

      Analyst Watch: NOV from add to buy at Calyon, NOV price target cut at RBC. ACI price target trimmed at RBC, GRP price target boosted at Calyon.  BP downgraded to hold at ABN Amro.

      PTSG To Present At IPAA OGIS Tomorrow. This is that tiny participant in XOM‘s Barnett play. Worth watching the webscast.

      Posted in Uncategorized | 18 Comments »

      Technical Tuesday

      Posted by zmann on February 6, 2007

      Oil…$59.95 But No Cigar. I’ll wait to add more bets to the downside until we cross and fail back through $60. I certainly don’t think today counts although it is interesting to see the all the life drain out of the stocks. Oil’s ‘s run at $60 and subsequently failure was nicely timed to coincide with the OIH hitting its 200 dma and bouncing lower. However, I think yesterday’s action was mostly noise and will await more data on Wednesday before acting. I don’t mean to sound like a broken record here but I’ve got my 20% positions and I really don’t see a need, based on data or charts, to add to them yet.

      Barclays Capital technical analyst MacNeill Curry, said crude prices were at a “make or break” stage. “The… rally we expected is potentially nearing completion,” he wrote. If prices climbed above $61, however, there was scope for further gains toward $65. Comment. I agree completely on the nearing completion statement regarding the rally. Unfortunately, you can’t ignore the technicians when it comes to break outs either. If we get a bigger than expected draw in distillates then crude could shoot through $61 in a heart beat.

      Early read on tomorrow’s inventory report (from Reuters):

      • Crude – UP a million barrels. No one really cares about this number now unless it significantly missed the mark in either direction.
      • Gasoline – a build but size in the article I read wasn’t specified. Ditto the comment above on crude.
      • Distillates – DOWN 3.2 million barrels. Probably a fair number. I wouldn’t expect a much bigger number than that simply based on the degree day data which were actually a hair lower than those of the prior week.

      Opec Watch: Opec basket is at $52 per barrel and rising. These guys are so happy they’re talking about keeping production steady at the March meeting. Gee, I wonder if there’s more propensity to cheat on your quota now that the danger of plunging oil seems to have passed. We’re up $10 off the lows of just three weeks ago when everyone wanted emergency meeting and a new round of cuts.

      Natural Gas: Getting A Bit Ahead Of Itself. The following two graphs depict: 1) the year over year (YoY) gas storage surplus or deficit and 2) natural gas front month contract prices for the same period. Reversals in the YoY storage chart have often led to peaks or troughs in natural gas prices. In times when overall storage remained at historic highs, the rate of change in YoY storage was a more important determinant of near term gas prices. For instance, YoY storage was in decline in late 2002 and gas prices rose despite an historic storage overhang. While we may dip slightly into deficit over the next 3 weeks (due to smallish withdrawals last year at this time) it won’t be by more than 200-300 or so Bcf.

      yoy-storage-020507.JPG

      A Close Up Look Shows That Gas Has Already Anticipated The Move In YoY Deficit Status. Only a few weeks ago, the YoY surplus stood at nearly 500 Bcf. With the advent of cold weather traders started discounting the erosion of this deficit and, I believe, have overshot the mark on natural gas prices given that:

      • Barring much colder than normal weather through the end of February the storage deficit should quickly reverse as last year saw two sizable late season withdrawals from storage.
      • We’re still on track to end the withdrawal season around 1.5 Tcf, well above the the five year average of 1.1 Tcf.

      closeup-yoy-gas-surplus.JPG

      Odds & Ends:

      Petrobras Could Get $300 Million Gut Check From Bolivia. Bolivia former coca growers union leader turned president Morale is asked PBR to swallow a price hike of 40% to roughly $5 per mmbtu for the 30 mmcfg it imports to Brazil on a daily basis. Brazil needs the gas and Morales is under increasing pressure to void Brazil’s current contract which runs through 2019. If it immediately went into effect and PBR were not able to pass the increased cost along to customers this would reduce annual eps by roughly 7%. I miss the old fashioned socialists who just oppressed their own people. Today all you need to do to become a socialist strongman, besides getting a lobotomy and a pair of tights, is to find something important to your neighboring countries and squeeze.

      Forest Oil Adds Reserves. Reserves grow 25%, reserve replacement up 372% all in @ an FD&A of $2.15 / Mcfe. On an organic basis, replacement rang in at a very respectable 258% with for $2.09 per Mcfe. Not bad performance with the company replacing the sold offshore reserves through the drillbit (prior to consideration of the pending THX acquisition).

      APC 4Q Earnings. Waiting for the conference call to reserve judgement.

      BP 4Q Earnings. Cut production targets. Consider them judged. I’ve got my toehold put position here and will add more this morning if they get any bounce after the “initial reaction sell off” on oil breaking though $60 today. The Thunderhorse and Atlantis production schedules slipped again and analysts have got to be getting tired of hearing about how these are projects “that no one else has done before.” Goldman went gambling here yesterday with that upgrade and crapped out.

      EEE. Another day, another bashing. This may fall to $5 if they don’t get out some concrete results soon but I’ll wait for the next pre PR related bounce.

      Analyst Watch – Yesterday Review. The Street Said To Buy But Investors Yawned. Yesterday saw upgrades for BP (Goldman) and EOG (Oppenheimer); initiation of coverage with a buy SWN (UBS); and MUR had its price target upped from $54 to $57 at Lehman. Four very powerful, bulge bracket sell side firms and four well known, liquid energy stocks and only SWN and BP managed to keep their heads above water on the day.

      Analyst Watch – Today. TLM cut to neutral at RBC.

      Posted in Uncategorized | 6 Comments »

      Monday Morning – Patiently Waiting For $60 Oil, Forecast Still Very Bullish For Gas

      Posted by zmann on February 5, 2007

      Oil Needs To Hit $60 Before I Take Further Action.The March contract had another strong performance making considerable progress in its march towards $60 last week. The contract closed up $3.50 on the week to $59.02 despite continued large builds in crude and gasoline stocks reported Wednesday. True, there was a draw in heating oil stocks that was either in line or slightly bigger than expected depending on which survey you pay attention to (Dow Jones or Bloomberg) but this is the first pull from storage in 7 weeks in the dead of winter and inventories are still well above average so it’s hard to see the bull case based simply on that (though CNBC tried).

      • Heating oil weighted degree days show a slight decline to 282 versus the prior week’s 287 which should yield a slightly smaller pull from heating oil inventories unless the refiners decided to continue to reign in utilization.

      No New Picks Until Oil Hits $60. I’d much rather miss out on the first 10% of a change in direction than try to pick a top or bottom. Phil of Philstockworld reminded me of my comments from January 17th: “Watch out for a potentially large bounce off $50.00.!!! If we don’t knife through it the bounce could be very painful so watch your puts.” I should have listened to myself more closely because I only added a few calls at the time. Man what a ride it’s been since then:

      perf-020307.JPG

      The divergence between oil the energy stocks has started to crumble. Until the last couple of weeks oil had vastly underperformed the oily stocks of the XOI as depicted in the first graph below. The out-performance of the stocks can large be explained by:

      • Wall Street’s belief that any weakness in oil and gas prices was temporary at best.
      • Record buybacks led by XOM.
      • A generally rising equities market.

      Recently, as oil took it’s almost mandatory bounce off $50 to its present level of $59 (up 14% in two weeks), the stocks managed to gain “only” 6% (see second graph below). This “divergence from the divergence” is not attributable to underperfmance from natural gas, which also scored double digit gains since the mid January commodity bottom, but is instead I believe, attributable to rising forward multiples and an increasingly pervasive sense that commodities have rallied too far too fast so oil and gas prices will head lower when this recent blast of cold weather abates.

      xoi-vs-uso-020307.JPG

      Organisation for Economic Co-operation and Development (OECD) Country Oil Inventories Have Been On An Inexorable March Higher. This list represents 30, primarily western, countries with large economies and trackable oil inventories. oecd-total-020307.JPGDemand for oil may be rising at 1-3% annually but these countries seem willing to put more and more oil into salt caverns and tankyards at higher and higher prices instead of actually consuming it.

      For a regional breakdown of OECD storage regions see my new Oil Macro page. The data runs through September 2006 but with the much warmer than normal weather through year end in both Europe and the US you can bet that inventories rose through at least December in the OECD countries.

      Winter weather hangs on in the East, Heartland. HDDs came in at 258 for last week, up from the early read of 238 HDDs on a gas weighted basis. That means that last week was by far the coldest of the season for the gas heated regions of the country. I really don’t see how we avoid a 200+ Bcf pull this Thursday unless something on the industrial side of demand is truly broken. The CPC’s forecast for this week is another quite blustery 254 HDDs. These are just the sort of forecasts to make one run out and buy calls on CHK, SWN, KWK for a one to two week pop and I am considering it.

      weather-020307.JPG

      These temperature forecast maps depict a slight change from ones over the last several weeks (there’s actually a splotch of red on them).

      While colder than normal weather continues to grip the eastern 2/3rds of the country a warming trending is stalled in the west. Could this be the end of Winter? Probably not but it will serve to limit gas withdrawals from the western region, a maybe slightly from the producing region in coming weeks. Texas is expecting a return to 70 degree highs which is actually a return to normal for our little slice of heaven.

      Since the western and producing regions have shown the biggest acceleration in withdrawals of late it would be better to see a return to more normal temperatures pushing further into the south before heading back for more puts.

      Earnings I Care About This Week. Actually the list is pretty light after last week’s deluge. The lesson from last week is don’t miss. Even the ties did well but APA missed, got downgraded, and got creamed despite better than industry average projected growth. Next week the majority of mid and small caps step up to plate.

      Monday: APC. Estimates: $1.26 eps; $2.73B revenues. Asset sales are running ahead of schedule. Production guidance should be down but the question remains as to how much lower it goes as the company pares back producing assets to reduce debt. Estimates are likely to fall a bit but nothing catastrophic. If they miss like Apache did last week it’ll make an easy decision for the analysts to downgrade the stock now and sort out the divestment related changes to the model later. However, it’s so cheap on a forward basis that it would have to be a significant miss to prompt analysts out of their current reiterate mode.

      Wednesday: DVN, PXD

      Thursday: NFX

      Analyst Watch:BP upgraded to Buy at Goldman, SWN initiated as Buy at UBS, EPEX started at neutral at JP Morgan.

      Posted in Uncategorized | 14 Comments »

      Finally Friday

      Posted by zmann on February 2, 2007

      Bears Got Bashed This Week.

      • XOI up 3.3%. Oil was up 3.4%. Much of the rally in the stocks came Thursday despite a decline of $0.87 in oil. The truth is, no one believes the pullback in oil is real until we hit $60.
      • XNG up 2.9%. Natural gas was up 2.1%.
      • OIH up 3.0%.. Can you say short squeeze?

      Thursday’s action hinged on XOM and VLO’s earnings beats. Although the market took awhile to digest XOM’s low tax rate which actually caused the beat they came around and sent the stock up a buck by day’s end. VLO beat by just not cutting prices at the pump despite the fact that they’re the nation’s lowest cost refiner (somebody call Pelosi) and that was enough to send the stock up 3%.

      The natural gas inventory report came in lower than expectations. I was looking for a withdrawal of 200 Bcf and the Street was at 215 Bcf according to CNBC. The EIA reported inventories declined 186 Bcf. Gas sold off but then rallied to close down only $0.14. This after gas rallied 10% in the last two weeks on the lingering cold and its impact on gas demand.

      This is where we stand now. Still in record territory and not likely to break below it next week either.

      gas-storage-020107.JPG

      I suspect a portion of industrial demand has become highly elastic to gas prices. Although the data to verify this won’t be available for another four or five months I strongly suspect industrial demand was the swing factor in the smaller than anticipated withdrawal. The regional weighting of degree days really should have prompted a bigger withdrawal. However gas has been over $7 for just over two weeks now and it’s possible that a physical buyer, maybe the fertilizer industry, decided to cut their intake until the cold weather subsides and prices fall (a two to three week wait). Smart move fellas.

      This is what I think of taking on additional energy sector puts at present. At noon EST yesterday I wrote the following in comments:

      I see nothing in today’s (earnings) numbers that would cause the street to reverse course on the group. Refiners are beating estimates with VLO heading up, service guys say there’s no problem and no slow down yet if ever, XOM managed a beat but only by way of a lower tax rate and no one cares. I see no reason to add to puts on this strength with cold hanging on longer than originally anticipated. I saving my bullets for higher levels. It’ll be up to falling commodity prices to take the stocks down and that could take a while. Gas almost certainly gets a bigger pull next week which is limiting the downside to today’s miss. I’ve got my token positions and will wait for the cold and Opec “cuts” to play out.

      APA cut US capex in 2007 by $600 million due to falling natural gas prices and rising service costs. Apache will reallocate those funds outside of the US (much like the majors have been doing for a decade). Here’s the quote – insert link. If enough of the independents do this its not good for the onshore rig contractors and service stocks in general. It would be bad for SLB and BHI in particular but would effect everyone from HAL to PTEN and PDC (who committed the sin of missing their number yesterday as well).

      There was some good news for the bears out this week. Besides all the fundamental data that shows we’re awash in oil and natural gas, that is. Scientists released their report on the state of Global Warm. The headline captures it all. Warming Likely Manmade, Unstoppable. The story summarizes recent findings/revisions and I gotta say, I’d buy ski boat maker BC and short ACAT, builder of really nice snowmobiles. Oh yeah, and whoever makes Tropicana suntan oil. LOL.

      Analyst Watch: RDSA cut to neutral at JP Morgan, APA cut to hold by Citigroup, MUR to buy Goldman, VLO to overweight at Prudential,

      Opec Watch: Quiet. Other than Saudi Arabia, I’ll bet a lot of foot dragging is going to occur on the Feb round of production cuts. Oil jumped $8 in the last two weeks and the temptation to cheat is mounting.

      Odds & Ends

      EEE Got Bashed For Another 10%. That’s a 24% slide since I referred to their press release as a non event yesterday. Not bad but I was out of my puts last month and didn’t re-initiate on the pre PR rally early this week. Here’s to paper trading! That and $4 will get you a cup a joe at Starbucks.

      CRR Beat And Will Likely Go Higher. This is that little ceramic sand (propant) company I occasionally mention as one to just buy and hold. Up $8.27 (22%) today! Earnings were good but they mentioned a successful slickwater frac in the Barnett using their product. This has massive potential. I’m waiting for it to cool off passing the time until it does by kicking myself repeatedly.

      Yellow orange snow falling over 580 square miles in Siberia. And Putin accused foreign oil companies of not complying with environmental regulations. Ha! This is Russian run oil region and they managed to turn the snow yellow! I thought only my dogs did that.

      Highlights From XOM’s Year End 2006 Conference Call.When asked about the previously stated objective of 3-4% production growth for 2007:

      Answer: When we look at — when we look at the production, we don’t really — I don’t really have a product target going forward. The 3% that we have talked about, when you look at — that’s an outcome of the projects that we have in the plans, and as we said, it will be lumpy depending on how projects come on, and it was a reflection of those projects over a longer period of time. So you see — you are going to see some positive peaks when you have more projects coming on and dips in that, and we really haven’t tried to get into year by year kind of outlook on that. — Comment – hard to pin them down since they’ve got a longer focus than most analysts care to think about.

      When asked about what Exxon called unscheduled downtime in Nigeria, XOM later in the call made this clarification:

      Answer: Well, I guess the bulk — from what I’m looking here, maybe the bulk of that Nigerian piece is associated with declines. And I just don’t have any specifics on the outages at this point.

      Analysts had a couple of questions concerning PSCs (production sharing agreements) that are approaching payout. When payout is achieved the operator, in this case XOM, sees a reduction in their percent of production. It’s an accelerated cost recovery on what are huge, capital intensive programs and the terms vary from project to project. Seemed to be some concern that Angola , which has been a huge source of growth, is seeing this occur which impedes growth. On the flipside it means that prices were high and these projects have high IRRs. I can tell you the street cares more about production numbers staying on an upward slant going forward. Exxon had no detail on this.

      On Global Oil Demand

      Answer: Yes, I mean and that’s probably the best way to look at it. We do the global balances and what are projected in our original projections would have been higher than how it’s turned out this year. And we’d see overall demand worldwide somewhere in the million barrel a day increase, something maybe a little less than that when you took a total global balance. Comment: Russia and Brazil together will add more than that this year.

      Mark Gilman of The Benchmark Company. My second question relates to tax rate. If I quickly to through the arithmetic and make the adjustment for the special item, the tax rate gets up to about 39% effective basis for the quarter if I’m doing the math right. Given business mix and things of that sort, where we were in this regard in the first three quarters of ’06, a rate in the 42% to 44% range would have seemed to have been where it should have been. I wonder if you comment on, perhaps, some of the factors that are responsible for that difference, and whether they are sustainable going forward. Comment: That’ll get you kicked off the Christmas card list! This is how they beat numbers. And no one else bothered to mention it.

      Answer: Given business mix and things of that sort, where we were in this regard in the first three quarters of ’06, a rate in the 42% to 44% range would have seemed to have been where it should have been. I wonder if you comment on, perhaps, some of the factors that are responsible for that difference, and whether they are sustainable going forward.

      When asked about Reserve Replacement that’s out later this month, specifically if 2006 would beat 2005. Last year reserve replacement was a paltry, non world beater 129% excluding property sales (112% with them).

      Answer: I’m not really not going to get — we’ll have it out here shortly. The thing that you have to remember in all of these things, though, is the timing of when a project comes on and when it’s funded. That’s — mostly it’s decisions and recognition of reserves or actually when you have a full funding decision and you are proceeding forward. So there’s often a skewing between when something is funded and when it comes online that those reserves are often recognized at different periods. But we’ll update you here shortly. Comment: Sounds like next year to me. Surely they replaced production?!

      Posted in Uncategorized | 20 Comments »

      Thursday – Gas Forecast & Oil Review

      Posted by zmann on February 1, 2007

      Dear Reader,

      I’ve added snap to my site. That’s not a commentary on my writing but the service snap which allows you to hover your cursor over hyperlinks to get a quick 2″X2″ callout preview without actually clicking through. If you’re like me and don’t like squinting at a tiny chart of oil you’ll just click on through but now you have the option to briefly check out the link. Let me know if it’s useful or annoying. Thanks.

      Natural Gas. Gas didn’t rally with “surprise draw in distillates” ( see oil discussion below) yesterday morning and it failed to rally with the Fed’s rate inaction yesterday afternoon. I guess 10% in one week is enough. Anything less than 200 Bcf today tanks it…at least for a couple of hours. Then less cooler heads will probably prevail. I’m staying away from additional gas based shorts until traders start to wake up and smell, well, all the gas.

      • My Estimates: 200 Bcf this week, 210 next week. Despite the slight drop in degree days I’m expecting a bigger withdrawal from storage today…

      hdd-vs-demand-013107aaa.JPG

      • Because the degree days were in all the right places to foster sizable demand.

      gas-demand-regiional-breakout.JPG

      • Consensus Expectation: I think around 200 Bcf.

      As you can see, the cold has forced me to up my January estimates:

      gas-table-013107.JPG

      • January Average Gas Withdrawal: 563 Bcf so we’re going to bust that.

      But even after all this cold gas storage remains within 20 Bcf (0.8%!!!) of record highs. Traders may rally gas for a time but it dies a week before the frost melts (basically when the first warming trend is forecast which will probably occur in the first or second week of February).

      Oil Reversed Course After What Appeared To Be Bearish Numbers Were Reported. After starting day off in the red, oil sold off on the inventory report, rallied five minutes later, traded sideways through a long lunch, started to sell back off and even went negative again and then soared when the Fed decided to do nothing. Bloomberg said it best with,“Oil jumped almost $1 in 15 minutes after the U.S. Federal Reserve cited firmer economic growth in six-weekly review of interest rates. Oil jumped 7.6 percent in the past two sessions, the biggest two-day increase since December 14 and 15, 2004 when gains were spurred by below-normal temperatures and falling stockpiles. Ah…of course distillate stockpiles are the only ones falling and this is the first time in 6 weeks but what the hell…buy, Buy, BUY!

      Yesterday regarding inventories I wrote the following (in italics).

      Consensus estimates for today’s inventory report are:

      • Crude: Up 1.2 mm barrels. Actual number: UP 2.7. More than 2x expectations.
      • Gasoline: Up 1.6 mm barrels. I wouldn’t be surprised to see a noticeably bigger build here. Actual number: UP 3.8 mm bls!!! Also a more than 2x beat…talk about noticeably bigger!
      • Distillate: Down 2.6 mm barrels. This would be the first drawdown in inventories in the last 6 weeks but it would leave inventories ABOVE the upper end of the historic inventory band for this time of year. Distillate down 2.6 mm bls. For what’s it worth CNBC (Can Not Bash Crude, ) reported this was a bearish number since expectations were for a 2 mm bls draw. Hmmm … I guess that would be the case if you take the number from one of the guys standing in the pit around you and not from the Dow Jones survey I use! Bloomberg was apparently looking for a draw of only 2.1 mm bls but I think they include an outlier that DJ doesn’t bother to call anymore.
      • Refinery Utilization: Down 0.1% to 87.3%. Down 0.3% to 87.1%. Our own grass roots Cartel hard at work (well, actually not working that hard) getting ready for the driving season.


      And the reaction to all of this was a BULLISH one. Traders are hell bent to test $60 oil.

      Energy Player Quote Watch:

      “The last two weeks we had the same pattern, we closed higher even though the numbers were bearish,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The psychology of the market has changed. Any dip is seen as an opportunity to buy.”

      “The heating season is effectively over,” said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. “Attention is shifting to gasoline and the driving season a few months ahead.”

      Crude inventories are now 10% above the 5 year average as we head into the seasonally slow demand period that is Spring. It does make one wonder whether the weather and Opec “cuts” will lend staying power to crude.

      wti-vs-inventories.JPGLet me just say now that I’m not predicting $20 oil. Please don’t sell your gas station if you own one before talking with your financial adviser. Please don’t get that second mortgage to buy puts on Exxon either. I’m just saying that I don’t think the V shaped recovery crude is enjoying will last past $60 nor hold that level. If the days of supply chart for crude didn’t mirror that inventories chart I wouldn’t even bring it up. And things are different now. You’ve had inflation. You’ve got a terror premium. You’ve had demand growth.  You’ve got hedge funds long massive positions in commodities. You have over a billion Chinese who dream of per capita oil consumption just 1/10th that of the average soccer mom. I understand all that. I’m just saying I don’t think the move has legs.

      Gasoline demand for this time of year actually looks pretty healthy. Here’s one for the bulls. We may have high inventories but we also have high demand. Gas prices have fallen and the consumer has responded with increased demand: implied gas demand is up 2.3% YoY. Of course gasoline prices are down 8% versus a year ago but I can’t really rain on this parade.

      As Hodge at Hancock said above, “the heating season is effectively over” and distillates remain well stocked. 

      distallate-013107.JPG

      Odds & Ends:

      HES Receives Warm Reception On Luke Warm Results/Guidance. The stock tried and did pullback several times during the day but couldn’t dodge the euphoria of the Fed’s decision to do nothing and the stronger than expected 4Q GDP numbers. I covered most of the numbers in yesterday’s column but I’d reiterate that these guys are expecting a 4% boost in production levels and a 20-30% boost in cash costs. And everyone sees that as normal. I’ll watch and wait a little longer (maybe as long as 2 weeks before acting) but either the service guys are going to have another banner year or energy producer earnings are going to retrench a bit.

      EEE Investors Grow Tired of “detail-less” PRs. Apparently the market agreed with me this morning. In comments I commented on their PR having no teeth. The stock was up 4% on the open and closed down 12%. Less testing more selling should management’s new mantra. In this case they weren’t testing the product but their “coal refinery” concept. Either way, it seems that everyone wants to see results. Someone obviously knew something was coming out as the stock repeated the pattern of past instances where it ran up prior to a “PR just around the corner” only to have the hopes and dollars of new entrants crushed back to reality. To be honest, I really like the new management team. They are class act and if anyone has the skillset to get clean coal burned everywhere it’s them.

      Nigeria Watch: The heart of the problem in Nigeria is graft. The good news is that the next president isn’t known for that and is far (on the northern border of Nigeria in Katsina state) from the region (the delta) that is. Excellent article on the graft issue from Reuters.

      From Stockpicker: A list of service stocks within the OIH ranked from most to least correlation with crude.

      I have more on today’s earingings in comments.

      Posted in Crude Oil, Gas Storage Graph & Comments, Uncategorized | 12 Comments »