zman’s Energy Brain

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Fiasco Friday – Market Looking Lower

Posted by zmann on March 2, 2007

Stocks continue to be led around by the broader market and it looks like another bad day for bulls is in the offing.

Oil has had a heck of ride this week… Oil has been trading a little fishily this week. Closing at $61.50 on Tuesday, $61.75 on Wednesday, and $62 even yesterday. Reporters will tell you this is the gasoline rally and they’re right.  That rally has been powered by a long list of infrastructure issues from refinery fires to fog shrouded waterways.

…But The Latest Rally Should Run Out Of Steam Soon. As those issues sort themselves out and gasoline inventories remain at high levels (I’m not kidding, look here if you don’t believe me!) crude should snap back. However, the current rationale is that because crude is higher, it will go higher. I’d like to sell stuff to these guys. “Wait, you’ll take another if I agree to mark up the price for you?! Sold!”

  • One Caveat: Crude may still reach $63 or $64 before any kind of retrenchment occurs (I’d also note that the continued dollar weakness is nothing but fuel for the oil bulls- yet another bit of near support for crude.)

Natural Gas Review: 5 Weeks of Winter To Go!

Gas Inventories Fell 132 Bcf Vs My 130 Estimate And The Street’s 140… First the errata. My table had the correct 130 Bcf estimate but the I had earlier been estimating 120 Bcf and forgot to change it in the text. Sorry for any confusion. Second, I got pretty close on the total but the west still had a draw which was offset by lower than expected demand (or greater supply) from the producing region.

estimate-vs-actual-030107.JPG

…But Gas Took Its Cue From A Rallying Crude Market To Close Up Slightly On The Day. After a brief dip gas traded higher with crude closing the day off a couple of pennies. No matter. Winter is rapidly drawing to a close and the next withdrawal number will again be smaller.

Here’s a brief summary of my thoughts on gas storage with 5 weeks traditionally left in the gas withdrawal season:

  • Storage as of February 23, 2007: 1,733 Bcf (updated March 1, 2007).
  • Max storage for this week in history: 1,972 Bcf (2006). At present gas is at it’s 4th highest level in history for this date.
  • We have fallen 12% (239 Bcf) into year over year deficit. This is actually up 39 Bcf from last week as last year’s comparable week withdrawal was 177 Bcf.
  • We remain 11% (179 Bcf) above the 5 year average.
  • If you take the coldest 5 week period (last week of February to the end of March) over the last 14 years you get demand of 485 Bcf which would still leave 1,250 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). Could happen but I feel its unlikely given the predicted warm end to February and the pronounced warming trend expected beginning around March 10th.
  • Conversely, the warmest 5 week period (late Feb to the end of March) saw demand of only 165 Bcf which would leave storage at 1,568 Bcf (and probably drop gas to $5.50/Mcf). I don’t think that happens either. I’m estimating we reach trough storage of about 1,400 Bcf. Note: I’m taking the low end of the my gas price range for Spring up $0.50 because storage levels have come down a bit faster than I thought and the expectation of a hot summer will likely provide additional support to gas prices that I had not previously expected.

gas-storage-030107.JPG

So It’s Likely We’ll End The Heating Season Amply Stored…

…And That May Not Be Enough To Significantly Hurt Gas Prices. The relationship between gas prices and end of heating season storage levels has changed over the last few years. The cost of getting gas to the end user has risen due to a combination of factors ranging from a tight service market in terms of both rigs and skilled labor to accelerating decline rates to increasing use of gas (although demand really haven’t grown much over the last several years). Because of these inflationary pressures high gas storage levels at the end of the heating season have been less of a factor in determining the direction or level of gas prices.

I realize the following chart is a gross oversimplification (it doesn’t take into account forward looking data and is just a snapshot in time) but at the same time it is illustrative of the change in this relationship.

storage-vs-price.JPG

While I still think gas prices will fall this Spring I think the impact may be muted, say to a low of $6 (maybe $5.50) unless a significant demand response occurs. I’d also note that those prices will make it pretty tough on some of the higher cost Rockies producers.

Odds & Ends:

Russian February Oil Production Up 4.2% YoY.  According to upstream, Russian oil production reached 9.86 mm bopd this past February (up slightly from January) while pipeline exports from Russia climbed a little over 100,000 bopd  (2.5%) from January.

Hillary Watch: The other day the oil companies recorded the highest profits in the history of the world. I want to take those profits. And I want to put them into a strategic energy fund that will begin to fund alternative smart energy, alternatives and technologies that will actually begin to move us in the direction of independence. ~ Hillary Clinton at the DNC winter meeting yesterday. That was the scariest thing I’ve seen in a long time. Her quote was pretty frightening as well.

Zman Bullishness Watch: This doesn’t happen very often but once in a while, in this high cost, low growth, bloated global inventory, surplus production laden environment I find something I really like. Not for a trade but for the IRA. Click here for a link to the Addax Petroleum post.

Analyst Watch: HAWK, CRZO, UPL started at Buy at Jefferies.

Snafu Watch: About 45,000 oil workers in India are planning a two-day strike demanding restoration of the selection panel to head the Oil and Natural Gas Corp (ONGC), a union official said on Thursday. ~ from Upstream.

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47 Responses to “Fiasco Friday – Market Looking Lower”

  1. El Diablo said

    The chart perfectly pinpoints the beginning of the influx of dumb/cheap capital. Real estate price chart would look same, as would utilities, gold, yen carry trade, etc…. Pull up a chart of April 2001 to see what it looks like when speculators exit a market.

  2. El Diablo said

    Greenspan was keeping a close eye on consumer prices for signs of inflation while all the cheap, excess capital was flowing into investment (speculative) markets–the most dreadful form of ‘inflation’. Thankfully though, this market has a peculiarly strong record at self-correcting this type of inflation, fed intervention is not needed.

  3. zmann bullish? hahahahaha……….
    There are a “few” in the e&p world that are worth being bullish about, but not d/t commodity pricing and disaster, but d/t production growth, cost management, etc……. the proper reasons.

    I still to this day it baffles me when a company like VLO has a fire that shuts down production, there stock ends in the green that day. I guess it tells you how many people are throwing money into the market without knowing anything about it. “Look! oils going up, buy some oil stocks”.

    Oh well, watcha gonna do,

    -SaneO

  4. tom2oc said

    Morning Z,

    Looks like it might be another fun day today. I did a TA big picture review of this crazy market and I feel the max pain for this correction is 2300. Once the correction is over, then we’re going back up! I will therefore continue to buy the dips. Got to get busy trading now. I re-opened my blog just for today so you and others interested can see how I see this market.

    Have a great day!

  5. zmann said

    El D – Hear ya dumb / cheap capital. We used to call it fast money before someone made that into a show. LOL. Fast money doesn’t: 1) understand what it’s investing in, 2) care about valuation or supply and demand, and 3) stick around through minor baubbles. It’s either MoMo or NoGo! It doesn’t help that inflation has has forced the E&Ps to adopt an Opec style mentality, in some cases shutting in production when gas hits $4/mcf.

  6. zmann said

    Spring gas prices vs storage – no longer a correlation. If you look at the last several years, the low storage trough years have seen prices deteriorate into spring/summer relative to the high storage ones. Exactly the opposite of what you’d think.

  7. zmann said

    Hear ya Sane. No used fighting it . Better just to pay attention to it and make money – “go with the dumb flow”

    Tom – cool. There’s a lot of demand for what you do. Keep it up.

  8. zmann said

    Red dawn in energy land. We’ll see if it sticks around. I see PTR up a little this morning but if the stocks decide it’s time to roll lower that and PBR will get hit hard.

    APC added yesterday late to list of putters. HES and MUR should have been.

  9. dave said

    Tom2oc…..nice to hear you opened your blog up again

  10. zmann said

    Here’s a link, now included in my blogroll at left of the articles published to SeekingAlpha and their partners at YahooFinance etc etc.

    http://seekingalpha.com/by/author/zman

    A few of them even have comments that are much less friendly than the crowd over here. Downright unfriendly but good for a laugh.

  11. dave said

    GMR seems to be having a good day so far

  12. nltd said

    Hi Z and all,

    Thanks Tom2.

    Downright unfriendly LOL I’ll bet! They just don’t know what they’re missing. Oh well, their loss…

    N

  13. dave said

    Going to call it a day. Flat except for two small bull puts. On TK and GMR

  14. zmann said

    Dave – yeah, shippers are up across the board. VLCC spot rates climbed another 10% yesterday in another sign that Opec is cheating.

    Thanks N!

    Interesting to see the group off so uniformly despite the flat broader indexes. Potentially energy is refocusing on oil’s tiring rally. We’ll see if the traders can get crude back over $62 by the close.

    COP should be added to that list of puts I should be but am not in at present.

  15. help said

    hmmm..looks like it will be a flat day…. most likely kill the premium on PUTS & CALLS

  16. zmann said

    Help – what will be flat? The broader? Haven’t seen you in some time.

    TSO continues to bleed a bit. Too far too fast is all. I wouldn’t chase it lower.

    Speaking of too far too fast, WNR after saying 1Q will best 4Q on higher margins. You can say that about the entire group but this is up 10% in 2 days! I’m going to wait a little longer and then try to pck this off in the middle with April 30 puts. Pricey, pricey, pricey.

  17. zmann said

    PBR and PTR fell apart from monring highsm,

    XOM looks like it wants to take a shot at a $70 test. 200 dma is at $68.90 which has got to be making some people nervous right now. 12 buys or strong buys, nine holds (including Goldmann).

    BP about to break $60…

    ,,,a lot of fast money is going to leave if these charts break down

  18. help said

    hmm this might be the right time to buy oil CALLS. what if there is a pump – on xom around 70?

  19. zmann said

    after nine straight days of crude up and higher US and Russian production I think the crude market is getting a little tired.

    If you mean for a day trade, maybe. I don’t really do that.

  20. zmann said

    APC just entered no man’s land on the chart. Lowest level since it bought KMG and Western Gas. The fast money is this group loves nice round numbers. As they’re broken the selling intensifies. APC just sliced through $40.

  21. umagumm said

    USO is about 8% in the last month, XLE is down about 3.5%

  22. zmann said

    Uma- right, and the down is off 3.7% for the period.

    …and also flirting with round numbers: 12,200. Psychology has gone from good to frightened in a week.

  23. Attacking Mid said

    Well, crap…… I’ve resumed my role as the entire market’s contra-indicator. For the benefit of the rest of the world, perhaps I should just post my trades here, so y’all can take the opposite position. *$%#@

    AM.

  24. zmann said

    Sorry AM . That sucks but I’ve often felt like that in the recent past.

  25. Attacking Mid said

    Call no. 1 – short the heck out of SU as I went long this morning.

    Call no. 2 – go long AAPL as I got stopped out of my calls, then it bounced back up $0.20

    AM.

  26. zmann said

    Very close to taking a put in WNR

    TSO continues to get rocked.

    PBR / PTR down nicely .

    BP going for a round numbers test at $60, XOM doing same at $70

    Taking 1/2 profits on APC – bot yesterday for $0.90, looking for sale now at $1.30. Too far too fast.

  27. zmann said

    Tom – what are thinking at this point?

  28. mike said

    Where are you going to start bidding on WNR? News +/- They are aquiring GI.

  29. Raj said

    Tom,

    Any input on OIH fall to 134.05? It is time to short or wait for pullback?

    r

  30. zmann said

    Mike – well factored in since they announced it months ago. I rember thinking at the time it was a pricey evrionment to be making acquisitions in . That’s overly simplistic since ther are cost and logistical synergies to be had but this price run up looks hgh.

    I’d expect the Street to tag them for a downgrade due simply to valuation soon. For now I’m waitng to do it closer to the close.

    The group is really starting to get tagged this afternoon, again tracking the Dow and not the commodities. Oh well, I’m short so I’ll take it!!!

  31. zmann said

    XOM – Holding remaining XOM 72.50 puts at $3. Too far too fast but I’m feeling a bit greedy after months of watching these guys defy gravity.

  32. zmann said

    Raj – Don’t noi where Tom is but here’s my 2 cents.

    Did you see my piece Tuessday on the ability of the OIH to get cheaper? There’s a component list of the OIH in that piece and several parts of the index are on the verge of hitting “open air” on their charts.

    BHI, BJS and DO represent alomst a third of the index. DO jsut went sub 200 dma, and BJS is close to a cliff dive as well. BHI has a little ways until it loses near term support.

    Moreover, SLB may only be 5% of the inex but everything in it generally queues off it and it’s chart looks frightening to all the mo-mo goes in the stocks right now.

    I’m holding BHI and SLB puts now as I like the lower premiums than you generally get on the group. I don’t think there’s any stock specific risk to being short them now and they’ll generally move a bit hard on a good day than the index.

    Do you chase it down 2%? I wouldn’t do the OIH puts one of the components. Hope that helps.

  33. tom2oc said

    sorry guys, been taking it easy today and no trading today. I posted my intraday observations on my blog since I had some time. BXK 114.50 and GOOG 440 are the key levels to watch. These levels were set early on and they turned out the be KEY ones again. IF failure, COMP goes testing yesterday’s low. But so far it’s holding. But the panic selling goes on so we never know.

    Raj, sorry can’t tell on OIH. Telechart has been down for hours now so I don’t have my TA tool.

  34. zmann said

    Cancelled sale of APC mar 40 puts at $1.30 .. holding through weekend. Daily charts look pretty bad at this point…lots of free fall potential.

  35. zmann said

    Welcome back Tom. Glad you got your blog up again. Comp looks weaker shortly to me but it would to fall 13 more (down 44 today) to get there.

  36. zmann said

    US gas rigs down 14, non-event.

  37. tom2oc said

    Z, blog is up only today on an exception basis as I don’t trade today. Will be shut down Monday.

    Looks like you’re making another killing with oil puts. Too bad I don’t short oil on Fridays. WOuld have loved to see OIH going test 140 Monday.

  38. zmann said

    That’s too bad but you know you’re alway welcome here!

    Yeah, oil is being pretty to good to me today. That APC is just about to crack down I think. USO and oil pump failing badly into the close of NYMEX. It was just too obvious.

  39. tom2oc said

    Yes, thanks. Nice to see what’s up with the black gold from time to time. Again, the oil market is negatively diverging from crude. Are you not concerned that there might be a huge catch up rally in the near term?

  40. zmann said

    No because the divergence has been going on for 6 or 7 months now. If you pull a chart of USO vs XOM or XOII you can see taht the stocks were essentially up to falt versus a huge loss in crude. Everybody on the Street thought crude would bounce and now that it has there’s not much more positive that can impact them.

    Plus, and I know you don’t like FA, but many of the leaders are not cheap on a forward basis relative to history.

  41. tom2oc said

    Very good points, thanks. I didn’t notice that positive divergence in the oil stocks.

  42. zmann said

    EEE continues to get slammed. Like I said before the company needs to stick to its knitting and not do some crazy carbon credit trading deal. Just make and sell the clean coal product.

  43. zmann said

    Gotta jet to a meeting. Thanks for a great week and have a great weekend!

  44. mike said

    zzz you still looking at wnr puts?

  45. zmann said

    Mike – missed my spot and they dropped about a buck. Will look at longer dated puts on Monday. I’m late, see ya later, best of luck…

    HES getting whacked (heh,heh)

  46. Bill said

    Having looked over your website with great interest it simply reinforces my recently gained opinion that I despise energy traders and the misery that they cause. The cowards and cowans that operate our government have allowed this perversion to cripple the US economy. The fact that we allow this kind of wholesale thievery and deception to occur makes me leave my libertarian roots behind and yearn for socialism. Until all of you traitorous parasites are banned from artificially and malevolently increasing the costs of energy I will remain doubtful of future of the American way of life.

    Worst regards.

    B.P.

  47. CHRIS said

    Bill,

    People like you make this country great. Someone has to be on the losing end of trades.

    CL

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