Monday Morning – Next Verse, Same As The First … More Selling

Asia got whacked for another 3% while the vast majority of you were sleeping so we’re almost certainly in for another bumpy session.

Axiom of the day watch: When the markets are running fast and scared round numbers take on heightened meaning.

• Oil: Eight session winning streak came to an end Friday. Forbes attributes the selling this morning to a combination of global economy nervousness, profit taking, and an easing of concern relative to U.S. gasoline inventories (told you they were full!). April crude looks like it’s in for a test of $60 but isn’t in real danger of cracking trend unless it breaks $58.50 which may be hard to achieve given the dollar’s recent plight,

• Natural Gas Continues To Weaken In The Face Of High Inventories and Warming Trend: If you haven’t checked in a while, click this for an update of the current storage situation. April natural gas appears destined for a near term run in with $7 as the weather begins to warm up.

The Week Ahead:

• Current Positions: I’m content with put positions in BHI, SLB, XOM, and APC right now. May take profits (pretty much a wash right now on the Mar 110 PTR position) as I last Tuesday when I took it that it was a rank wildcat of a bet. It should pay off pretty nicely on the open this morning,

• BP: Got stopped out last week in a “failure to communicate thought versus trade entry” (aarrgghh!). Still looking for a point to enter a longer dated put position but it just keeps falling away from me.

• Shippers: TK – all the good news is out here and estimates are actually coming down following the quarter’s results. As a group the shippers rallied Friday as VLCC rates began to build in the second half of last week (a potential sign that OPEC is cheating. Of course, I may reverse course at a moment’s notice if further indications arise that OPEC production is rising.

• Mini-majors: HES – insider selling continues, stock remains just off all time highs; MUR – still expensive at 11x forward numbers despite its share of operational short comings of late,

• SGY – high operating and F&D costs = high economic breakeven. This is an oilier E&P than most, facing stiff Gulf of Mexico decline rates and offering guidance that is flat to down. They have failed to partner up twice in the last year and I think it’s highly vulnerable to the effects of retreating oil and gas prices.

• Natural Gas Shorts:
  • APC: fell below $40 (nice round number) and is now at it’s lowest levels since acquiring Kerr-McGee and Western Gas. The company is over half way home in its desired divestitures but commodity price pressure won’t help when try to sell the remaining, potentially higher hanging fruit on the auction block. Doubtless the company is both cheap and extremely well managed. This is a TRADE, nothing more.
  • BBG: high F&D + good operating costs = slightly elevated full cycle economics. Contrast that with the generally unfavorable discount Rockies gas receives now and a smaller than peer group average hedge position (and a stock that’s been on a roll of late but now looks toppy) and I’m looking for an entry.
  • COG: on the fence but thinking puts. Higher full cycle costs than the preceding. A goodly hedge position around $8 and strong management make me hesitate. Still, if gas plummets through $7 I’ll be in the puts.
  • COP: this gassiest of all majors is selling off technically without me. I’ll most likely add an initial short position on any contra-group strength over $65 this week.
  • Staying away from shorts on CHK, SWN, and KWK. If gas cracks $7 these guys will fall as well. I just don’t like shorting extremely well run companies that aren’t excessively overvalued. Besides, they’re hedged to the gills for their size.
• Refiners: It doesn’t get any better for them this time of year (gasoline really got out of hand last week culminating in a 10% wholesale cash price jump on Friday!!!) and they’re going to have a great first quarter but enough is enough. I am strongly considering adding near the money positions on VLO, TSO, and entering a new put position on WNR.

• Coal: No change. Still bearish

• Longs Trades. PBR is down 16% since the beginning of the year versus less than half that for the XOI. Late Friday they announced another big oil discovery in the Campos Basin. I know I’ve repeatedly grouped the stock with other, high flying foreign oil firms but the damage to the shares of late has been extreme in comparison to most and this news could provide a small bit of respite.

Odds & Ends
CFTC: Natural Gas Open Interest Plummets While Net Position Recovers To Neutral. Does this bode poorly for near term gas prices? Maybe, maybe not (I know, how useful). I consider this week’s look to be slightly gas price bearish. Here’s why:

• As I’ve stated in the past I believe the predictive element of CFTC data is somewhat contrarian in nature. In my way of thinking, large net long positions represent potential supply and are therefore actually bearish and visa versa. This week bulls and bears are evenly matched (the net position is near zero).

• As always when I’m writing about the CFTC I’m examining the non-commercial (speculator) data. After rising to levels of what can only be considered speculative excess last Fall, open interest in NYMEX natural gas futures had its largest one week decline in open interest in seven years. Maybe it’s nothing. Maybe they’re just gathering their firepower to go long when things settle down in the broader markets. I’ll keep a close eye on this because a continued reduction in open interest has often led to falling commodity (gas) prices. But again, we’re at step one in that analysis now.

• Combining this sudden lack of betting one way or the other with the players abandoning the table for friendlier games (and that’s all this is to the hedgies speculators) I’m struck with a slightly bearish look for gas.

I’ll See You In Comments. Have A Great Week!