zman’s Energy Brain

oil, gas, stocks, etc…

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Wednesday Morning

Posted by zmann on March 7, 2007

I’ve got a late breakfast meeting so I’ll make this brief.

Headfake or New Life? Yesterday, the markets zoomed in the morning and again in the afternoon. Stocks were broadly higher with the Dow and S&P500 up over 1.3% and the Nasdaq up nearly 2%. The energy indexes fared even better with the XOI (up 1.9%), XNG (up 1.6%), and OIH (up 2%) all up on the strength of the largest cap members in each. Even gold rallied 2% on the day.

The energy commodities also had a good day:

  • Oil gained $0.62 (1%) to close at $60.69, a day after barely reclaiming $60 at the close. I probably shouldn’t bother pointing out that the markets and oil generally run opposite each other or that a stronger dollar usually means lower oil prices.
  • Natural Gas rallied $0.22 to close at $7.47 on renewed storage and supply concerns but honestly it had fallen pretty fast (from near $8 to near $7 in little of a week’s time) and was due for a deadcat bounce. Those concerns voiced on the gas storage page by Bill are valid and I appreciate the input (more on them in Thursday’s post).

No new picks (other than quick trades) until I’m comfortable buying off on the current direction of the broader market. This looks like a head fake to me and one more bad day in Asia could really spoil the mood on the Street.

Take a look at the XLE vs the DJI and the USO.

dji-vs-xle-vs-uso-030607.JPG

Oil couldn’t have mattered less to the energy stocks over the last week. However, that may change promptly if the market settles down today and inventories are out of line with consensus. Anyway, I’ll be in a meeting when the numbers come out so good luck and be careful. Especially watch out for the five minute reversal in oil prices following the data.

Speaking of inventories it’s that time of the week: Gasoline and refinery utilization are key to oil holding $60 or running to the $63 to $64 level. Estimates in bold from Reuters.

  • Crude: up 2.0 mm bls. Imports appear to be on the rise and this they are playing catch up. I understand the Houston Ship Channel actually processed the prior week’s fog laden backload of roughly vessels last week so I’ll bet crude comes in higher than expected. Note this is a reversal of yesterday’s statement but at the time I had thought HSC was still partially shut in for the period. Either way, this is not the number people are going to watch unless its either very high or very low.
  • Gasoline: down 1.4 mm barrels. Call it an educated guess but looking at the number of refineries starting to gear back up from maintenance and/or technical difficulties I’d say utilization should start to creep up to say 86% this week. That could yield a slightly smaller than anticipated draw in gasoline. Offsetting factors are increased demand for fuel and potential drawdowns in blending components. I thinking the number will be a little smaller but my confidence here is not high
  • Distillate: ??? million barrels (from the Bloomberg survey). I ‘d be shocked if it’s lower but it really doesn’t matter unless it’s a huge number. Remember the “catch up” demand from secondary and tertiary sources here can be enormous well after the degree days have started to melt away.

Odds & Ends

Snafu Watch: Reader El Diablo said it all here. My two cents, traders will grasp at the 35,000 bopd shut in at China’s second largest oil field due to heavy snow.

Analyst Watch: BEXP price target slashed at FBR but buy rating maintained.

EIA Cuts Global Demand Forecast. I think someone who looks and sounds just like me said about a week ago that the IEA (International Energy Agency) would have to do this soon. The EIA beat them to it. Highlights of yesterday’s report:

  • 2Q07 global demand falls 0.3 mm bopd to 84.8 mm bopd.
  • 3Q07 falls 0.1 mm bopd to 86.3
  • full year 2007 falls 0.1 mm bopd to 86.6
  • 2008 falls as well from 88.4 to 88.1 mm bopd

from my February 28th post:

“Recent demand growth prognostications now in question. From the IEA’s January Oil Market Report dated two weeks ago: Global oil product demand is raised by 111 kb/d in 2006 to 84.5 mb/d and by 273 kb/d in 2007 to 86.0 mb/d following revisions to China.

They may have to trim this back some.

Hey, somebody’s gotta pay attention to this stuff. (Psst, sounds like the EIA is still too high).

Vladamir Watch: Very few new stories out there all of a sudden. Nice plane, going to Athens to sign a pipeline deal but otherwise very quiet.

Greenspan Watch: From Former Federal Reserve Chairman Alan Greenspan sees a one-third chance of a recession, according to an interview published by Bloomberg News. “We are in the sixth year of a recovery; imbalances can emerge as a result,” the 81-year-old Greenspan said. He said he was “surprised” by the market reaction to comments he made on Feb. 26 on the possibility of a recession. Comment: Guess his assets are out of the blind trust now, eh? So he retires and starts speaking plainly? Nice.

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51 Responses to “Wednesday Morning”

  1. Peezi said

    What’s the trade on CVRD tomorrow? (RIO) It was up 7% yesterday, up currently right now, and releases results after the bell. They just bought Inco last November, and Nickel is trading at an all time high so there is some uncertainity in the EPS estimates from what I am seeing. Think it’s gonna soar tomorrow or is this 2 day surge just a headfake?

  2. tom2oc said

    Z, knee jerk up on USO/OIH. What’s your take on this reaction in light of the inventories? Thanks.

  3. nltd said

    Tom

    Z had a meeting. Did not specify when back.

    N

  4. zmann said

    Those are pretty bullish numbers. Imports way off. There was some residual effect from the HSC.

    From the EIA’s report: Due, in part, to delays at the Houston Ship Channel, U.S. crude oil imports averaged less than 8.9 million barrels per day last week, down 650,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have
    averaged over 9.4 million barrels per day,

    This is what I wrote yesterday but then changed this morning…I should’ve stuck to my guns. Oh well, we’ll get those imports back in this week’s report release next Wednesday.

  5. zmann said

    Just back for a minute from a remote (no CNBC) location, then off again.

    HSC buggered me. Also refining capacity jumped back up to 85.8% but the mix of products yielded lower gasoline production than in the prior week. Also imports of gasoline and distillate were impacted by the HSC thing.

    Oil was up a buck last I saw. Where’s it trading now?

  6. tom2oc said

    Thansk N and Z. I’ll continue to wait for 140 inflection level to see what the hell to do with that OIH.

  7. zmann said

    Based on this look at inventories plus the 3.3% rise in gasoline demand, the 5% increase in jet fuel demand, and the persistant cold, there is little chance OPEC will cut.

  8. zmann said

    Man , I really stunk up the room when I reversed course and called for a bigger build in oil. Totally blew the HSC thing. My apologies.

  9. bill said

    zman, if you are actually trading energy stocks with such a negatively-biased view, your account must be hurting. looks like you were a country mile off on your inventory “estimates” for this week. hope you enjoyed your nap;-}

  10. nltd said

    Z

    You may wish to set the record straight vis-a-vis HSC, etc on PSW

    N

  11. zmann said

    Bill – sold most puts last week as indicated on Monday but thanks for your concern. The draws are ship channel and refinery snafu related.

  12. zmann said

    Bill – I think I said stunk up the place but I guess country mile works too.

    Naps are for whimps.

  13. zmann said

    Bias – I’ve got longs and shorts as indicated.

    I’ve been calling for oil to fall for a long time (since late last summer) and it did. Excess supply is growing but not drastically. Still think oil could trade back into the mid $50s after Opec meets.

    Gas as well and it did then recovered (I think too much). GOM declines are slowing, onshore US is growing, LNG taking advantage of more and more stranded gas. Floor probably $6. Ceiling ??? Could go a lot higher – La Nina may form with dry summer (bad for hydro/good for Western US gas demand), hurricanes (bad for everyone/good for gas prices), etc..

    Know I seem like a bit of a bear but you’ve got to admit that gas demand growth hasn’t really shown up and we wouldn’t be closes to $7 if not for one of the coldest January/Feb combos on record (I think that’s correct but feel free to correct me, I know it was one of the coldest Febs)

    I’m always open to hearing new data out so please keep pumping.

  14. El Diablo said

    Zmann-

    Please don’t kill yourself on the minutiae of predicting weekly storage numbers, there are too many factors causing variance in that number that are impossible to predict with precision. In the end, all the ‘estimates’ are just ‘guesses’ (although within a country mile still is way beyond the skills of most analysts).

    The ‘big picture’ emerges from the fog of weekly variances. If your bets are placed on that, you will do quite well.

  15. nltd said

    Z

    Thanks for quick response to PSW. In your absence I had mentioned over there about yesterday’s report here that last week’s backlog was all unloaded…WT%$#@*. I agree with El D. I don’t know how you get stuff as right as you do, given the plethora of oft conflicting info out there…

    N

  16. zmann said

    Thanks fellas. I assure you I don’t kill myself over getting the weekly numbers right any more than economists do when they blow the employment numbers by a galaxy mile. I do hate being so far off though.

    For the most part I just like to see where supply and demand and inventories are shaking out. The over/under calls are really only important for that day (maybe only then for an hour or so)

    Random Snafu from CNBC: Saw the nice folks at TSO are extending maintenance at one refinery by two weeks. Also, BP delaying Tx city restart another two weeks. Imperial’s got their Toronto unit back up to 75%

  17. bill said

    Not a pumper, rather a realist. Technically speaking, oil is due to visit $45, but who knows when that will happen. That said, $60 is showing to be support, where it was resistance a week earlier and this week’s numbers, plus cold weather the next few days will continue that trend for the time being. I am looking for May contract to hit 65.50.

    Re gas – I posted on your gas board. The Canadian export situation is what is changing the dynamics of NG, oil sands in particular. Exports to the US are slowly being choked off (while demand is rising) and sooner or later, this leads to a big bull run. With mild weather coming soon, we could easily see prices have a short run to $6, but support at this level has proven to be VERY firm. That said, most NG weighted stocks are trading as though gas has been stuck at $5-$6 the past year. Do the digging and you will see!

  18. zmann said

    Yes, I obviously have an aversion to digging. As I posted on the gas storage page, I think imports from Canada will fall but production declines there have long been predicted but never really materialized. Plus, the LNG situation is changing as well…more of it’s on the way.

    As to the gassy E&Ps trading like gas is at $5 to $6 /Mcf it might have something to do with the service inflation that’s causing them to direct capital away from growing production towards simply maintaining. The E&Ps I look at are suffering from LOE advances on the order of 20 to 30% per annum on a unit basis. Something’s gotta give. That can’t continue without higher commodity prices…and prices look at best like they’re flattening out on a year over year basis. Or are you one of those $15 gas and $100 oil guys?.

    The days of “saved by price” are over for them. Now it gets a lot harder. Maybe that’s why they’re not doing so well. I’m not saying the stocks are overly expensive but they’ve lost a lot of momentum. What I’m doing is modeling up several where I like management and their concept or plays or positioning and getting ready to go long. But other than a few areas, I’m not convinced yet.

  19. bill said

    Re CDN NG production pullbacks – it’s real and has nothing to do with natural declines. This is more in the line of shut-in production. Read the recent quarterlies from CNQ, ECA or TLM.

    Service rates are falling, not rising, since energy prices have come off their highs. However, I still factor in 10% inflation.

    Re prices – it doesn’t matter what I think, it is what the market is telling us. If a major can sell forward prices at $65/bbl and $9.30/bcf for next winter, I’d say those are pretty bullish numbers and a heck of a lot higher than what doom and gloom prognosticators would like to see. A good hedging program can pretty much guarantee healthy profits, at least for the next several years! Current valuations only make sense if forward hedging at premium to spot weren’t possible.

    Last point on NG prices…I do recall most “analysts” calling for the end of winter in mid Jan and a “likely crash” in NG prices to $3-$4/bcf during the shoulder season. now, we all know none of that has or will happen, but if you look at NG majors, such as CHK, the valuations represent worst case scenarios. I am waiting for one last pullback to 28-29 before loading up.

  20. tom2oc said

    Holy cow Z! You’ve been doing great for months on those inventories numbers. Normal to miss it from time to time. Heck, the analCysts are ALWAYS wrong anyway with their consensus numbers on payrolls and others and they’re still keep on getting paid huge sums to be wrong and wrong again. I would be wrong also all the times if I was to make predictions like you have the guts to do. You’ve been great! Don’t worry, be proud! You’re entitled to be off once in a blue moon. These numbers are crooked anyway.

  21. zmann said

    Bill- sorry should have said production growth stagnation instead of declines. People have been claiming for years that this is the year production rolls over and yet it continues to rise.

    Questions I’d like answered: How much of total Cd production on a bcfpd basis goes to feed oil sands production at present?

    What does Cd growth itself look like? I’m guessing it’s the 2-3% growth number you hear in the US.

    Whose the biggest player in gas in Canada, I think it used to be BR so is it COP now? What are they saying?

    If service rates are falling (and in some instances I think that’s the case but definitely not overall) thta’s the deceleration and reversal (something’s gotta give) that I’m looking for and which will be bad for the service stocks.

    Re prices and hedges: that’s why I stay away from guys like CHK SWN, KWK, who are great operators with good hedge positions and growing production. I’m sure they’ll fall as well but I’d rather not fight the fundamentals. I’m probably not as bearish as you think.

    On CHK, I’ll be long at some point but I’m looking for a bigger, longer capitulatory sell off in the group and then sideways trading. May not happen but I won’t be short names like that before it (unless it has some crazy, contra group move spike or something which I doubt)

  22. dave said

    Tom2oc I think of the #’s as oil accounting

    Zmann I think its time for me to start to scale out of TSO

  23. zmann said

    XOI above both 200 and just now 50 dma. Next real resistance maybe 2.5 to 3% higher.

    OIH same on the dmas but 140 is pretty close resistance,

    XNG punching up against resistance (about a % away) at 460.

    If they make through these levels I’ll drop remain shorts for cash and wait for new entry points.

    The PBR long from Monday is on fire.

    TSO looks pretty extended but the Street is calling for it to go over $100 soon.

  24. tom2oc said

    OIH on fire and getting close to my 140 inflection level. Will be interesting.

  25. Raj said

    Tom,

    What is the your game plan for OIH?

    R

  26. zmann said

    Tom – over 140 and you’re long right? You might get some help from crude today. I’d bet they shoot for a $62 close (about $0.30 higher than present) after hanging out up a buck most of the day.

  27. zmann said

    kissed 140 on the nose…then fell away a bit. Whatchya think Tom?

  28. foo said

    I know oil is up, but what’s with the sudden surge in buying all the energy stocks? I didn’t get the memo, did you? Too late to play here?

  29. Raj said

    Z,

    Lots of selling volume for OIH on level II quote. May be time for some puts if we get a spike.

    R

  30. zmann said

    R – not a bad idea. I generally play BHI as the option premiums are bit more palatable while you still get a correlation close to 80%. I’m waiting to see oil close because they should try for a $62 or higher finish.

    Foo – broader market + “bullish” inventory report.

  31. zmann said

    EEE falling into new low territory in mid $6s. But the same analysts who love the gas stocks love this little beast as well. Maybe buy around $5

  32. tom2oc said

    Raj, I almost shorted OIH just below 140 but opted to wait to pass the nice guys oil pump going into 2:30. WOuld have been good for a quick buck but glad I didn’t take the risk. My plan is to at OIH on the bull side above 140 and bear side below 140 and as close as possible to it using 140.25 as stop. But will depend on that NYMEX closing. Could go both ways big right here at inflection point. Be very careful and use very tight stops. G/L

  33. zmann said

    Deutche Bank analyst on CNBC just said XOM is the best of a bad breed. Taxes too high, returns falling.

    E&P spending to be down this year while overall spending to be up. The offsets are more on refining and chemicals.

    He said the lower E&P budget is bad for the service companies.

    CNBC asked if you be selling any of the service companies and he said no, oil is on a rising trend and they’re playing the season trend into the driving season. It would take a brave person to short oil stocks here.

    So there you have it: yes the fundamentals are decling but buy the stocks because they’re going up.

  34. zmann said

    BQI and PTSG en fuego today.

  35. zmann said

    LOL ROFLMAO EL D!

    Show me the gas El D!

    from EL D’s post on the gas storage page:

    Here is the total annual natural gas consumption for each of the past 10 years in MMcf:

    1997-22,737,342
    1998-22,245,956
    1999-22,405,151
    2000-23,333,121
    2001-22,238,624
    2002-23,007,017
    2003-22,276,502
    2004-22,388,975
    2005-22,241,202
    2006-21,859,496

    http://tonto.eia.doe.gov/dnav/ng/hist/n9140us2a.htm

    Someone please explain where demand is growing?! (Other than in the imaginations of gas company managements and clueless speculative traders)

    That’s why I said “2-3%” growth in quotes before. Becasue that’s the “accepted growth of gas demand” Not that you can see it. At these prices, industry burns anything that will ignite to reduce their consumption. Paper, glass, steel etc all used to be huge ng consumers, now they’ll burn anything to keep gas consumption to a minimum – post that over here too! I remember the days of management says (year after year after year) “if only we could get a normal winter!” Welcome to global warming baby!

  36. dave said

    GE gone red

  37. zmann said

    Odd to see PTR down all day. Maybe it’s the CNOOC production shortfall news?

    Nat gas gave back half of yesterday’s deadcat bounce.

    HES: Very close to taking the HES puts here (probably the $50 apr’s) for $1.10. I’ll probably wait for the morning.

    WNR: Bidding very small April $30 for $0.60 with the stock up 8%. Just testing the water to see if I can split that spread.

  38. tom2oc said

    Raj, I got in OIH Apr 140 puts at 139.7 and I might get in Mar 140 calls at EOD depending how it goes for a volatility play. This market is not looking good today and I think we’re going down tomorrow and if we do, OIH will be suffering imho. But could go both ways here big time and that’s why I’m considering the 2 way play.

  39. Raj said

    Tom,

    Good move. OIH has been down almost 1 point since.

    R

  40. tom2oc said

    Raj, gee, that’s a breakdown. I’m not going to get the calls after all. Got enough profit cushion already to soften an adverse open. That market is UGLY! Odds are the selling will resume tomorrow.

  41. zmann said

    WNR and HES immediately walked lower and away from my bids. No trade there.

  42. dave said

    Kind of a fun day.

    Zmann thanks for your posts

    Tom2oc thanks for your posts on your site

  43. dave said

    Kind of a fun day

    Zmann thanks for your posts

    Tom2oc thanks for your posts on your site

  44. dave said

    2 bagger

  45. nltd said

    Z Thanks for another day.

    Tom GOAX turning red stopped me from getting QQQQ’s calls. Thanks.

    N

  46. zmann said

    You’re welcome N adn Dave. Thanks Tom, El D, and Bill F.

    Good discussion guys. Sorry I screwed the pootch on the number. No harm done other than my ego.

    Dave, congrats on the 2 bagger. Was that the TSO long call or the OIH puts?

  47. zmann said

    I just want to reiterate my thanks to you guys for coming in here and laying your thoughts on the blog. And not just the ones I whole heartedly agree with but the counter points as well.

    As to the lurkers who never chat on the board I’m very glad to have you here as well. We’ve got all manner of big and small oil companies, service companies, news outfits, hedge funds, and a lot of individual investors who hit the site daily for a read. And, as you can see from the map up top, international viewership continues to swell. Anyway, I really appreciate it.

    Have a great night and I’ll catch you in the morning!

  48. tom2oc said

    Dave, you’re welcome!

    Nlfd, Great!!! Way to go to beat the WS crooks!

    Z, we all eat humble pies at times in this market. This is what makes us better trader if we’re able to learn a lesson from a mistake.

    Good eve all!

  49. dave said

    Zmann…..No a 2 bagger on posting my last post { I’m not good at posting, not clear} TSO I took 1\3 off and moved my stop up

  50. mike said

    I had fun with xom March puts the last 30-45 minutes!

  51. zmann said

    Mike – I see what you mean. Here are the march 70 Ps

    http://www.quote.com/qc/stocks/charts.aspx?__VIEWSTATE=dDwxNzU0MjgzNTk0Ozs%2B&chartform=form&symbols=OPRA%3AXOMPN&compsyms=&SPR=1%3AD&SFR=1&submit1=Draw+chart&TIO1=&TIO2=&TIS1=1&TIS2=&TIO_1=&TIO_1_P1=&TIO_1_P2=&TIO_1_P3=&TIO_2=&TIO_2_P1=&TIO_2_P2=&TIO_2_P3=&TIS_1=&TIS_1_P1=&TIS_1_P2=&TIS_1_P3=&TIS_2=&TIS_2_P1=&TIS_2_P2=&TIS_2_P3=&CST_Display=1&CSZ=400%2C300&CGR=3&CST_Scale=1

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