zman’s Energy Brain

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Archive for March 14th, 2007

Thursday – OPEC Meeting & Natural Gas Storage

Posted by zmann on March 14, 2007

Today’s topics

  1. Intro w/ oil and gas price action
  2. Natural gas
  3. Opec Meeting Watch
  4. Gasoline picture show
  5. Stock action (inaction in this case)
  6. Odds & Ends

What a whipsaw! All determined by the broad markets with neither the downdraft nor the updraft determined by oil which actually closed at $58.16 after a brief dip below the $57.50 level (my initial target for a pullback from last week). In fact oil trailed around in lockstep after the DJI most of the day which seems normal for an important sector in a choppy until you look at that same chart for the last year. Some credit also has to go to natural gas which retook the $7 level and inspired a small rally in the gassier E&Ps.

I said this in comments yesterday: It [natural gas] did so after the heating oil number came out which was bigger than expected. The expectation is that a big HO draw today means a big gas draw tomorrow. Not always true. The HO relationship with temps is not as linear as is the relationship between gas and temps. I think this rally in nat gas gets reversed tomorrow. Comment: I stick by that.

Natural Gas Inventory Day

  • My expectations: 90 Bcf. Degree days were roughly identical to the prior week (in aggregate) when we got a 102 Bcf withdrawal. Of that number 12 Bcf was a database adjustment.
    • Note: the EIA’s file ng_stor_wkly_s1_w.xls located here does not yet reflect year ago figures from the weekly natural gas report here. I have emailed them to update the database. When they do I’ll update the gas storage page.
  • Street: range of 80 to 140 Bcf, consensus was unknown at the time of this post. I’d bet the over under is 100 Bcf. Below that and you slip towards $7 immediately. Above it and gas may get a small reprieve…say a day or two at most before it again heads toward $6.50.
  • The reason is simple: degree days are expected to fall by nearly half this week. I won’t surprised to see another burst of cold make for choppy trading but I still expect to see lower prices in the second half of March and early April setting up a good buying opportunity in the quality, gassy E&P names prior to summer’s heat and hurricanes.

If we get a 100 Bcf number today and average withdrawals for the remainder of March we’re likely to bottom out with more than 1,400 Bcf in storage. Well above the five year average of 1,232 Bcf but well below last year’s 1,692 Bcf number.

OPEC Watch: The ministers begin the first of a two day meeting today in Vienna. I’ll update in the comments section.

Gasoline Picture Show. We received little help from yesterday’s inventory report in hobbling the 3 legged stool upon which high gasoline prices rest. Utilization continued to slide although according to the companies that’s about to reverse, imports ticked up but only just, and demand ebbed but also only just. Hey, if demand and imports move in the same direction next week (down and up respectively) the stool should start to wobble a bit under the weight of $0.40 of gain in RBOB prices since mid January.

Extended maintenance and snafus are keeping utilization low

gaso-utilization-031407.JPG

Imports may be trending lower but this is after running high to historic norms.

gaso-imports-031407.JPG

From EIA’s comments yesterday: gasoline imports have also dropped, falling below 1 million barrels per day the last six weeks after averaging 1.15 million barrels per day in 2006. After receiving a lot of gasoline imports earlier in the season, gasoline stocks are relatively low in Europe and refinery maintenance has begun there as well, just as other parts of the world see an increasing need for gasoline. As a result, the arbitrage for shipping marginal gasoline supplies from Europe to the United States diminished considerably, further limiting imports.

Demand actually fell slightly from a week ago but remains elevated for this time of year.

gaso-demand-031407.JPG

Two charts straight from the EIA’s weekly are very telling of just how much of a rise we’ve seen in gasoline prices this season:

gaso-driving-season-run-up-031407.JPG

gaso-jan-to-mid-march-031407.JPG

Wow…With Price Action Like That Inventories Must Be Very Low. No, they’re still above average. So what do you think happens if we’ve gotten the pre driving season rally already out of the way and refineries start coming back into service?

gaso-storage-031407.JPG

Holdings Watch: I took a little TSO put position yesterday – May 90s puts between $3.40 and $3.60 (average is close to the top unfortunately).

Odds & Ends

STEO Watch: If you don’t read the EIA’s short term energy outlook you should. Here’s the link. The price estimates move around as oil and gas prices do and I’ve found them to be utterly worthless beyond the next few weeks in predicting price. No offense meant but they stick pretty close to current prices with an eye towards what’s happened in terms of direction over the past month. However, the data they keep up with is phenomenal.
Briefly, they expect the OPEC surplus to increase in 2007 and 2008 to 2.0 mm bopd from 2006 levels of 1.3 mm bopd yet they expect oil prices to be up relative to last year on higher demand in 2007 and again in 2008. This is inspite of the fact that early year demand came in lower than expected and that non-Opec supply is growing faster than expected (Caspian Sea, Russia, Africa, Brazil, and even the United States). That’s a head scratcher. Growth in demand is expected to slow as well. Hmmm.

And here’s their thoughts on gasoline inventories:

Total motor gasoline stocks are projected to be at the upper end of the normal range throughout the forecast period. Nevertheless, continued demand growth pushes inventories (measured in terms of days‐of‐supply) steadily lower, setting the stage for an increase in gasoline margins and retail prices. Comment: Who do these guys work for? I mean, steadily lower? That’s the red line in the last graph. Does that look steadily lower, especially given the season? These are smart guys but sometimes you’ve got to stop contradicting yourself or trying to make the data fit the scenario and just say things don’t make sense, are irrational, overblown etc, etc.

Analyst Watch: I’ll update in comments.

END Watch: Back down to $2.11 after 2 days of very little volume. To me this one is fire and forget (or at least check infrequently). Either way I hate to be that guy at the poker table who only points to his recent gambles when they’ve immediately paid off.

Posted in Uncategorized | 64 Comments »

Wednesday Morning – Oil Inventory Day

Posted by zmann on March 14, 2007

What’s driving gasoline prices higher? RBOB is up $0.40 in the last two months. A confluence of three events are forming what the MSM habitually refers to as a perfect storm: low refinery utilization, low imports, and strong contra-seasonal demand. I prefer to think of gas prices as sitting on top of a three-legged stool. Solve any of the three problems and the crushing weight of above average gasoline inventories brings prices toppling down.

  • Utilization Is Depressed By A Plethora Of Snafus. The first is the unusually low levels of refinery utilization the US is experiencing at present. We’re in the first of two maintenance seasons for the year and things haven’t gone well. At present utilization is only 85.9% (below the three year average of 88% but above last year)  due to several high profile refinery fires and extended maintenance cycles at several large facilities.

ref-util-031407.JPG

  • The second factor is falling finished products imports. This is a function of: 1) logistical issues with the the Houston Ship Channel and 2) reduced tanker loadings. As you can see in the following chart, gasoline imports have been declining in recent weeks during a period in which they are normally rising. This is worth close monitoring since a reversal here could quickly lead to a reversal in gasoline prices.

gasoline-imports-031407.JPG

  • Demand has been unusually strong year to date.   Enough said, it’s true. People buy more gasoline when it gets close to $2 per gallon and they have very short memories.

The relatively low levels of gasoline production and the reduced imports with three months left until the beginning of the U.S. driving season have induced a panic stricken atmosphere in which reality and perception have diverged by a country mile.

  • The sad thing is is that the mainstream media portrays the situation as especially dire despite the fact that gasoline inventories, at least before today’s report remain above the average range. If you don’t believe check out the energy portion of our site today to see a nice set of graphs pull directly the government showing current gas and oil stocks.
  • My Thanks to El Diablo for his vigilance as he posted a great set of headlines portraying the rocky situation with Nigerian rebels and the threat posed by Iran’s nuclear defiance. The funny thing was that those headlines were from March of 2006! Even the accompanying stories could have been complete cut and pastes.

The Truth is that inventories remain above average, not just crude but gasoline and heating oil (need proof?) and my sense is that as the snafus sort themselves out we’re headed for a test of the $55 level in the near term, say 1 to 2 weeks, unless today’s numbers show a significant decline in crude again or the gasoline number is just atrocious…something over 2.5 mm barrels.

Oil: Down nearly $4 in the last four days .In my book, yesterday’s failed attempted to retake $60 translates into the statement, “what was support now becomes resistance.” Now more than ever I think we make a move on $57.50 and then $55. Inventories, if hinky, could give a bit of a boost but the writing is on the wall between moderating weather, a gasoline situation which is at just about the worst I can imagine right now and an OPEC meeting where nothing will happen.

Expectations from a variety of surveys for today’s inventory report looks like this:

  • Crude: up 1.9 to 2.0 million barrels. The alleviation of the supply bottleneck at the Houston Ship Channel should help bring this number back into positive territory after last week’s surprising withdrawal.
  • Gasoline: down 2.45 million barrels. Should this number come in as expected gasoline inventories would still be above average for this time of year. A bigger than expected draw here would likely send crude back up over $60.
  • Distillate: down 1.8 million barrels.…We could still get a big number here from secondary and tertiary demand sources but i’s unlikely to be oil price moving unless it doubles the expected draw.
  • Utilization: rising to 86.3%.

So What Hasn’t Felt The Sting Of Falling Commodity Prices Yet?

  • The refiners for one which are touted daily as the best buys on the planet despite the huge run the group has experienced since the beginning of the year. Crack spreads are up, no doubt about but the multiple expansion feels overdone here. When reformulated gasoline (RBOB) cools there will be some profit taking to say the least.

refiner-comps.JPG

The rest of my put picks from Monday have performed pretty well. I know it’s only two days in a rotten market but the variances in the performance of the different categories (taken from Monday’s post) demonstrates that in many cases the sell off has been a thoughtful process and not just a “sell the sector” event. The damage has been worse where you would expect it to be: the higher cost producers.

comps-031307.JPG

Odds & Ends

OPEC Meeting Watch: No one expects them to do anything. Ministers from Qatar and Algeria have repeatedly commented over the last couple of days that no no further production cuts are necessary.

Analyst Watch: CVX upgraded at DB

Posted in Uncategorized | 36 Comments »