10
Apr

Tuesday Morning – Don’t Sell Your Car Just Yet

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Oil Slices Through My $62.50 Target With Room To Spare. Oil traded off yesterday as the world woke up to the fact that 15 more Brits were waking up in London and not Tehran. It happened last week but the world just took notice. That's the official excuse for the $2.77 rout in May crude as the "geopol" premium began to come out of the price of a barrel of oil.

Beginning at $60 around March 22nd, oil had charged as high as $68 during the "crisis" and now it's time to test that $60 mark again. If we don't slice through that and close below it, watch out for the dip buyers to come screaming into the sector. I said this the last time oil was testing $50 and man did they bounce it off the round number!

Yesterday I gave a graphical tour of the US gasoline situation. While we wait on more data tomorrow lets take a quick look at OECD nation inventories.

I've heard and red several comments regarding falling crude stock piles in the Organisation for Economic Co-operation and Development (OECD) countries. The latest official data is for December and at that time OECD oil inventories were approaching all time highs. Maybe they've fallen drastically in the last three months. Of course, this hasn't been the case in the U.S., which makes up just over two-fifths of the OECD stocks but I'll get to that in moment.

Total OECD Stocks, as of December 31, 2006, were 10% higher than they were at the beginning of 2001. So as worldwide demand spirals out of control and peak oil theorists tell you to sell your car while you can, inventories enjoy a rather steady build. Hmmm.

 total.JPG

European OECD Stocks, which make up roughly a third of total OECD stocks, were 8% higher for the same period and were at an all time high at the end of December. This growth did not come from a definitional change in the OECD composition during the period.

europe.JPG

Other Non-European, Non U.S. OECD Stocks, were down slightly from 5 years ago but only make up 2% of the total. Maybe these are the ones commentators keep referring to as "falling off a cliff". If that's the case I really don't care.

other-non-europe.JPG

I saved the U.S. for last for two reasons: 1) it's the biggest piece of the OEDC at 41% of total stocks when the SPR is included and 2) the EIA tracks inventories in the US every Wednesday so I can extend the chart beyond the timeframe of the previous charts. First, the OECD data for the U.S.

 us-with-spr.JPG

And Finally, the U.S. without the SPR included. Here the Strategic Petroleum Reserve is removed to provide greater detail and because it really hasn't changed much in the last 18 months. Note inventories are up 15% relative to the beginning of the period and that the SPR is not the source of growth here.

 us-through-march-2007.JPG

So for the record let me just state that we're not running short of storage. In tomorrow's post I'll start looking at recently revised regional demand and supply estimates for 2007 and talk a little bit about the expected growth in the OPEC surplus in 2007 and 2008. No doubt demand is growing smartly but is this growth as out of control as the MSM and hedge fund guests would have you believe. Shhh, don't tell T Boone or he'll jump on CNBC to refute it!

Natural Gas. Yawn. Wake me after the inventory report on Thursday.

Gas Inventories Remain 27% Above The Five Year Average

  • Storage as of March 30, 2007: 1,569 Bcf.
  • Max storage for this week in history: 1,696 Bcf (2006). At present gas is at it’s 2nd highest level in history for this date.
  • We are now DOWN 7% (125 Bcf) relative to year ago storage levels. This is an improvement from a 17% YoY storage deficit just three weeks ago. This swing from a YoY storage surplus to a YoY storage deficit when the cold weather hit in mid January is what propelled natural gas from $6.50 to nearly $8 this year (May contract). 
  • We remain 27% (1,231 Bcf) ABOVE the 5 year average which includes 2006’s record levels.

gas-storage-040907.JPG

In tomorrow's post I'll start looking at summer build rates but this post has gotten monstrously long.

Odds & Ends

Holdings Watch: puts on everything but shipping.

  • Refiners (Teeth Kicked In, Holding On By My Gums). Man have I been a dope on this sector of late. Everything here is a May put and I may have to roll into Junes but the run in both gasoline and the stocks appear excessive. I'll update the cracks page today. I'm still in the increasingly small camp that thinks gasoline's run ends (slows, then rolls over) when utilization comes back towards and finally goes above 90% which would mean gas prices are closer to their peak at present levels than the usual peak during the summer. I'm also counting on the elevated U.S. prices to continue to divert more product tankers to U.S. shores to get that gasoline imports number north of 1.1 million bgpd. I'm not however, placing further bets until that scenario has very obviously sailed (a concerted run on $2 RBOB would serve nicely as a signal but I'm really not holding my breath).
  • Mini majors - (HES)
  • Shipping . Long (TK) - OPEC is cheating I tell you! (RAIL) - Buffet likes the rails because they're growing. Rail car shipments have been off a touch and the stock is depressed.
  • Heavily oil or gas leveraged - (SU), (COP), (APC)
  • Service - sidelines - lots of merger talk makes this group a minefield in both directions.

Analyst Watch: see in comments tomorrow.

42 Responses to “Tuesday Morning – Don’t Sell Your Car Just Yet”

  1. 1
    Randy Brown Says:

    Zman….enjoy and appreciate your hard work. As “janitor emeritus” of the Natural Gas Traders Hall of Fame, I have mentioned your blog to our energy group. We are trying to dumb-down energy trading from black-box alchemy back to fundamentals. Your site is an excellent resource and we hope that all your fills are complete!

  2. 2
    bill fraser Says:

    Nat gas to the moon today.

    What the heck???? high of 7.89 off a 7.53 low

  3. 3
    El Diablo Says:

    YoYo rippin nat gas today. “Got there last year, so it can this year too.” Supply and demand are irrelevant. Only thing that is important is the YoY price. Rewrite the text books. Some Brian-Hunter-wannabe has it all figured out!

  4. 4
    zman Says:

    Hurricane savant Gray calls Gore grossly alarmist

    http://www.cbn.com/cbnnews/134379.aspx

    rofl

  5. 5
    zman Says:

    ——————————————-
    Bill – I think it’s a blip, possibly someone has put out the first survey results for this week’s withdrawal and they’re large.

    Noting on the La Nina or hurricane news fronts. I’ll check around a bit more.

  6. 6
    zman Says:

    Randy – Thanks for the compliments. Let me know if you have any areas of interest you’d like discussed. I can dumb down anything since that’s the level upon which I feel most comfortable operating. ;-0

    Natural Gas Traders Hall of Fame? Energy Group? Hope all your fills are complete as well!

  7. 7
    dave Says:

    Zman

    I missed most of the blog yesterday but read it all last night. Really well done, quite a resourse.

  8. 8
    zman Says:

    It’s amazing to me to see how hot the energy sector is. The scale of the relief rally this morning (since oil is up a few pennies) is out of this world. We get a $2.77 loss yesterday and a $0.38 gain today and the XOI is now higher than Friday’s close???!!!

    Ditto XNG which is questing for 500 and is currently at all time highs!

    OIH broke above the 150 mark and looks to be able to push itself to new all time highs within a few days if oil doesn’t collapse (or does that really matter?)

  9. 9
    zman Says:

    Thanks Dave – I send you a copy of my book:
    Energy Trading – 10 Reasons Why Should Think About Something Else when it’s published.

    Still snooping around on the nat gas pole vault…looks like more cold weather in the North East expected over the weekend is the raison d’ etre for today’s big ups.

  10. 10
    zman Says:

    Got to love CNBC’s way of spinning everything energy as bullish.

    Here’s a quote from the weathergirl,
    “we’re riding a wave and the wave is higher”

    that with oil up $0.47 at the time. She comments that crude was off almost $3 yesterday but it’s up today (again $0.45) and that’s all that matters.

    Then she comments that it’s strange that traders are rolling out of the front month early and into the out months. That’s not strange at all but OK.

    Then she comments about WTI’s $5 disoucnt to Brent being odd. Again not odd, we’re awash in crude.

    She falls to mention that gasoline is up nearly 3 cents, on a $0.45 rallin in crude, the same amount it fell yesterday on that nearly $3 drop in crude but she does mention another outage a a Citgo refinery.

    I miss Melissa Francis but she got shelved from energy for doing too much of her own analysis.

  11. 11
    Bill Says:

    Zman,

    You are making light of the recent hostage crisis – not funny at all. Perhaps you should read the sailor’s accounts of how they were treated, or, better yet, spend some time reading up on our own hostage crisis of 79-81. In no way should price movements two weeks be seen as “pumping”. It is actually offensive to suggest so.

    Re Natgas – now tell me, why should NG ever sell at a discount to oil? After reading recently that traders had built up record short positions in NG, I could see some punishment coming. We have gotten used to this unusual situation where we are paying a discount for a cleaner, less politically sensitive form of energy that also comes with a more stable and predictable supply. Doesn’t sound very rational, does it?

    I also laughed out loud when analysts pronounced last week that the heating season was over, right before one of the largest early spring storms this country has ever seen. What do you suppose will happen if we get a couple heat waves and even a hurricane or two, before storage is filled?

    Enough bleeding about “manipulation” in the energy markets. Look at what has changed on both the demand side and geopolitical arenas in the past few years and you will see why we are going to test recent highs if we have a hot and active summer.

    CNBC and retail traders do not create the market. Get over it.

  12. 12
    zman Says:

    Bill: Take a deep breath

    Paragraph
    #1 not my intention.

    #2 natural gas is a local market commodity, oil is a global market commodity. Prices are tied to the expectations of supply and demand for each plus inventories + geopol.

    #3 it’s the tradional end of the heating season and the beginning of the shoulder or slack demand season. No real reason to laugh there, just less demand (historically) in the offing for the next 4 to 8 weeks. In answer to your query, prices would go up.

    #4 Yes look at demand – I’m speaking of natural gas, it has done nothing in the last 10 years. Take a look at the EIA data if you don’t believe me. Storage stands at the second highest level ever.

    #5 I never said they did. I generally accuse CNBC of incomplete reporting and taking the word of traders as gospel. Finally, I don’t have to get over anything…it’s my site. Move along now.

  13. 13
    sane Says:

    🙂

  14. 14
    zman Says:

    Dow Jones Survey:

    Crude: up 1.6 million barrels
    Gasoline: down 1.3 million barrels
    Distillate down 900,000 barrels

  15. 15
    El Diablo Says:

    Someone needs to explain the ‘nat gas discount to oil’ theory to me. Other than the two being forms of energy that are mined from the earth, I fail to see ANY other similarities that suggest that they should trade at the same price.

    Our sources of supply are totally different (96% domestic vs. 50%? imports)

    The uses are totally different, they’re not interchangeable/substitutable.

    The amount of ‘refining’ necessary to convert to a useable form is totally different.

    The distribution systems are mostly different and not subject to all the same risks, ie, fog in houston ship channel, closing straits of hormuz.

    The storage balance is totally different–the natural gas injection/withdrawal cycle is firmly established and only fluctuates within a relatively tight range.

    The demand growth is totally different. Our natural gas consumption has not grown in 10 years, crude consumption is still growing at roughly the population growth rate when adjusting for economic expansions/contractions. And in fact, demand for natural gas appears to have more elasticity.

    The only similarity is that if a hurricane comes through the gulf (as they have every year since the US was settled), oil and gas rigs will close for a few days (as they have every year since we have been drilling there.)

    Considering these factors, it appears to me that crude ‘should’ trade at a ‘premium’ to natural gas, it has far more ‘risks’.

  16. 16
    zman Says:

    “While we expect [refinery] utilization rates to improve as we transition out of maintenance season, refined product inventories are at very low levels,” Prudential analyst Jason Gammel said in a research note. “We expect that margins will remain strong into summer, but they may be near a peak in the shorter term,” he added.

    Does this look like very low levels?

    http://tonto.eia.doe.gov/oog/info/twip/gtstusm.gif

    or this?

    http://tonto.eia.doe.gov/oog/info/twip/disstusm.gif

    Very low levels…I think not. Distillate is actually towards the high end of the range. Gasoline is just below the middle of the range. Very low levels, ha.

    Prudential raised price targets and estimates across the board today.

  17. 17
    zman Says:

    El D – Thanks. I was afraid I’d have to run through all that and don’t really care to. On a Barrel to Mcf basis you’re looking at a 6 to 1 ratio as standard, 10 to 1 in Canada but that’s pretty meaningless.

    Why not compare Uranium or solar to natural gas? I’m very concerned about the discount on sunshine right now. ;->

  18. 18
    Bill Says:

    el diablo,

    zman has asked me to “move on”, so I can’t comment on your questions, other than to say the only thing keeping a lid on NG prices is the growth of LNG, making it a more global commodity on a yearly basis. Far too many reasons to list why NG demand will grow. And yes, there is switching between the two sources of energy, just not overnight.

    Zman – yes, you were making fun of the hostage crisis, on a daily basis. I believe when one puts “crisis” in quotations it implies a lack of belief. had the crisis ended even slightly differently, where do you think the price of oil and gas would be? (er, where would the “pumpers” take it to)?

    we had no cnbc in ’79, but prices still seemed to spike.

  19. 19
    sane Says:

    Hey Bill,

    You want to lash out at z for supposedly “making fun” of the hostage situation. So my question is did you have any problem being long oil and making money off of it, or rewarding Iran for taking the hostages?

    Sane

  20. 20
    El Diablo Says:

    Z-

    Again, we are on the same page. The comment was getting lengthy so I didn’t go into solar, wind, and nuclear, but considered it!

    This sort of ‘flimsy’ analysis is indicative of the bubble mentality, reminiscent of the dollars per eyeball analysis of the internet bubble.

    Like that time though, there is a hoard of capital that is looking for returns, so momentum rules the day in the short term.

    Although the internet bubble was large by 2000 standards, I still believe it was not nearly as large as the combined dollar value of bets on housing/energy. Even in the internet hay-day, few had large, concentrated bets on the sector; most funds had relatively small bets that paid off enormously. Not the same for energy/housing this time. When this one pops, it will be worse.

  21. 21
    El Diablo Says:

    Bill,

    The type of switching between oil and nat gas that you vaguely reference should be examined.

    Switching between the two as a source of heat (homes) or power (utilities, industrials) involves a LARGE capital expenditure, either for a new boiler/furnace (homes) or a whole new plant (utilities, industrials).

    If the entire world believes that there should be not $/Btu difference between the two commodities, there would be no incentive to invest that capital, because the savings on the operating costs would dissipate with the discount, and you’re left with an expensive new machine to amortize.

    So if the world believes the discount is temporary, then there would be no ‘switchers’.

  22. 22
    zman Says:

    Bill – I meant let’s not escalate the attitude, not get off my site.

    I disagree with the quotes in crisis comment making light of the soldier’s plight. Not at all my intention. People who read me know that’s not my intent.

    It was more a comment on the rabid “she can tell you ’bout the plane crash with a gleam in her eye” mentality that the MSM including CNBC but also FOX and CNN (who were about done with Anna Nicole Smith and needed a new hot topic) treated the story, interviewing ex generals and such who talked about bombing Tehran over this.

    Mahmoud was never going to harm those guys nor is he ever going to cut off the flow of oil. He cannot afford too since much like Chavez in Venezuela his social programs (like $0.12) gasoline are what keep the people from doing a Mussolini on him.

    Also, I’d love to see your data on switching because I spent a summer on it a few years back and never came to a good conclusion. I’ll tell you that electricity generation from oil is less than 4% at peak and the switchers are less than half of that number. Natural gas is 20%, coal is roughly 50% with nukes another 20%.

    As far as homes, far less than 1% are dual fuel for heating.

    I agree that gas demand will grow as more regions of the country are gassified however the growth has been stunted by higher gas prices. Ask GE, they’ve got a ton of turbines that were cancelled for delivery when Calpine and others saw gas jumping in the early 2000s.

    Moreover, the decline in gas production in this country has slowed with increased production in Tx and Wy nearly offsetting Gulf of Mexico declines. More on that in tomorrow’s post.

    LNG expected to rise but many think naytural gas from Canada is going to drop 10 to 11% as prodcution declines and demands from the oil sands divert it from pipes flowing south.

    Feel free to comment away.

  23. 23
    zman Says:

    My screen is green
    Bill thinks I’m mean
    It was not my intent
    To make light of torment
    I’m sorry a bunch
    and off to lunch

  24. 24
    El Diablo Says:

    Z-

    Please send me a copy of the book…

  25. 25
    zman Says:

    Welcome Notre Dame fans! If you’re looking for the gasoline comments that was yesterday’s slide show.

  26. 26
    zman Says:

    El D- You’ll have a few chapters in there!

  27. 27
    sane Says:

    Is it a poetry book z 😛

    Just Kidding

    Sane

  28. 28
    zman Says:

    Oh man, Sane’s hit the grog early today.

    RBOB gasoline has outpaced yesterday’s decline now despite a much smaller move in crude. Still staying away from more refiner puts….waiting on more data and a crack in this run.

    Anybody see anything on that Citgo outage I wrote of earlier? I haven’t seen or heard except for that one CNBC comment earlier.

  29. 29
    sane Says:

    I have seen nothing about the Citgo outage, and I looked all over.

    Sane

  30. 30
    zman Says:

    EIA comments on natural gas prices this am:

    The Dept. of Energy said in its report on short-term energy and summer fuels outlook that it expected average spot Henry Hub natural gas prices over the summer season to be 18% above year-earlier levels, as “concerns about extreme weather conditions and rising prices in the oil market” keep upward pressure on prices.

    Comment: none but I’d like a bigger tax refund now please.

  31. 31
    zman Says:

    EIA cries mea culpa to hurricane mania

    The EIA’s Short Term Energy Outlook called for higher prices as we approach the “extreme” weather concern season but further down in the form it predicts summer gas demand will fall by 1% for electricity generation as we had a hot one last year.

    Domestic Production Growing. They expect nat gas production to rise in 2007 and 2008 citing a recovery in the GOM and a higher rig count on shore.

    LNG Still Expected Up Big. They also show a massive pop in LNG and state that 1Q07 preliminary LNG shipments rose 4&%!!!!!!! I’ll put that in better perspective but its a lot, and we’re going to over a Tcf of lng imports in 2008.

    Curiously, they skip mentioning our biggest source of imports – pipelines from Canada. You’d think you’d make mention of it if you’re projection high gas prices.

  32. 32
    zman Says:

    Forgot to add the link to teh STEO

    http://www.eia.doe.gov/emeu/steo/pub/contents.html

  33. 33
    El Diablo Says:

    There’s a lot of green between now and first serious gulf hurricane, earliest >Cat 3 storm was second week of July in 2005.

    Hurricane fear is like any other fear; wanes over time. Buying gas at $8+ 3 months in advance seems a bit overdone. Especially when a lot of gas will added to historically high storage for the next 3 months.

    Maybe weather forecasters have improved dramatically since last year, but by July 1, anyone will be able to look at storage and see that we could shut down the Gulf for 2 months and still comfortably make it through a severe winter.

    For the next 3 months, there’s no upside to the fear: Forecasts can’t get any worse, and storage will only grow. Now look at Jan 08 gas at $10!! Sweet!

  34. 34
    zman Says:

    END is starting move up b/c people have noticed Brent is trading at a $5 premium to NYMEX now.

  35. 35
    zman Says:

    Note to dip buyers:

    WNR getting roasted. CFO sold a few shares but the stock is really getting popped. Have not heard the latest deal not happening rumor but I’ll bet it’s out there and there’s no way the guy would be selling if there is a shread of truth to it.

  36. 36
    zman Says:

    El D – lot of green, par 5

  37. 37
    El Diablo Says:

    Also perplexing is markets fixation on ‘potential hurricane threat’, yet ignoring three sequential quarters of slowing economic growth, and ongoing lowered expectations of growth.

    http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyid=2007-04-10T122433Z_01_N09354877_RTRUKOC_0_US-USA-ECONOMY-GROWTH.xml&src=nl_usbusinessearly

    If I examine past 12 years of storage and consumption data, no single hurricane or hurricane season is detectable based on statistical analysis. Yet economic slowdowns are visible in consumption data, even to an untrained eye (as are unusually cold or mild winters). Although I think its a bit early for even DTN Meteorologix to be making bullish predictions on next winter…

    If this is betting on hurricanes vs. economic slowdowns, it explains the large short-interest: hurricanes are meaningless relative to economic fears.

  38. 38
    El Diablo Says:

    Anybody got any price data for last year ex-Brian Hunter?!

    His multi-billion bets moved markets last year. Now that’s he’s obliterated a $10B hedge fund, I don’t understand the YoYo’s using last years’ prices as any comparison for this years’…

  39. 39
    El Diablo Says:

    I’m serious about the “Brian Hunter Effect”

    From another blog: http://www.wilmott.com/blogs/satyajitdas/index.cfm/2007/1/26/Fear-and-Loathing-in-Derivatives–The-More-Things-ChangeAmaranth

    “Hunter placed a similar bet in 2006. The major strategy was to buy the March 2007 natural gas futures contract, while shorting the April 2007 futures. The trader wanted to profit from the fact that, historically, natural gas prices increased during winter and then fell after March as demand for heating by consumers decreased. Natural gas prices started falling in early September 2006 as supply became readily available. The trader was hoping that either a hurricane or a cold winter season in the US would eventually push natural gas prices upward.”

    “Unfortunately, the weather did not co-operate. A relatively uneventful hurricane season in the US meant that the March/April 2007 natural gas spread fell sharply in September. Amaranth’s trade, which would profit in a widening spread environment, was plunged into negative territory as the March/April spread narrowed from 2.05 points on September 1 to 0.75 points on September 18.”

    “In the end, Amaranth were forced to transfer its energy positions to JP Morgan Chase and Citadel Investment Group at an apparent $1.4 billion discount to their mark-to-market value compounding the losses to investors.”

    The sort of buying today could be indicative of a large (and very profitable) short closing out his position. Looks to me like today was just a continuation of several prior days of buying, which started on March 28, the first day of this contract trading as the front-month. No telling of where the end is though.

    But if I’m correct about this being the end of the Brian Hunter Effect, natural gas could be in for a large correction when this buyer is cleaned up.

  40. 40
    El Diablo Says:

    It’s also VERY INTERESTING to note that the March 2007 contract price fell almost every single day from Feb 26 (the first day it became the front month contract) to March 19. This unrelenting selling pressure would coincide with unwinding the March 2007 long position mentioned in the article above.

  41. 41
    El Diablo Says:

    The Citadel/JPM explanation is far more plausible than concerns about hurricane season, despite what CNBC and government beaurecrats say. Three months in advance is not believeable.

    This buyer is buying with little regard to price impact, with identifiable patterns, and apparently with more concern about urgency of closing the position. A ‘hurricane’ buyer would not have this urgency and could spread buys out over the next three months in order to minimize price impact.

  42. 42
    T-Tupp Says:

    I personally think the “hostage situation” was a joke in and of itself. i don’t know if it was satirical in nature, but the National Post (Canada) did a story on MAkkaaahamooohood, or however its spelled, dressing them up in his new clothing line, and having them line up in a ridiculous looking group for a picture lol. this guy is a huge joke.

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