06
Jul

Friday Briefing

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Oil is flying high again this morning over another kidnapping in Nigeria. Since the fundamentals are being ignored at this point (see oil report review comments below) hype and technicals are 100% in charge. Crude looks as though it's hell bent for $75

Gas Report Preview.

The Street: 70 to 90 Bcf injection.

Over/Under: Anything under 80 Bcf will be seen as bullish, over 90 will be perceived as bearish and in between and $6.50 becomes even better suppor but we trade sideways.

My Estimate: 90-100 Bcf.

  • Cooling Degree Days: 68, in line with prior expectations of 68 and up from 59 last week. Essentially in line with year ago levels and about 10% warmer than normal. This jives with Edison Electric Institute data which showed generation was up 3.9% relative to the prior week. This week’s CDDs are expected to climb slightly to 71.
  • Imports Rally To Third Highest Level Of 2007. Both LNG and pipeline imports from Canada were up. LNG notched its third highest level of the year last week with 3.16 Bcfgpd while imports from Canada makred a modest (but almost certainly short lived) recover reaching 9.3 Bcfgpd.

Oil Review:

Alaron Watch: Going into yesterday's oil report Alaron expected a pretty bullish report. Before the report perma-bull Phil "I Never Met A Barrel I Wouldn't Want To Pay More For" Flynn wrote: The weekly inventory reporting from the Department of Energy will be exciting again! Look for crude to be down 2.0 million, gas to be down 1.0 MB and distillates down 2.0 MB with runs up 0.5%.

How about this for getting it wrong!

  • Crude: UP 3.1 mm Bbs (the Street had expected a draw of 700,000 barrels)
  • Gasoline: UP 1.8 mm Bbs (6 times the Street's expected 300,000 barrels!!!)
  • Distillates: UP 1.2 mm Bbs (also 6 times!!!!!!!!!!)
  • Utilization came up 0.6% (which Flynn later in the day termed a disappointment)

Oil Sank With The Report Then Rallied. In a nutshell the report showed much larger builds than expected.

Up, Up, and Away. Is it a bird, a plane, why no, it's oil storage!

crude-stocks-070607.jpg

 Nine Year Highs Going On 14 Year Highs. How can you say it's a function of low refinery utilization and therefore demand when gasoline produciton is cranking? (see below)

crude-stocks-long-term-070607.jpg

Gasoline Resumes Building Inventory Levels: RBOB rallied $0.0199 to close at $2.28 despite what should have been viewed as a surprisingly large build in inventories. Yesterday on MN1.com I indicated that we could see a bigger build in stocks given the lack of significant production growth last week despite a big surge in utilization. Production of 9.4 million barrels is the highest so far this year and ahead of 2006 and 2005 levels.

Imports Rebounded. The bulls are using this small bounced in imports to claim that imports saved the day and that without these high levels inventories would have dwindled again. But they didn't. They've been arguing for weeks that only imports are "saving the day" despite the fact that production continues to rise week after week after week.

gaso-imports-070607.jpg

Demand: Where's The Holiday Boost. Oh yes, there wasn't one. Demand grew at 1.2% year over year which is down from recently levels of 1.4% and 2% earlier this Spring. The permabulls were expecting, or at least said they were expecting a big boost in demand due to driving over the July 4th weekend. Why it didn't happen: 1) holiday in the middle of the week is bad for big trips, 2) lots of rain kept people in doors, and 3) the holiday will really be in next week's numbers but I don't expect a big surge in demand then either.

gaso-demand-070607.jpg

And Gasoline Inventories Continue To Recover. Despite this recovery, the permabulls continue to call for $4 gasoline.

gaso-stocks-070607.jpg

And Distillates...
Odds & Ends

Analyst Watch: (BP) and (RDS.A) from Hold to Buy at Deutsche and (UDRL) to hold at BS.

Suncor Watch: (SU) signed a deal with the union covering 2,100 of its 4,000 employees at it's mining and upgrading operations. Workers get a 7% pay raise in the first year and 6% raises in each of the next two years. That stock has gotten awfully lofty. Time for another look once oil calms down.

Holdings Watch:

CALLS:

  • (IOC) sold July $22.50s for $4.70. A 119% gain since Monday. I may have taken them off the table a little early but I wanted to be out before the next drilling report. If it's good I'll take $30 strike calls upon the news as the reaction is likely to carry the stock well into the 30s. If bad I'll take puts around the current level as the stock will likely retest the lows around $19.
  • (EOG) calls. Continue to hold with a slight gain.

PUTS:

  • (TSO) bought July $57.50s for $1.80. Last bid $1.50. I also own the $60 Julys here with a cost of $3.20 and a current bid of $3. The refiners fell in the first few hours after the oil report but then uncommon sense prevailed and oil and gasoline rallied in what some traders termed a "gamed" holiday volume market.
  • (HAL) took a lashing early; apparently on further accounting concerns. I'm considering a DD here as I think the OIH remains strong and eventually punches out to a new high of at least 185 in the very short term.

Format Watch: In August I'll be moving to a slightly more structured format. The basic outline will look something like this:

  1. Intro
  2. Crude Oil & Gasoline Section
  3. Natural Gas Section
  4. Equities Of Interest (if any)
  5. Special Feature (if any)
  6. Holdings Watch
  7. Odds & Ends

The Special feature section will be an occasional download on coal, ethanol, solar etc. The Equities of Interest section will give updates on stocks I've reported on and am thinking about taking a position in as well as have links to new reports. If you have anything else you'd like to see now is the time to speak up. All requests will be looked into. At present we're working on getting a live streamer for crack spreads and an automated system for position changes. As we transition to a subscription site I want to make sure that you, future subscriber, get more than your money's worth!

If you're on the fence about subscribing let me offer two options to you: 1) if you've been around for a while at the zmansenergybrain.com site (as a registered user) you'll be eligible for a discounted rate when the site goes pay, and 2) portions of the site will remain free with an abridged daily post (probably the daily intro and the odds and ends section). Picks, the data tabs (crack spreads, natural gas storage, company specific reports, current holdings etc) and the ability access site commentary will be limited to  site subscribers.

If I don't speak with you in comments today, have a great weekend!

40 Responses to “Friday Briefing”

  1. 1
    zman Says:

    SU bears close watching. Food and energy don’t count, how about wage inflation? Does that matter. The stock is up strongly in the last several months on this little rally in oil and the weakness in gas. The increase in earnings expectations don’t bear out this magnitude of rally.

  2. 2
    zman Says:

    HK – Taking an opener in the August $15 Calls. Partially fill at $1.55 so far.

  3. 3
    cowboy Says:

    I would love to short SU but they creamed me the last 2 times and now I’m scared to !.

  4. 4
    zman Says:

    Cowboy – me too but the stock is up another 15 to 20% since the last time we played that story. Like I said, for now I’m waiting out oil. Part of what makes it different is a 8 month low in AECO hub (Canadian) gas prices this time around (gas there is down 19% in the last month) and that’s one of their biggest cost.

    Natural gas drifting lower ahead of the report. Still haven’t heard a good consensus number just a range of 70 to 90.

  5. 5
    zman Says:

    N – LOL. We should send her one of those little “Wall Street Words” dictionaries.

  6. 6
    zman Says:

    Thanks N for the oil trader talk. It’s good to know from a pro that I’m not alone in my thinking!

    Nat gas. I don’t have huge confidence in my number this week b/c I feel like I’m missing something which is often the case when I stray so far from the Street. I’m in fact position very lightly going into the number and a mid 80s number would probably be good for my calls.

  7. 7
    zman Says:

    Sambone/Redjack – any update on storms? L96 looks disorganized but still spinning.

    Big heat expected across mid west next week. Could be supportive of gas if we get a middling number.

  8. 8
    zman Says:

    IOC down for the first time since Monday.

  9. 9
    Dave Says:

    L96 has too much going against it. Nothing there, IMO.

    IF this season develops, I believe it’s gonna be storms with their genesis in the Caribbean or Gulf of Mexico rather than African waves. Just the opinion of a non-trained non-meteoroligist.

  10. 10
    zman Says:

    78 Bcf – HK lifting but UNG looks momentarily stuck. That number loks as low as last week’s number looked high. Guess it balances out.

  11. 11
    zman Says:

    Nicky, really the west is less important for gas than the midwest and south in terms regional gas-fired generation as a % of total. I’ll post a graph of it over the weekend.

    Stocks slightly stronger on the smaller gas build. We’ve crossed the 2.5 Tcf in storage mark only once before this in history and that was last year.

    Gas stocks remain 4% below year ago levels and are now 18% above the five year average. Given the weather and the high level of imports I’m wondering if the rain in Tx isn’t botching operations in the Barnett Shale worse than I thought.

  12. 12
    zman Says:

    OII exploding new ATH. Never got mine. 🙁

  13. 13
    zman Says:

    Long OII – Aug 60 calls.

  14. 14
    mdinh Says:

    Are you still holding those FTO puts?

  15. 15
    zman Says:

    mdinh,

    Yes but still very small. No sense running into the meat grinder until the fundamentals start to matter.

    OIH breakout in full swing now,

    HAL has completely recovered from yesterday’s accounting snafu related sell down,

    OII looks pretty strong in here and it makes a great hurricane play,

    Natural gas looks like it’s trying to mount a minor recovery,

    TSO is surging higher but not really bugging me as it still looks like it’s rolling over and crack spreads will come down again for this week as oil outpaced gasoline.

    EOG acting well, HK thinking about coming positive as well after a sluggish start.

  16. 16
    zman Says:

    Dave – agreed L96’s got nuthin.

    Codydog – I look at your suggestion as a paysite feature.

  17. 17
    zman Says:

    Answer to a question regarding different product cracks on the PSW site:

    BBD – yes, but the 3-2-1 crack spread is generally a good measure of refiner profitability. That is 3 barrels of oil to make 2 barrels of gasoline and 1 barrel of distillate. On the right coast we use a 2-1-1 measure as heating oil has more significance and SUN and VLO there are geared for higher distillate production.

    If you look you look at RBOB = reformulated gasoline blendstock for oxygen blending on the West Coast it’s call CARBOB (California RBOB) which is a higher standard. At present the CARBOB crack is close to $28 / barrel down from over $41 just five weeks ago and the west coast 3-2-1 (which includes Ca’s high standard for diesel has fallen to just over $26 from over $36 a few weeks ago. Harder to make = higher margin when you compare to the stuff we produce along the Gulf Coast which has a 3-2-1 closer to $19 at present (down from a peak of $29).

    The refiners ran up on these severely rising cracks but have failed to come off with them. Part of that is the lack of lower grade diesel and media induced fears about heating oil supplies for the winter. What a load of bunk that it. Standards for diesel changed last year to favor lower sulfur content so you are never, Never, NEVER going to see the same level of high sulfiur concentration diesel in storage. Over distillate storage is very HIGH right now. Distillate and gasoline prices are a house of cards here.

  18. 18
    zman Says:

    Natural gas getting torched.

  19. 19
    zman Says:

    Search me, a lot of reversals are taking place in equities as gas sinks. A bounce would be welcome soon.

  20. 20
    scoop006 Says:

    Z
    Felt compelled to purchase 20P’s TSO Aug. $60. @ $3.80.
    Your thoughts please?

  21. 21
    zman Says:

    I like the length there, in fact I’m taking on no more July contracts at this point.

    I’m thinking we get a sell off in gasoline next week and possible a small move down in oil. Like Nickly said we’re up, what, 7 days in a row now?!

    Cracks are not holding up either. I’d set some good stops b/c this market is still pretty hypey.

    From a technical perspective I like it to the downside as well as this is a just another lower high.

    Natural gas trying to bounce a little.

  22. 22
    zman Says:

    Sorry, yes meant the natural kind. I think gasoline is way overbought here for the data.

    I think nat gas ultimately falls to that second level of support and maybe tests $6 but then bounces.

  23. 23
    MMarkkk Says:

    Interesting tidbits from Credit Suise:

    – slowing production
    growth (total production flat in April), a rising cost curve, and an improving
    demand outlook (driven by the power sector)

    We believe that longer-term
    trends remain supportive for gas given slowing production (total production flat in
    April), a rising cost curve, and a strengthening demand outlook (driven by the
    power sector). Specifically, YTD (Jan-April) natural gas demand from the power
    sector is up 2.1 Bcf.d (+17%) over the same period last year.

    The rain in the Fort Worth Basin wasn’t around in April and that’s when they are showing overall production flat. I think the impact of risky price curve and the high rig rates/services cost have had some impact. That was starting to wane before the rain hit. Its been raining for what seems like 8 weeks and there is lots of flooding. It really doesn’t take much rain to make rig moving a problem and that is having some impact.

  24. 24
    codydog Says:

    why would you think a “big player” is “away”? They’re all as a close as a cellphone.

    Another consideration is geo-political risk. Its not hard to imagine that a “big player” has information flow about “events” that retail, even semi-pro retail has absolutley no access to.

  25. 25
    MMarkkk Says:

    Sorry, the last paragraph is my own, not CS’.

  26. 26
    MMarkkk Says:

    More from CS on LNG imports:

    Nominations for July look equally as strong (in the 90 to 100 Bcf range or 2.9 to 3.2 Bcf/d), but could fall toward the lower end of this range given the recent fall off in NYMEX prices. We expect imports to fade in August as Asian and European buyers begin seasonal
    restocks ahead of winter.

  27. 27
    MMarkkk Says:

    And finally, a few scenarios from Credit Suisse:

    Three Summer Scenarios: With about four months left in the refill season and rapidly expanding storage inventories (at least so far), we see three possible summer scenarios, which are summarized below. Weather and storage capacity are the primary factors that will determine the Oct 31 outcome.

    (1) “Storage Reset”/Late-Season Shut-Ins (our most likely case): Storage ends July at or above last year’s level and stays on pace to finish the season at 3.6 Tcf+. Since practical limits of storage are only in the 3.5 Tcf range, elevated storage levels would cause system pressures to build, crowding out gas production and forcing storage operators to slow refill activity. Subsequently, a lack of refill demand would cause spot prices to crash to the $5’s or below and prompt producers to voluntarily and involuntarily shut in production, causing the system to normalize during the last 6 weeks of the season. In this case, end of October
    storage would be closer to 3.4-3.5 Tcf. We don’t think this scenario would have much effect on the 2008 futures curve (which is at $8.20 currently). We see this scenario as the most likely.

    (2) Expanded Storage Scenario: While we see maximum storage capacity of about 3.5 Tcf, an alternative view suggests storage capacity has grown to 3.7 Tcf+ which would enable continued high refills through October. In this scenario, we would expect spot prices to hold up better ($6 to $7 per MMBtu) helped by injection demand, but would expect the 2008 curve to weaken significantly (falling deep into the $7’s) as the market feels more secure
    about gas supplies for the coming winter.

    (3) “Extreme Weather” Scenario: Our final scenario relies on hot weather/storms. Significant weather would cause massive power generation demand which coupled with heavy storm
    activity would avert the need for shut-ins and result in end of season storage at 3.3 Tcf or less. We see this as less likely as it would take very significant weather from the storage levels we are at right now for this scenario to be achieved. Also, we have only seen 2-3
    major shut-ins from storms in the past 20+ years.

    My comments: I think the first scenario is more realistic although its tough to predict around #3. If storms hit, you’ll see some sort of price run up but will depend on strength of storms, number of storms and what if any damage is done. If we see scenario #1, I agree there will be lots of shut in production and a curtailment of drilling activity. We covered this last week…great buying opportunity.

    Have a great weekend. Its raining cats and dogs again; one highway on Galveston Island has 2-3 feet of water on it…yes FEET!! I’m thinking an Ark might not be a bad investment at this point!

  28. 28
    zman Says:

    Thanks Mmmarkk…stay dry. I did some looking into storage and non-coincident peak storage is above 3.5 Tcf. Scenario 2 could be in store as well but I think we get at least a touch of 1 and 3 as well. I don’t think you see gas crashing into the low 5s.

  29. 29
    codydog Says:

    z-

    dont you start to get btu-equivalent trades put on as ng rolls around 6 and cl being above 70?

  30. 30
    scoop006 Says:

    Z
    Assuming Nicky’s thesis in post # 34 is correct how would you play it? TIA

  31. 31
    Sambone Says:

    Man, little old 96L won’t die. Still has some spin to it, and heading for warmer waters. Wind shear is going up though. Tough little bugger!
    http://www.ssd.noaa.gov/goes/flt/t1/loop-vis.html

  32. 32
    scoop006 Says:

    Nicky Thanks for your response

  33. 33
    codydog Says:

    I’m not making any points really.

    1. Big players need liquidity to trade so when senior traders are out, of course there is less volume. Less liquidity not volume contributes to exaggerated moves. eg, the volumes in energy and metals are almost rounding errors in the bond and s&p mkt, not really but you get my point.

    small players never go away, but in essence their volumes dont move the mkts, as they tend to be trend players, not trend initiators.

    big players offices are staffed 24/7 with direct lines to the major trading center where liquidity exists. big players trading credit lines dont get smaller in different time zones although their volumes do due to liquidity issues.

    2. Fundamentally of course you’re correct. But a big player has access to geo-political events before CNN spews it out because they work their sources endlessly again because their desks are open 24/7 and they see the trade flow.

    Keep in mind too, that mkts can remain irrational longer than most people can remain liquid.

  34. 34
    zman Says:

    OII zooming to fresh highs ahhhhhh.

    Maybe that little old l96 is giving the hurricane crowd early hope.

    I think Nicky got everyone’s questions. Just checking in periodically as its a very slow one today.

    I used to work for one of those big players and our marching orders were pretty set for these days and a phone call on the beach was NOT welcomed. But it’s different from shop to shop and guy/gal to guy/gal. Maybe some big wigs like being called on a low volume holiday but not most.

    Codydog: can you elaborate on #41?

  35. 35
    zman Says:

    Probably seeing some more liquids (said staying in) meant coming out of the stream now

  36. 36
    Sambone Says:

    If a TD hits the GOMEX, then my DEEP will soar. That’s the only reason I’m watching this stuff.

  37. 37
    zman Says:

    Sambone,

    ditto OII which has options.

  38. 38
    zman Says:

    IOC out of steam. down 3+%. Tempted to take a small high call for Monday but that would be gambling.

  39. 39
    codydog Says:

    all energy sources have a btu value and when one energy source is ‘cheap’ or ‘expensive’ on a btu basis, you can put on a spread trade. I forget the exact multiplier but one exists to correlate ng to oil to electricty etc…eg, you can buy 10 ng, sell 1 cl with the expectation that the universe will go back to the mean and pay you off on your trade. I forget the multiplier but seem to think on a transactional and contract basis, its maybe 12, but I could be absolutely wrong on that number

  40. 40
    zman Says:

    traditional its 6 to 1. The actual ratio is 5.4 to 1. That btu to oil setup has been busted for some time. Since we’re currently near 11.7 to 1

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