12
Jul

Thursday – Oil Review & Gas Preview

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What Is The Cure For All Evils? Marsh Mallow. Seashore mallow plant, or marsh mallow, could be a new biodiesel source. This soybean-like (in terms of oil content) perennial (unlike most other crops) grows in the salty marshes along coast lines, which if you haven't heard, are soon to be expanded by global warming. Here's the link to the story and here's my favorite quote of the month if not the year, "It's almost like the pig of the vegetable world; you can use everything but the squeal".  I'll bet the rest of the plant could be funneled into a (STKL) cellulosic facility.

Oil Price Watch: Recovering early. (CVX) cut Erskine field oil production in the North Sea. Few details available but I'll look further into it in comments as its boosting Brent which in turn is boosting everything else.

Contango Erosion. Here's an interesting piece Nicky forwarded last night regarding the diminution of the oil contango.

Here's a look at the near strip as of last night: pretty flat curve.

contango-evap-071107.jpg

Pretty tight just one month out and you're beyond the cost of storage. In the good old days of one month ago, you could buy a barrel, store it for a few months, sell it and make two or so dollars if oil did nothing less your storage costs. No longer. With so much oil bought for speculative purposes (we can see from the CFTC data that crude open interest is near all time highs) and little rise to the forward curve speculators have less incentive to hold, in fact a good reason to unwind barrels, than they did just a few weeks ago. If speculators do see a top (one possible reason for the decline in contango) and this contraction of the contango leads eventually to backwardation...lookout below.

I'm not saying this is happening...yet but it's another piece in the puzzle calling for a short term, near term retrenchment. In fact, until we see some huge "gap up" style morning hitting at least $75, if not breaching the old high of $78 and change, combined with a mid day trade off I won't believe the top is in. But this situation bears close watching. If we get much flatter a lot of folks are going to get very worried and potentially they'll be dumping barrels into a refining market that simply can't handle them.

Natural Gas: Continued Tuesday's rally yesterday morning but at some point figured out that no storms were cropping up in the gulf, ran out of steam and closed down a dime to $6.71. Estimates for today's storage number are varied and mostly higher than last week with some back close to the century mark. Gas needs to hold the lows seen Monday and last Friday or we're in for a $6 test.

Over / Under. Probably 85 Bcf. I think more eyes are on crude and crude products right now than natural gas and those commodities will have a greater impact on the energy stocks than this gas report. In the event of a light number I believe it will lend support to the rating hobbled OIH. But back to the over / under, I'm going with 85 on that. As in below 90 short term bullish, above 90 short term bearish. I rather we get a weak day out of the way crashing to $6 to give us the best buying opportunity of the year but I'm not able to manipulate storage levels.

My estimate: 90-95 Bcf. This is based on slightly cooler weather than in the prior week offset by a small drop in total natural gas imports and somewhat balanced by what seemed, at least to me, to be an awefully low number last week.

If we do get a smaller number than I'm thinking I'll be going back to the well on (KWK) and/or (SWN) and (APC) calls, which I've been meaning to get back into pre earnings anyway, just after report time.

Holdings Watch:

  • CALLS: No action.
  • PUTS: No action
  • STOCKS: Sold (SCU) for $1.11, a 25% gain after their VP of Canadian operations ducked out to pursue other activities. Canada could be big for them. Having the guy run it jump ship with no explanation is more than a little concerning. Maybe it's nothing. Canada that is. But if I were thinking I'm in on the ground floor of a potentially company making division then the last thing I'm going to do is quit. I'll revisit the story when they announce their next quarter results.

Stocks of Interest Watch:

(HAL) Boosts Buyback: Last night the company announced an increase to its buyback of $2B. Current repurchase allowance stands at $3B which at current prices would equate to about 9% of the outstanding shares.

Oil Inventory Review

Well we got the bigger build we were expecting and RBOB did not like it:

rbob-071107.jpg

  • Gasoline stocks rose  1.2 million barrels. Higher than some estimates from Tuesday, lower than the Platts survey issued Wednesday morning. This caused a little confusion early but on MN1 Phil and I said this was a bad report for gasoline prices and a neutral to bullish report for oil. And bad for the refiners from a quick trade perspective. It took a while but the refiners dived for the mat with RBOB into the close of equity trading.
  • Production Fell to 9.2 mm bpd while utilization stayed essentially flat at 90.2%. Both numbers were lower than expected. Still, it was a record for this week in history.
  • Imports Rose Again. Like I wrote yesterday, high imports are hanging around longer than expect due to the exceptionally high margins this year.
  • But So Did Demand. Demand rose to 9.663 million bpd a record for this week in history. Before you bulls get running though I'd point out that this equates to a 0.4% YoY growth. We had been showing growth of 1.5 to 2% this spring and that growth rate has been declining. as we enter the peak months.

Crude stocks declined by 1.4 million barrels but only because oil imports fell off the globe which sounds to me like a one week affair if ever there were one.

Odds & EndsAnalyst Watch: (RDS.A) cut to neutral at UBS. (DNR) cut to neutral at Calyon.

Hat's Off To Flynn Watch: He's been right on price; got to hand that to him. At least the direction of price if not the actual levels. Like many of the PB and J (perma bull and jamming it to the media) crowd, the fundamentals take a ride in the big back seat and when the week to week expectations of draws are met instead with builds, eh, just shrug it off and talk about hurricanes, refinery outages (even though production is much higher than utilization would suggest), and geopolitical woes. But hey, right on price is right on price, right? For my part, I don't see gasoline prices continuing higher here as stocks rebuild though and I expect cracks to resume their downward course.

I Want To Be The Next Nutbag Watch: In a bid to rival the carnie-like antic of Hugo, Vlad, Achmed, Morales, and that disturbed little man in North Korea, Rafael Correa, president of Ecuador has decided to "revise" its contracts with Repsol. He's even pulling out the environmental card ala Putin.  I can't think of a better way for a poor country to reduce its oil production than to tick off the foreign oil companies who actually get the stuff out of the ground for them. If you can I'm sure these kinds of "leaders" will utilize it but be careful about signing any contracts with them.

Have A Great Day and I'll See You In Comments! Z

79 Responses to “Thursday – Oil Review & Gas Preview”

  1. 1
    zman Says:

    Sorry for the down time; host had yet another problem.

    What is the deal with bush speaking during inventories???!!! That’s weak.

    Nat gas pre game: under 85 Bcf – bullish. Finger on trigger for APC, COG, SWN, KWK, and XTO. CHK will move a little slower up if you miss those but the run will be more limited. Ditto NFX which is currently down.

    If big number (95+) puts on just about anything, especially OIH, BHI.

  2. 2
    zman Says:

    out OII calls @ $2.50. 127% 6 day gain.

  3. 3
    zman Says:

    Nicky – I saw that at PSW last night. I like the switch from oil to gas but pure plays will still get dragged down if oil get clobbered.

  4. 4
    zman Says:

    OII going on up without me.

  5. 5
    zman Says:

    106 bcf

  6. 6
    scoop006 Says:

    Z what month you buying?

  7. 7
    zman Says:

    BHI: sold 90 calls, bought 85 puts

  8. 8
    zman Says:

    july- should be a quick snap

  9. 9
    zman Says:

    bought swn 45 puts

  10. 10
    zman Says:

    N – they wouldn’t – isn’t Bush speaking right now?

  11. 11
    zman Says:

    SWN’s bought for $1.15 now $1.40 bid.

    We’re now only 3% below year ago levels and 17% ahead of the 5 year average.

  12. 12
    David Says:

    Make sure not to take the headline Natural Gas number at face value. There was a 10 bcf reclassification from base to working gas.

    So the true number is 96.

  13. 13
    zman Says:

    Thanks David – just saw that and its the reason for the run up in OIH and recovery of other stocks as well. Still pretty bearish number I’d think in the big scheme of things but in line with some numbers out there.

  14. 14
    MMarkkk Says:

    In light of David’s input, still like any of the put trades? Looks like SWN may have be out the barn.

  15. 15
    zman Says:

    MMarkkkk – I’m watching UNG very closely to see if people blow off the number. My BHI’s got halved on this run but it looks to be getting tired now. HAL also re-rallied on the discovery of the revision after the initial response. I’m going to ask Katz at EIA as a parting gift to have them put a big * on numbers like that.

  16. 16
    zman Says:

    BHI going ballistic. Damn my eyes! Always read the fine print. This number is nothing to get excited about but brokers are screaming that the confusion is a buying opportunity.

    SWN working nicely but probably left the gate.

    Watching UNG closely but also the broader mkt for signs of slowing.

  17. 17
    zman Says:

    Nicky – what do you think on oil now? That’s a new high for August and I’m in the camp that we need a big up day with a reversal, maybe next week.

    Strip prices are $0.08 to $0.11 up each month beginning with Sept/Oct.

    Natural gas looks weaker.

  18. 18
    zman Says:

    Gotcha Nicky – that’s a key reversal on crude I take it?

  19. 19
    zman Says:

    Thanks Nicky, that’s what I thought. So whose piece do you like better, mine or Phil’s? Granted he gives you more anecdotal fear and loathing about the international terror situation than I do.

  20. 20
    zman Says:

    Mark I still like the BHI here for a quick trade lower.

    Also FTO rises everyday but if we get a near term reversal that one should shake out pretty hard as it’s pretty much the most expensive, itty bitty refiner of the bunch.

  21. 21
    zman Says:

    Oil only up 0.55, gasoline now down 0278

    Refiners still up on the broader, I see another day like yesterday where that group, which has been downgraded by just about every bulge bracket firm months ago, tanks late, brokers not going to support them up here.

    OIH backing with nat gas and oil

  22. 22
    zman Says:

    SWN looking at the $44 mark for support. Don’t get me wrong it’s a great company but it’s priced like it too. With lower gas, imo, on the way they could be in for a hit, again if they take out this level. Chart looks ugly.

  23. 23
    zman Says:

    Thanks. I think he’s in touch from a “feel for the market perspective” perhaps more than most. He’s definitely got a PB bent though and the trepidation voiced in today’s piece is pretty modest. I like a little more hard data with my coffee. I used to be on that side of the fence and I’ll tell you that bearishness doesn’t sell with the mass market.

    OIH getting smacked to pre report levels.

  24. 24
    Joe Says:

    Z – are you going short FTO yet?

  25. 25
    zman Says:

    Joe – Taking a small new position in the August 50s for around $1.90. My July’s are pretty cooked.

    TSO Julys coming back to life.

  26. 26
    zman Says:

    SWN cracking lower now. 43.83

  27. 27
    Saeed Says:

    Early Restart at BP Whiting

  28. 28
    zman Says:

    Thanks Saeed! Guess that’s the further impetus for the gasoline plunge.

  29. 29
    zman Says:

    sorry that $2.90 on the FTOs

  30. 30
    Fred Says:

    Z I am long OXY and they got the boot already in Equador.

    http://ww4report.com/node/2032

    Also noticed OXY sold remaining LYO. Could be setting up for something big?

    July 12 (Reuters) – Occidental Petroleum Corp. (OXY.N: Quote, Profile, Research) said in a filing with U.S. regulators that it liquidated its remaining stake in Lyondell Chemical Co. (LYO.N: Quote, Profile, Research).
    Occidental said it sold 14 million Lyondell shares in the open market.

  31. 31
    zman Says:

    OIH reversing that little head fake now.

    Phil’s a good guy on oil, especially for a generalist. Good grasp of what makes things move in general. He’s anti-oil co which I’m not (lot of my good friends and readers work at oil companies) but other than that we see eye to eye on most moves. He’s also much funnier than I am which my wife tells me isn’t really setting the bar very high.

  32. 32
    MMarkkk Says:

    took light psoition on SWN; also COP rocketed this a.m. and last few days has shown strength morning, and gave back some late. wonder if this is still part of the Cramer 80-to-100-to-120 pump?

  33. 33
    zman Says:

    Natural gas getting simply shelled now down $0.27 at session lows.

    Oil off $0.33 and I do think that $73 level is extremely important. Can you say key reversal day. I was saying in today’s post (having stolen much of Nicky’s prose) that we needed a big up morning and then a heavy sell off.

    How’s volume Nicky?

    Gasoline almost down a nickel.

  34. 34
    SLM Says:

    “Nicky – what do you think on oil now? That’s a new high for August and I’m in the camp that we need a big up day with a reversal, maybe next week.”

    Does today count?

  35. 35
    zman Says:

    Mmarkk – when does Meeker go into service on REX. Just wondering if the CIG strip will hold up better than hub now giving a play on some Rockies guys.

  36. 36
    zman Says:

    my futures service just decided to bugger itself.

    How flat does the strip look now Nicky?

  37. 37
    zman Says:

    Hey Tupp – is a DDT on TSO or DTT or DQT?!

  38. 38
    zman Says:

    There simply is too much bullish enthusiasm out there to dent the current rally” in oil, said Edward Meir, analyst at Man Financial, in a morning note.

    LOL

  39. 39
    T-Tupp Says:

    lol?

  40. 40
    T-Tupp Says:

    nm got it

  41. 41
    T-Tupp Says:

    more of a DTR

  42. 42
    zman Says:

    laughing out loud

  43. 43
    T-Tupp Says:

    delicious trading range

  44. 44
    zman Says:

    natural gas rally = a little short covering.

  45. 45
    T-Tupp Says:

    i dont think you can read the charts on these guys, well not anything past strong support and resistance- and maybe stochactics for ST momentum.

    the fundamentals are too strong and will always overpower…..

    –on a more serious note– hahah

  46. 46
    T-Tupp Says:

    z on barchart.com, how do you get the futures chart to allow you to add a stocks symbol for comparison? i know i see the field there, but any time i enter one it wont recognize it and direct me to the page to look up a ticker symbol… :-~

  47. 47
    zman Says:

    Tupp – their site is very buggy, sometimes it works, sometime it doesn’t. Today their oil prices are busted.

  48. 48
    zman Says:

    you can draw uso or ung against a symbol but you can do that anywhere

  49. 49
    zman Says:

    CLR making another new ATH. Cheap is working even with down commodities. Same goes for CHK on the cheap comment.

  50. 50
    zman Says:

    can somebody with a bloomberg tell me what the 6 month strip looks like. I showing December BELOW November now. That can’t be right.

  51. 51
    MMarkkk Says:

    Z- here is a link to a Kinder presentation on the status as of June. bottom line is part of the capacity from Meeker to Cheyenne is up and running. 50% increase in capacity in this portion will come later this year (probably 4th qtr – schedule says Dec.). Then, from Cheyenne to Missouri will go in around Jan 2008 and then the last phase from MO to Ohio in 2009. That’s the highlights.

    Getting volumes to Cheyenne helps a bit but the Cheyenne Hub is overrun so basis won’t improve until the gas can get out of Cheyenne. So realistically, Jan 2008 before the Rockies basis blowout is impacted substantially. And then, as we’ve said before, it is doubtful the stocks will move until their next earnings report when they blow the heck out of the estimates.

    Are we getting close to $6? I’d expect to start making some moves at that point. I like your list…SWN, CHK and NFX. PetroHawk is interesting and I’ll get in EOG as well even though they correlate with crude oil. They make their money in nat gas so their earnings will follow that move as well in the long term

  52. 52
    MMarkkk Says:

    http://www.kindermorgan.com/business/gas_pipelines/rockies_express/REX_Shipper_Mtg_Presentation.pdf

    sorry, forgot the link

  53. 53
    zman Says:

    MMR announces a big one. Flatrock, deep well in very shallow water, 189 feet of pay, drilling down for a deeper objective but that’s one hell of a bailout zone! They have an NRI of just under 20% here and operate.

    It was a 75 Bcfe (net unrisked portion) including the deeper section. What they’ve got now could be worth about 25 Bcfe to the company which only had 75 Bcfe booked at YE06.

    In 10 feet of water and surrounded by infrastructure they should be online in a couple of months with some pretty good rate here (significant to the company).

    PXP has a slightly bigger chunk at around 25% nri but it means a lot less to them reserves wise.

    News came out an hour ago and I’m watching to see if it pulls back a little. Could be up again on broker follow through tomorrow for a quick trade.

  54. 54
    zman Says:

    Thanks Mark, take a look at that MMR, they’ve been hitting pretty well YTD on the shelf. I personally don’t like investing on a treadmill but that looks like serious reserve adds for them. Could be worth a trade and if the Operc (deeper) hits, wow. Nice rate add either way and quick.

  55. 55
    zman Says:

    Still holding my HAL calls here. The stock is too cheap, business is too good. I’ll exit the July’s soon and probably will avoid earnings though. Just to be safe.

  56. 56
    MMarkkk Says:

    z: just a small correction on that MMR well. the 189 feet of pay was across 5 differenct zones. But, one of those five had 120 feet of pay across 238 feet of gross interval. Net-to-gross of about 50% which isn’t bad. Proximity to pipelines/infrastructure is great and its just at 16,500′ which isn’t all that bad. Now they drill down to 19,000 which is where the fun could start! But that’s got to carry a pretty big risk factor…I’m guessing they have around a 10% chance of success on that deeper section given that play. I could be wrong on that as I don’t have any more information than what’s been released to the public but 19,000′ tests carry large exploration risks so 10% may be optimistic. But hey, that’s our industry!

  57. 57
    MMarkkk Says:

    Yeah, the well should come on really strong given the pay and pressure that will come with that depth. They’ve got some well-seasoned geologists working for them and they know the shallow Gulf very well.

  58. 58
    zman Says:

    Mark – sorry, should have said bail out zone(s). looking back it reads like I was talking stacked pay which I didn’t mean to say but I type faster than I think sometimes. I’d hazard 10% is probably fair on the deeper but I’d think what they’ve got should be giving them a little better boost than a buck and low change given the adds. Just watching for now.

  59. 59
    zman Says:

    Thanks N. My system showed backwardation from Nov to Dec earlier but I think it was a timing glitch on the software.

  60. 60
    zman Says:

    Scoop,

    Did you see the CLR valuation last night?

  61. 61
    zman Says:

    Tupp – you watching this FTO and TSO move?

    We’re working on a live or very close to live generic crack spread ticker stream.

  62. 62
    MMarkkk Says:

    Z – agreed on mmr. I’ll need to do a bit of research tonight on their reserves/production history and what this might look like for their bottom line. I’m guessing it should get them more than the bump but shallow GOM isn’t as sexy to the street as a big deepwater discovery that may or may not ever be economic and will take many years and billions to get on stream. These “boring” little shallow water discoveries only add to the bottom line within a few months and carry far less risk.

  63. 63
    zman Says:

    M – agreed. Nobody likes the shelf since APA bought the last big chunk for some major. The deeper shelf should get more respect. Plus JU rates are coming down while the semisub and drill ship rates keep going up, right?

  64. 64
    scoop006 Says:

    Affirmative. Holding 2k@#15.

  65. 65
    zman Says:

    TSO clearly broke back through its 50 day moving average today.

    Scoop – it won’t be immune to a big down draft in oil if we get one but its quite a bit cheaper than it’s peers despite some pretty good reasons not to be.

  66. 66
    scoop006 Says:

    Would you suggest Selling 1k @17 to average down to $13 and let it ride?

  67. 67
    zman Says:

    Scoop – that can’t hurt. I’m not in doubt about them but the commodity is a different subject.

  68. 68
    T-Tupp Says:

    of course. TSO and VLO is all i trade….. DD when the stochastics cross. i initiated yesterday at 1130

  69. 69
    zman Says:

    anybody see anything on the storm front. nat gas just took a late lurch higher.

  70. 70
    redjack Says:

    Tropics are quiet…

  71. 71
    zman Says:

    AXC.TO – more discoveries in Nigeria. This is a long sleeper type holding.

    big oil column in one with 3 gas zones

    other well is 5 zones of gas. What do you do with gas in a country that flares a Bcfgpd. Count on them to stop doing that and build LNG facilities. AXC will be ready when that happens.

  72. 72
    zman Says:

    redjack – yeah, I think its a bit of short covering based on the warm weather early this week and it’s impact upon next week’s gas #

  73. 73
    scoop006 Says:

    Any last trades of the day?

  74. 74
    H Says:

    Hey, I been out all day, and just clicked on…Whats going on in the XLE’s?

    I mean xom oxy and company, I already know about cvx’s earnings, the rest being bid up on fundies/earnings expections? anyone taking puts?

  75. 75
    MMarkkk Says:

    several LNG projects in discussion phase right now. Shell/Chevron I believe have a couple of ideas. However, would you build a multi-billion dollar facility onshore in that country??? Especially one as complex and pressure/temp laden as an LNG gasification and export plant??

  76. 76
    zman Says:

    maybe far, far offshore.

    Have a great night everybody! I’ll be around from time to time if you need anything.

  77. 77
    scoop006 Says:

    Z-J. Cramer pumping APA tells a compelling story as its selling @ 10x earnings vs. 14x for others in sector.

  78. 78
    Kevin Says:

    Did you notice the move in BQI today…up almost 26% on 10x normal volume! It had been beaten down pretty hard. They do seem to have a compelling story, which was why I invested in the first place but its hard to imagine them not pulling back a bit from such a run!

  79. 79
    zman Says:

    K – I missed it.

    Scoop – Very solid operators and cheaper will hold up better than expensive in a downdraft. I see no reason to go long it right now with oil on what I see as a little bit of a precipice. Not a huge downdraft expected by $5 could easily happen as that contango flattens. See Friday’s piece for thoughts on oil.

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