21
Jul

Weekly Wrap – Week Ended 07/20/07

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The 12 Month Strip: Still In Backwardation

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Gasoline Inventories Fell. Slightly higher demand, slightly lower production but it was imports falling off a cliff that made the RBOB bulls run again...for a whole day. Then it was back to declines. If you'll note in the graph below, the decline in stocks came about when it should. True enough we're out the bottom of the range but imports and production are very likely to higher again this week. Demand? That might be higher as well but stocks should go back to builds.

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Last Friday I Pointed Out The Fat Valuations Being Placed On Refiners. You can review that summary of the RBOB situation here. This is nothing new and I've often pointed it and they've gotten even fatter.

That was then (7/13/07)

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But this time Wall Street Analysts started to agree after a week of sharply decline gasoline prices and crack spreads. The results was the beginning of downdraft, broken up Wednesday by an import induced drop in gasoline stocks. I think the decline in gasoline and in crack spreads continues, barring a hurricane of course, for some time.

This is now (7/20/07)

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Do I Think Enough Is Enough For This Refining Fall From Grace? The big caps are coming back into a the high end of their historic forward multiples. I think they have less room to fall at this point but that fall they will until crude oil starts to soften. As to the tiny little companies above (FTO, WNR, HOC) there is little doubt they have jumped the shark.

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Natural Gas in Storage. U.S. gas in storage increased by an in line 65 Bcf. Gas reacted somewhat bullishly to the report and we made several gas pics that if taken quickly turned out quite well. Still thats only 3% below last year's record level of storage and while some real heat is on the way, inventories are 16% ABOVE the fire year average.

What matters more storage or storms? Great question. Storms for the short term but storage for the long term. While the import situation remains in flux it is not plummeting yet. And production in Tx, Wy, and many smaller states is on the rise due to a combination of non-conventional plays and reassessment of older fields (deeper, new tech etc). Gulf of Mexico production continues to recover from the storms of 2005 and is poised to move even higher with the additional of large gas projects like (APC)'s Independence Hub which came on line this week. Independence alone is expected to reach its capacity of 1.0 Bcfgpd by year's end and it serves to make several nearby projects economic and thereby will sustain production at peak levels for several years to come.

So am I saying there's too much gas around and that prices will fall off a cliff? No. The funny thing about much of the recent growth is its cost. If you'll note from the table above, that gas directed rig count is a stone's throw from the record (which was set last week at 1,501). It has to stay that way as places like the Barnett Shale, through large in overall size, suffer from high early decline rates (50% is common within 3 to 6 months). To continue growing operators have to keep drilling. A lot. That keeps a lot of rigs busy which is expensive. Manpower is short and those people need to be, and are paid, to stretch themselves so far.

Then you've got the fact that many E&P companies were late to the proverbial game. Mitchel found the Barnett (or at least they were the first ones to make it a name every soccer mom knows) and Devon acquired them for it. Then the other big cap E&Ps came into the play, one after another, and then the mid-caps and then the smaller guys with the more recent ones paying a pretty penny for the privilege to lease and drill there. While some of the early guys are probably economic at $4 gas, many of the new entrants (last four to five years) and even new leases by the old guard, would find $4 gas intolerable and $5 and even $6 only marginally profitable.

So, no I don't see us plummeting much below $6 (if we get there with all these clouds in the Atlantic) or you'll see operators announcing shutin (as is there right) until prices make more senses to them. It won't happen in the Barnett at first or at all but the Rockies may see some news along those line soon.
CFTC: Another Record For The Shorts. The net short position reached 93,000 for futures and options combined, another record. While shorts again edged up I would note that longs increased for the second week in a row and I suspect that if the numbers were through today as opposed to Tuesday (the date of record) that long position has grown a little more. Gas was awfully jumpy as the tropics looked somewhat threatening and that tells me there's a lot of fear for losing the large gains the shorts have made over just the last month.


Holdings Watch. Fairly Busy Week.
See the ZEB Performance tab for the latest open and closed option positions and performance.

20 Responses to “Weekly Wrap – Week Ended 07/20/07”

  1. 1
    jimbo Says:

    Good morning! Really appreciate your site. I get a lots of info to digest. Couple questions.
    1) Heard one commentator state that NG can’t really go below $6 because of the NG “liquids” in gas. I assume he’s saying there is an underlying value in the pentanes, etc in gas. Do you agree?
    2) Have been following Penn West (PWE) since last year. It’s quite divergent. Doesn’t always run with the onshores, doesn’t always run with the CanRoys. It’s super company and a major holding of FAIRX, a super mutual fund. Do you know why it is such a maverick?
    Have lots more questions, but don’t want to over do it.
    Regards…Jimbo

  2. 2
    T-Tupp Says:

    Mitchel found the Barnett (or at least they were the first ones to make it a name every soccer mom knows)

    — dont get it lol. ???

  3. 3
    scoop006 Says:

    The lead article in Sunday July 22,2007 New York Times:”RECORD FAILURES AT OIL REFINERIES RAISE GAS PRICES” This is an interesting read and may be accessed by logging onto their website.=NYTIMES.COM

  4. 4
    zman Says:

    Jimbo,

    Thanks. I’m glad you like the site!

    NGLs: As to the comments about natural gas prices and natural gas liquids (NGL’s). NGL’s are produced with gas from gas wells. A lot of it (the majority) comes form Tx. A certain amount is pretty much always stripped from the gas stream, reducing the BTU content of the gas to or near to pipeline standards, basically converting it from “wet” to “dry” gas via the processing or “midstream” facility. (This is what DVN put into that Master Limited Partnership last week). Anyway, so you strip out more or less NGLs from the median depending on the relative prices of natural gas vs those pentanes, butanes etc that are in the stream.

    Will it keep gas prices above $6? Well, let me say that while I don’t think gas goes much if at all below $6 soon, the support of gas prices by NGL’s will be modest compared to other factors. The commentor is likely saying that with higher relative NGL prices (to nat gas) a greater % of NGL’s will be extracted thereby reducing dry gas production, decreasing injections to gas storage and reducing the climb in storage relative to year ago levels and thereby supporting prices. That’s possible. But given the way the govt presents data it would take a while to see.

    I still think $6 is in the near term cards and then technical trading factors will take charge for the near term. Bounce or not to bounce. As Nicky so aptly pointed out last week, we stand at the cusp of moving into record gas storage territory. This coming week a year ago saw a 7 Bcf WITHDRAWAL. 65 or greater injection flips us INTO RECORD STORAGE TERRITORY THIS WEEK for this week of the year. That’s rather bearish. The weather appears to have been present to create this scenario as well (we’ll know for sure in the morning) as it looks to have been the hottest week YTD. Anyway, hope that clears it up!
    Z
    In the meantime you’ve got some big, and not necessarily NGL rich pieces of growing and new gas production that probably offset the extraction loss. I n my mind, heat is the answer to supporting gas prices at the $6 level. Normal summer heat. But his point is valid, just a bit hard to prove since the NGL extraction data isn’t for this month won’t be tallied and published for months to come.

  5. 5
    zman Says:

    Jimbo

    PWE – I know of them (it’s one of the many Canadian investment trusts) but I know little about them. As Mmarkkk pointed out last week, things got a bit harder for these guys tax wise last year. I actually had a deal go bad in Ok over the tax law change at the 11th hour. Generally, if they can keep acquiring assets to keep production up and keep paying the monthly distributions and prices keep rising you should be fine there.

  6. 6
    zman Says:

    Tupp- Mitchell Energy was the company to bring the Barnett Shale to household name status, they we acquired by Devon Energy in the summer of 2001. They were innovative guys, figuring out a way to use slick water fracs to complete gas shale wells, how to drill multiple wells from the same pad and I think they were in on the record for a horizontal gas well as the time. I’m going by memory which is not always a good idea so if any real oilmen did that instead of those Mitchell guys well feel free to shout at me about it!

  7. 7
    zman Says:

    Scoop – Thanks for pointing it out. Good article although normally I give little credence to anyone who starts an energy article with a picture of a fire. Very hypey. Also, there are always a lot of problems with refineries. The infrastructure is exceedingly old.

    “Some critics of the industry have theorized on Internet blogs that the squeeze on gasoline and other refined products points to a deliberate effort among oil companies to bolster profits by keeping supplies tight. But experts point out that the companies have little incentive right now to hold back on fuel supplies.” They’re not talking about me here, must Phil over at PSW. lol.

    I agree with this statement whoe heartedly:
    ““It’s a marvel we can continue to run refineries the way we do these days given the many requirements and specification changes we have,” said Charles T. Drevna, executive vice president of the refining industry’s main trade group, the National Petrochemical and Refiners Association. “There comes a time when the piper has got to be paid.””

    I agree with the refiners about this one too:
    “No refineries have been built in the United States in over three decades, because refiners say they are too costly. Instead, they have been expanding their existing refineries.”
    Comment on the one above: Greenfield (new) refinery construction makes no sense. Even if you could break ground on a new facility by getting it past the EPA and local enviro-wacko groups logistically, you can add piece to an existing site much, much, much, much more quickly and efficiently that you could from the ground up. These facilities aren’t some plant that takes up a city sized block or two, they are city sized! Hundreds and hundreds of acres and the pipelines supplying crude and carrying products away already have right of ways there. That’s another big headache to overcome.

    One last bit from the article.

    But with a third summer of high gasoline prices, lawmakers are debating legislation they claim would punish oil companies for exploiting the tight supply situation and engaging in “price gouging.” At the same time, they are pressing refiners to produce more fuel.

    “Refiners want to keep running in today’s economic environment,” said Mr. Drevna of the refiners association. “But when they shut down they are accused of gouging the system. When they don’t, they are criticized for overrunning their facilities.”

    Comment: punish the oil companies? People who talk like that don’t care if you pay $5 for gasoline or $30/mmbtu to heat your house in the winter. Punish the oil companies! Ha! Why don’t we just save time and hang all the people on fixed incomes.

    If the plan is to tax “windfall” profits so that you can get elected you have no idea (or even scarier maybe you do) what kind of bedlam/ lower production of oil and gas and gasoline you will cause. It’s an exceedingly difficult job that lawmakers have NO IDEA what to do about. Hillary has talked about “taking those oil profits” What country does she think this is, Venezuela? I only ask because they (the Venezuelans) just snubbed/robbed “Big Oil” and now they’re cutting drilling rigs by 40%!!! Read the article, it could be a picture of what is to come here if people who want to “take those oil profits” get in the oval office:

    http://www.upstreamonline.com/incoming/article137598.ece

  8. 8
    zman Says:

    Evening N – Nice work Friday with the down gas call for Monday. See #4 above regarding the shift. Once I get a look at the weather in the morning and at imports the Monday night we should be able to see whether or not we hit a new high for storage for the week…if not this week then next. Off to a ball game. Check in later.

  9. 9
    T-Tupp Says:

    Z- whats your email? im intrerested in subscribing. im at tyler@wintru.com let me know the price ect. and PS i agree about this becoming a big yahoo message board, this should be kept between the knowlede thirsty and the knowledgable…. or else we will drive up options prices and make it a lose lose proposition for ANYONE within our community…

    i dont know if that was what you were thinking when you said that about yahoo message boards but WE/ off to the jazz festival here in Windsor for the night..

    cheers

  10. 10
    zman Says:

    Tupp – message sent.

    For anyone else who needs it:
    zmanalpha@gmail.com

  11. 11
    jimbo Says:

    Monday AM….Bloomberg reports the merger of GSF and RIG.

  12. 12
    codydog Says:

    z– Is VQ a play on GSF/RIG deal?

  13. 13
    codydog Says:

    z–or GRP?

  14. 14
    Stephen Says:

    Most of the rig stocks NE, RDC, DO are up 5%, with RIG and GSF up 7%. OIH is going to go up pretty high today.

  15. 15
    MMarkkk Says:

    Z- do you get the CERA weekly updates? I believe they are subscription.

    Interesting blurb in this week’s edition. One large driver in NG storage is the record LNG imports this year. This was driven by weakness in European markets as their temperatures have been unseasonable and the market for NG and LNG has cratered. This led to large volumes of LNG heading over to the US. Will this quirk continue in Europe? Doubtful. Also, the erthquake in Japan knocked a nuke plant offline. Don’t know how long it will be shut in but that electricity generation capacity will have to be replaced by NG fired plants. This will increase demand in Japan for LNG imports. This will drive supply away from the US so we may see a further decline in LNG imports in the US over the next few months. Again, I didn;t get the magnitude of the impact and I haven’t heard how long the nuke is going to be shut down in Japan.

  16. 16
    Stephen Says:

    In the long term, I think the GSF/RIG deal is more positive for GSF than RIG, what do you think of a long GSF, short RIG strategy?

  17. 17
    codydog Says:

    deutsche downgrading RIG

  18. 18
    MMarkkk Says:

    1st well on at Independence Hub is producing 50 MMCF/day, with 14 more wells to follow!! Without severe heat and/or threat of a storm, I can’t see NG staying near $7 for a while. Look for some short term supply/demand/storage gyrations. But if you see a five in the price to the left of the decimal point, it’s probably time to start buying ‘cuz rigs will be shut down.

  19. 19
    Popeye Says:

    Bloomberg:

    Crude Oil Declines on Report That OPEC Is Concerned About High Oil Prices Crude oil fell after Reuters reported the Organization of Petroleum Exporting Countries was concerned about high oil prices and their impact on the world economy.”

  20. 20
    Popeye Says:

    And from the other side of their mouth Bloomberg reports:

    “Oil Prices to Keep Rising This Year on OPEC Supply Restrictions, CGES Says Oil prices are likely to keep rising for the rest of the year because of supply restrictions set by the Organization of Petroleum Exporting Countries, the Centre for Global Energy Studies said. “

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