The A B C Story of Yesterday: A) Crude rallied a little early after 3 count 'em 3 consecutive lower closes, B) get a seemingly bearish report (for crude) and dive like demand for Chinese-made plastic toys, and C) then rally again and close up $0.77 to $80.30 as hedge funds realize that a little place in Oklahoma saw a decline in crude inventories.
- Crude Oil: adding another buck to cross back up through $81 this morning in early trading.
- Natural Gas: Trading off a dime to $6.95 on the November contract as Tropical Storm Karen weakens and looks increasingly likely to turn North towards Bermuda.
Childish Statements Watch:
Flip: "After yesterday's sell-off it appears that the delayed seasonal top might start to finally be in place," said Phil Flynn of Alaron Trading. - PF 9/25/07
Flop: People might be looking at the build in crude supplies as an aberration," said Phil Flynn, an analyst at Alaron Trading. "If you look at year-on-year levels, we're still down." "Cushing [inventories] continue to fall," he said. "That of course is the key area for Nymex crude." -9/26/07. Z Comment: Yes, crude stocks are down to 321 mm barrels vs 325 mm barrels a year ago. Wow…1.3%!!! And WTI was $83.38 for the end of the reporting period last week, up slightly from the $59.79 it was worth as of 9/22/06. Sometimes it's better to say nothing than embarrass yourself like that….oh wait, he won't be embarrassed because no one in the mainstream media will call him on it.
Flip: "With the market showing signs of technical exhaustion, multiple events of fundamental import like weather or political strife that produce actual supply disruptions will be required to get the market moving steadily to the upside again. For now, a considerable shakeout looks likely to play out," Kilduff said. – 9/25/07
Flop: (after yesterday's $1.50 rally off the lows) "The [inventory] report wasn't as bearish as it appeared to be given the situation down in Cushing, [Okla.]," Kilduff said, explaining that there was a draw in the inventories at Cushing. -9/26/27. Z Comment: Yes, Cushing, OK, home to about 6% of U.S. crude storage saw a decline of 200,000 barrels from 18.3 to 18.1 million…better send lawyers, guns, money…
And here's a new comment addict: "Crude-oil prices have fallen in two consecutive sessions for the first time since August," Lafakis said in a research note after the data. "Tropical storms have not materially affected crude-oil production on the Gulf Coast as speculated." Z Comment: Look at the imports and wait for the impact next week pal.
And …"Gasoline demand is very weak, and refiners are demanding less crude to be converted into gasoline because margins are currently razor thin," Lafakis said. Z Comment: Gasoline demand was the second highest on record for this week of the year…did you even read the report? Furthermore, margins are not razor thin. I just don't know where they get this stuff but they're all tripping over themselves saying cracks stink when in fact cracks are, on the whole, just a little under year ago levels.
These are heat cracks on a weekly chart: down but the third quarter average is in line with 3Q06 levels. Razor thin my …
These are RBOB cracks: down also but also NOT razor thin. These are well above year ago levels and in fact only recently turned lower as gasoline demand fell off (yeah right, don't make me laugh – see gasoline demand below) and oil went through $80. The big dip on the end of both of these charts is attributable to the fact that products did not keep up with the last minute pump rally for crude yesterday. That big hump was summer and as you can see, it extended well into the third quarter.
Stocks We Care About Today:
- (CVX) approved a massive $15 billion buyback over the next 3 years on Wednesday morning but it was largely lost in yesterday's trading action. It should have a nice effect on the majors today combined with rising oil. I'll likely take cheaper (COP) calls for a trade.
- (CHOLF.PK) China Oilfield Services just came public with the second largest IPO ever in China. This is the oil service arm of CNOOC (CEO) and will probably run wild today. I know nothing about these guys but I bet it's off to the races and potentially (CEO)
- (COP) – On Monday I wrote: China also issued new rules today increasing the opportunities for foreign firms to explore and develop new fields in China. Should be good news for (COP) who picked up some large onshore acreage positions with the BR acquisition. Wednesday night (COP) said it is offering its 295,000 acre Chuan Zhong block in the Sichuan province. The PR then goes on to talk about the 10.3 MMcfgpd (nothing for a company of Conoco's size) that a field in the block currently produces. What it doesn't tell you is that this is a tight gas sand reservoir potentially holding several Tcf of recoverable reserves which should attract a pretty
pennyyuan. You've got to admire COP's timing of the sale announcement, coming just two days after the Chinese make it easier for foreigners to get involved.
(UPL) sells Bohai bay assets for $223 million, big impact for (NFX). Based on Ultra's year end 2006 reserves in China of just under 4 mm barrels this is a very strong price equating to $9.32 per Mcfe. This bodes well for:
(UPL) as that is a fat price,
(NFX) as it is planning to close the sale of its Bohai Bay asset during the fourth quarter. At year end 2006 NFX had reserves of 5.3 million barrels in Bohai Bay on it's books. Last week I was shocked by the $9+/Mcfe sale price it achieved for its North Sea assets. Now they could do it again meaning that this little piece, which most analysts saw as just the wrap up of their divestiture program, and could rake in another $300 million. And then NFX still has select Gulf Coast properties on the chopping block after that. You really couldn't pick a better time to streamline your ops given prices.
- and (COP)'s coming producing asset sale from the previously bullet.
- (TLM) – BigJim keeps point out the huge call activity and the fact that the stock is quietly marching higher. This is a perpetually discounted but incredibly solid Canadian E&P run by top notch guys. I'd call it a gift at 3x forward cash flow for any major willing to take it in but there are issues with the decline of its core Canadian gas properties and whether or not the growth provided by its international operations is enough of a enticement to either rally the stock or allow for a takeout. Acquisition plays are hard to do with options since options are a wasting asset. I like the company and am thinking about leaps or the common.
- Karen is Tricky: Overnight she weakened considerably and 3 models now show Karen abandoning her much anticipated vacation in Bermuda for Florida. This is far less troubling than yesterday evening's tracks which made a couple of cases for a GOMEX visit.
- TD 13 – unlikely to cause trouble in the U.S. but could force some evacuations and shut ins in the Bay of Campeche if it lingers and becomes TS Lorenzo.
- Central Atlantic Blob – ask Sambone, he's got both eyes on this one.
Oil Review – A Picture Show
Total Crude Stocks Unexpected Rally: Oil stores remain in YoY deficit territory despite an unexpected (by me and everyone else) build in crude stocks. I think this is simply a bump in the decline as the 4Q tightness scenario I outlined two weeks ago points to a 1.8 mm bopd shortfall in supply relative to demand.
Crude Stocks At Cushing, OK, Home to 6% of U.S. Storage Capacity But Still The Tail That Wags The Dog.
Crude Imports: Highest level in five weeks led by a surge into PADD III (Gulf Coast). May mean we see smaller numbers next week.
- Gasoline: Strong demand, falling production.
- Production – dropped 348,000 bpd with biggest declines coming from the East Coast and Midwest regions.
- Utilization: Time For Some Downtime: We're hugging levels not seen since the industry was in the middle of getting bashed by Katrina/Rita/Wilma in 2005.
- Imports: Held steady at just over 1 million bpd.
- Demand: Second highest level for this week in history. That's really saying something when you consider average retail prices were $2.81 last week, 18% above year ago levels of $2.38 (which set the record for gas demand). What it's saying is "yeah, gas is expensive but so is every other out of pocket, non capital good you can lay your hands on buddy from milk to stamps. And no, I don't want to get a car that lets me and an overnight bag drive in the HOV lane by myself. I have friends who need leg room and furthermore I don't want to resemble Ed Bagley Jr in any way, shape, or form. I'm a selfish American and I'd rather drive up a mountain to watch a pollution enhanced sunset from the air-conditioned comfort of my Hummer than bicycle half way there and get run over by the Hummer guy who is already on the way back down. And we don't mind paying the extra $0.43 difference in gas prices as its money we all save on stamps by texting each other as we eye that empty HOV lane." At least that what it seems to be saying. I could be way off base.
- Gasoline Stocks Remain Low: Still, stocks rallied (barely) for a second week in a row which is what is supposed to happen this time of year.
Natural Gas Preview:
- My Number: 70 Bcf. Which takes into account the lower cooling load and continuing decline in imports but my confidence is low given the disruption of production in the Gulf of Mexico.
- Street Consensus Range:60 to 70 Bcf. This week's number should push storage a little more into the YoY deficit side given the 77 Bcf injection in the year ago period.
Injections from now until the end of the season (Nov 2 or so).The following chart depicts the injections (green bars) seen until the end of the injection season relative to the mid September gas in storage level (red blocks). As you can see there is an inverse correlation meaning that if storage is low at this point in the cycle more gas is likely to be injected a the storage injection season wanes and vice-versa. This is just food for thought but my thinking is it augers for a 3400 to 3500 exit. By the way the average of those green bars is 378 Bcf which would yield 3,510 Bcf peak storage this year and the max is 536 Bcf which would get us to nearly 3,700 Bcf.
- (VLO) Added some more October $70s for $1.20 bringing my average to $1.48 upon reading the Inventory Report and thinking to myself, this isn't so bad, and seeing VLO, a sub 8x forward multiple stock with less planned downtime in 3Q and 4Q than many of its peers begin to tank. It was a bumpy ride but last bid was $1.25 (saved by that last minute crude rally). Further additions will likely come in the $67.50 strikes on any further significant weakness.
PUTS: No Action.
Odds & Ends
Analyst Watch: (STO) cut to neutral at Credit Suisse, CPX price target trimmed 10% to $34 (stock is just under $21) also at CS.
Bravo Brazil Watch: Brazil says it won't "renegotiate" contracts with foreign oil companies like it's communist wannabe neighbors. Director of Brazil's oil agency ANP commented "Hugo Chavez has a good relationship with Brazil, but he is only a neighbour. This movement by Mr Chavez has no reception in Brazil," Comments: nice to see someone lives up to their word in the state run oil nation world. This is a positive for (PBR).
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