30
Jan

Wednesday – Oil Inventories and the Fed

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Bernanke Is Our Pimp Watch. The market has become addicted to rate cuts. First 25 bips and we're a little bit happy...for a little while. Then another 25 but that the euphoria from that one faded faster than the first. Let's up the dose to 50. Ok, there's a week of relief. Wait, you still feel sick? Talk, talk, talk, testify, testify, testify. Bam...there's a surprise 75 bips hit for you, take that market! Today Ben will dole out another inflation exacerbating cut of either 25 (very disappointing) or 50 (ahhhh) basis points. Purely for what we do around here let's hope its 50 (of course, what does that say about the true state of the Union) and that it brings some peace to the financial and broader markets (I know, I know, dream on). For lack of substantive news the oil and financial markets joined at the hip these days and the most important piece of data I've seen of late is a slight slippage in U.S. gasoline consumption.

Commodity Watch

  • Crude Oil rallied again yesterday with the move in the broad market, closing up $0.65 to $91.64. The rally was attributable to rising equities and a small amount of Canadian volumes shut in due to weather. This morning crude is trading up slightly and will no doubt trade with the equity markets today.
  • OPEC & Bodman Watch: The Cartel meets tomorrow and still no change in quotas is expected. Bodman repeated his call for OPEC to hike output yesterday in a speech to the U.S. Chamber of Commerce and once again this call fell on deaf ears at OPEC who basically said, "if you are going into recession, you will consume less, oil, so why should we produce more oil?" Bodman conceded that forecasts show demand falling off this year but of forecasts themselves he said they "tend to change with time and I would not put too great a stock" [in them]. Now this comes from the head guy of the Energy Information Administration who in the past has pointed to those same forecasts as showing that OPEC needs to boost output. You can't have it both ways. Use your brain and figure out a way to align your interests with those of OPEC. Just beating your head against the same tune relentlessly and to no avail is just embarrassing and shows a lack of creativity. How about offering them some weapons? How about offering to take some barrels into the SPR at a set price to cushion the increased production. I could come with these all day but he's not a subscriber and I'm not running for office. I just think it's embarrassing to hear him repeat the same tired line over and over. Apologies for the rant.

  • Mexico Watch: Pemex sees Cantarell decline at steady pace, down 200,000 bopd in 2008. This represents a drop of about 16% on December volumes of 1,26 mm bopd and in line with 2007's drop. Pemex has stated it will increase exploration activity this year. The next big thing on Mexico's radar is the Ku Maloob Zaap complex with currently produces about 600,000 bopd and is expected to reach just under 800,000 bopd in the next 2 to 3 years. Pemex hopes to hold current production flat at 3.1 mm bopd for the next few years but the roadmap to accomplishing is less than clear to me.

Early Read on Oil Inventories (average of the Dow Jones and Platts surveys)

 exp-vs-act-012508.jpg

Zcomment: These are pretty seasonally average numbers. The distillate draw may be a little low given the weather but nothing to go out on a limb for either as it can easily lag a weak or two. Unless the number is a draw for crude I don't see oil detaching itself from the direction of the market today. Key things to watch for in todays report on the supportive side for prices would be a continued erosion of stocks at Cushing. On the bear side another dip in gasoline consumption and/or another drop in refinery utilization as more than the usual number of facilities go offline for long planned/delayed maintenance. Refinery utilization is expected to fall another 0.2% to 86.3% but having listened to the VLO call yesterday it could fall further. 

 

  • Natural Gas traded off a dime to close out the February contract at just under $8. I still see gas range bound between $7.50 and $8.25 for the next several weeks, barring an unusual bought of cold weather, before it dribbles lower towards $7 in late February. This morning the  February contract is trading slightly higher. 

Friend of the Blog Watch: A friend of the blog sent over a couple of pieces on the health of the deepwater markets, natural gas and some E&P stuff. Never hesitate to send this stuff to me. I've been on both sides of the Street and can honestly say that I enjoy my current side the most although it doesn't generate the kind of commission to pay for this kind of research (or even for a small team of data monkeys just yet). I will summarize the main points of this piece hot off the Credit Suisse presses:

Deepwater Market Very Tight; Getting Tighter:

  • current utilization of deepwater floaters is 94%,

rig-available-days-012908.jpg

  • 74 rigs are being added between now and 2011,
  • 65 of these will be ultra-deepwater capable.
  • Much of the demand/current shortage is attributable to drilling off the coast of Brazil. Up to a quarter of the new builds may be needed to exploit Tupi, Jupiter, Carioca, and Parati discoveries in the Santos subsalt Basin for which PBR and the Brazilian government estimates reserves at a lofty 70 to 100 billion barrels. It's probably a bit early to get to those kind of numbers but rest assured they will try to prove up as many barrels as possible as soon as practicable.
  • As direct beneficiaries of this trend they point to: PDE, NE, DO, and RIG. Favoritism shown to outperform rate NE and RIG although they point to near term upside on PDE due to the recent rig with PBR and due to some near term rollovers. While everyone essentially has 2008 booked, NE has 3 to 5 rigs as of yet uncontracted rigs for 2009 giving them the most upside potential to current estimates.

deepwater-multiple.jpg

  • So if you combine the first table with the second you can get a grasp for just how solid those out year numbers are. I would also add that ATW is rumored to be a takeout before year's end...hard to play with options unless you go to leaps and in which case I think you will be fine unless we have a general collapse in the price of oil which I don't anticipate.

 

Stocks of Note and Earnings Watch:

The refining complex exploded out of the gate on (VLO)'s big beat yesterday. For quite some time I've been saying I wanted to be out of the group through 4Q earnings...I'm still on the fence and think that yesterday's surge may be in some case a bit overdone. I may take a small position in FTO (should have yesterday but will now wait to see how it trades during the TSO report on Thursday). You can always see the most recent crack spreads and refining multiples at left on the Refiners and Cracks tab.

(BHI) reported $1.26 vs $1.28. Revenue was also light at $2.74B vs $2.79B.

(SII) - These guys announced weaker than expected guidance yesterday and the stock was pounded for 8.4%. They too will benefit from the surging deepwater market and I'll be taking another look at getting long here soon.

(HES) - appears to have reported a miss on earnings of $1.59. Will have more on this in comments.

(CEO) taking 2008 guidance higher.  Based on the midpoint of guidance, CNOOC now sees 2008 production growing by 16% to 539,000 BOEpd. 

(SU) approved a plan to spend $20.6B to increase production by 200,000 bopd by 2012. Those seem like pretty expensive barrels and there is a call at 10 EST.

(HK) closed an offering a 18 million shares (the shoe was full for 2.7 mm additional shares) pricing slightly in the hole $15. I own the stock and plan to be long more calls by earnings. 

Drybulk: (EXM) offered slightly better than a 20% premium  for (QMAR) yesterday to create the largest U.S. listed dry bulk fleet and sent the group higher on speculation more consolidation of this highly fragmented industry is around the corner. The group is called higher this morning and I may switch from (DRYS) (a likely buyer) to another name here soon.

Holdings Watch

CALLS

  • IOC March 20 calls for $2.90. Last bid $3.00. See yesterday's piece here.
  • BTU FEB $60 Calls for $1.75 on $2.50 pullback in the common today. Earnings Thursday.

PUTS: No Action

 

Odds & Ends

Analyst Watch: (CSIQ) upgraded by Oppenheimer to outperform.

94 Responses to “Wednesday – Oil Inventories and the Fed”

  1. 1
    Denise Says:

    Z-how confident are you of the down $10
    probablity for IOC? would you mind guessestimating in % terms? I would guess the upside is harder to gage because of the short interest covering.
    Thank you-was trying to figure out a strategy-long common and a out of the money put to limit my downside.

  2. 2
    zman Says:

    D – its the next round number lower and I have heard several people say it. If the well comes in wet, tight or otherwise dry then the stock tanks. $10, 11, $12 somewhere in that area. Does it stop at $15? I really doubt it, too much riding on the well. % of it going to $10 on a failure, probably 70%.

  3. 3
    Denise Says:

    Thank you

  4. 4
    zman Says:

    T – I tried to answer all your questions on the IOC report comment area. Please let me know if anything was unclear as I did a very shorthand lesson on geology, seismic, other IOC which reminds me, Antelope is a separate project, not yet drilled.

  5. 5
    TTupp Says:

    alo

  6. 6
    TTupp Says:

    thanks z

  7. 7
    zman Says:

    Drybulks – running nicely…. just looking at the fleets you’d think GNK, PRGN, NM would be targets for a DRYS takeover.

  8. 8
    zman Says:

    will do a drybulk update for the morrow. EXM soaring a day after it announces a takeover, that’s strong work.

  9. 9
    zman Says:

    should have added DSX, Cramer’s favorite to hate upon dry bulker… great for a takeout.

  10. 10
    Popeye Says:

    I’m seeing 3.7M volume on HK is this correct?

  11. 11
    zman Says:

    P – its deal related volume

  12. 12
    Popeye Says:

    Ok nevermind I guess it is due to the offering. I need coffee.

  13. 13
    zman Says:

    I’m thinking to add NM or DSX or both here, doing a little valuation work but the group is flying up while I type and 10key. NM has had the smallest move.

    P – it should trade a little better once this volume is out of the way.

  14. 14
    doc Says:

    Any thoughts on URDL.LOW pe TAKE OUT???

  15. 15
    zman Says:

    ZTRADE:

    March 25 DSX (drybulk) Calls for $4.30.

  16. 16
    zman Says:

    Doc,
    I know the name and little more there, not sure what the replacement costs would be but the segment they are in, North American land drilling, is not much of a grower these days. It makes sense conceptually as a takeout after Alice Chalmers took out Bronco Drilling last week but from a metrics standpoint I’m just not sure. On earnings estimates it looks like its trading in line with that deal.

  17. 17
    Dman Says:

    Z- what fraction of the total current deepwater fleet would 65 rigs represent?

  18. 18
    Denise Says:

    Article about possible political party change in Canada-do not know how much merit the possibility has-but something for the future radar
    http://www.deltaga.com/index.php?option=com_content&task=view&id=639&Itemid=9

  19. 19
    zman Says:

    ~ 30% of the floater market

  20. 20
    zman Says:

    go DRYS go

    surprised to see the Chinese oils off today with CEO’s growth expectations and up oil

    Edwards and Giuliani expected to drop out today.

    Thanks D and thanks for the alt view article on coal.

  21. 21
    zman Says:

    I think SLB is acting like an anchor on HAL. If it doesn’t respond to an improved market today (which I’d expect at some point in response to a 50 bips cut) I’ll be moving on to the Marches here.

  22. 22
    zman Says:

    crude and gasoline up 3.6 mm barrels (both high)
    distillate down 1.5 mm barrels (in line)

  23. 23
    zman Says:

    refiner utilization fell off a cliff again to 85% like someone I know mused in their morning note.

  24. 24
    zman Says:

    cushing stocks edged up a hair. In all I’d say a bearish report for crude and products. crude took it on the chin at the report but is recovering now. stocks taking a pretty neutral stance on the report as well.

  25. 25
    sane Says:

    Gasoline demand still below 9M for the week.

  26. 26
    zman Says:

    Sane – right and two weeks are starting to make a trend. Did you listen to the VLO call yesterday. I counted the word “recession” no less than 10 times before I stopped counting. Everything I read about refiners now says … “and we now think refiners are discounting a moderate recession in the U.S.” — people are starting to finally adjust their driving habits. That being said, at least the government is going to cut us all checks so we can buy more gas in time for high prices this summer, lol.

  27. 27
    zman Says:

    Doc – did you want me to look at UDRL, I’m taking a look at EVEP for the weekend.

  28. 28
    doc Says:

    URDL worth a look.

  29. 29
    zman Says:

    Sane – let me know when you get the API data.

    Nat gas rallying a little this moring up $0.16 to $8.10. People are expecting a giant withdrawal tomorrow. Most are over 200 Bcf and I’ve seen one looking for 300 Bcf.

    Doc – I do some comp work on it for the weekend, ok?

  30. 30
    Denise Says:

    If anyone is interested this afternoon-will be free internet access(4:30 est)
    2008 Financial Markets and Economic Colloquium at Seton Hall University-speaking will be
    Doug Kass, Tony Dwyer of FTN Midwest Securities, Gregory Peter of Morgan Stanley, Brian Reynolds of MS Howells, Cody Willard of Fox Business Network and Scott Rothbort on this year’s economy and financial markets.

  31. 31
    zman Says:

    IOC- breaking 20 …news any day now. As you guys who’ve been around know, I don’t normally play exploration as I like my money too much. Players involved here and the past data on the play make the third well here (non-aptly named ELK4) quite a bit less risky than a rank wildcat however. I went with a long March as “news out any day” can often take longer than you think. However, their last drilling report was on the 17th and given their history of you’d expect one either this week or early next week.

  32. 32
    Denise Says:

    sorry forgot link
    http://www.shu.edu/news/article/61900

  33. 33
    Denise Says:

    Z-does news leak early from that part of the world?

  34. 34
    zman Says:

    Unreal move in crude up $0.50.

    On IOC , downside protection for $0.30 to $0.35 for the FEB 15 puts is not a bad way to go. Somebody took a chunk of the March 10s this morning.

  35. 35
    zman Says:

    D – yes. In this case, unknown. This is speculation brought about by past hype, current ownership, a blog or two, etc lol.

  36. 36
    Nicky Says:

    Morning all – yes Z – three weeks of bearish data now and still energy goes up – its nuts!

  37. 37
    Nicky Says:

    Even if the cut 0.50 it feels priced in to me so I think any further rally is going to be very short lived. Buy the rumour, sell the fact and all that. And also then the market has to wake up to the fact that he is likely done!
    Until tomorrow anyway!!

  38. 38
    sane Says:

    API

    Crude UP 100K
    Distallates down 3.9M
    Gasoline Down 400K

    Strange numbers

  39. 39
    sane Says:

    EIA and API totals have come closer together though

  40. 40
    zman Says:

    Nice to see pullback in FTO and APA, both names I want to own for earnings.

    Sane – thanks for the API…at least the distillate numbers looks reasonable.

  41. 41
    zman Says:

    For those who want to play a big number on the gas storage report tomorrow:

    APC, SWN, EOG most like to run on a number close to 300 which is a possibility…have not seen a consensus number yet.

  42. 42
    zman Says:

    TBSI soaring in the drybulk sector…assume it’s more takeout speculation

  43. 43
    Dman Says:

    Cramer is talking about an OPEC supply cut & for looking for crude to head toward $100 on that thesis. Don’t know where he gets the “cut” notion from. They could just do nothing. Many observers think OPEC can’t raise supplies even if they want to, but maybe Cramer thinks they actually can’t sustain current supplies? I’m just guessing about his guesswork.

    Anyways, as Z alluded to this morning, it sure is pathetic to see the lame drumbeat of Bush administration officials asking “please sir, can I have some more?”

    They are somewhat reality-challenged, so maybe they think that asserting something “must” happen will make it happen.

  44. 44
    zman Says:

    Ok, I’m bored but feeling much better today. Any format changes you guys have would be more than welcome. I ask periodically and try to incorporate the best ideas I see but I can’t do that without your help.

  45. 45
    zman Says:

    Dman – I think OPEC could raise (eventually) production by 1 to 2 million barrels. From the time they said go it might take 6 months … that is the amount of spare capacity most analysts think is on hand. Do they cut with oil teetering on 90? Everything they’ve said of late says no but they often test the waters before a meeting to see what the potential impact will be. They know that no cut won’t lift prices a lot and they know a cut would likely send us into the mid 80s potentially breaking key support around 85. I think they hold fast.

    Cramer could be right but its like most of his calls 50/50. He loves to scoop and has no long term memory. Does he have a performance page, lol?

    Don’t get me started on Bodman.

  46. 46
    zman Says:

    Warming up to SII. BHI slamming the group with its miss today. Street acting like a herd of lemmings today taking down those who beat in the service sector, like HAL with those who missed. Very stupid.

  47. 47
    Denise Says:

    Z-When you have some time would you take a look at MVO -06-royalty trust IPO -had some production shortfalls from OK ice storms-was thinking of rebuying
    Operators are Vess Oil and Murfin Drilling-most of reserves in El Dorado
    area
    Thank you
    http://ipo.nasdaq.com/edgar_conv_html/2006/10/05/0001047469-06-012468.html

  48. 48
    zman Says:

    will do

  49. 49
    Dman Says:

    Z- There *is* a website somewhere that tracks Cramers’ predictions.

    Service being whacked: the only service name on my screen that is green is PDS, still holding its recent breakout. Is it whispering something? Or mumbling, maybe.

  50. 50
    zman Says:

    Could be the BRNC deal has them up a bit… ya know HAL also said they don’t foresee improvement in Canada this year.

  51. 51
    zman Says:

    FSLR getting punished. Trading just like the dry bulks did on the way down.

  52. 52
    Dman Says:

    Z- I’m looking to add some deepwater exposure here, so I reviewed Wyomings comments a while back & there’s a sentence I can’t figure out (the second one below):

    “I think anything that has deepwater and exploration as the primary revenue/service is where to be. OII,DO, RIG if the street starts to run on the additional jack ups then it is out.”

    Can you translate? What is it that would be “out” and why?

  53. 53
    sane Says:

    API talks about US oil demand and production

  54. 54
    Nicky Says:

    Z #45 surely raising production would send us into the mid 80’s and a cut would send us higher???

  55. 55
    zman Says:

    Scoop – did you do the FSLR put?

    Dman – Hmmm. I remember seeing the statement. Wyo is mostly available on Friday so I’m not sure if he will comment. If I had to guess I’d think he meant by out that if the Street could be upset over the number of newbuild jackups that will come into the market (about a 20% increase over the next 3 years). Will try to confirm with him.

  56. 56
    scoop006 Says:

    Z Yep FSLR Feb $170 @ $15.50

  57. 57
    zman Says:

    Scoop – nice trade.

  58. 58
    freeflow Says:

    anybody got the rate cut news yet?

  59. 59
    zman Says:

    Due out in 5 mintues

  60. 60
    scoop006 Says:

    Z What do you expect re RATES

  61. 61
    zman Says:

    probably 50 , otherwise he just has to do another 25 tomorrow as someone else said yesterday on fast money. he’s a goat either way.

  62. 62
    Brian08 Says:

    Buddy of mine at JPM is saying 50

    and it is 50…

  63. 63
    zman Says:

    AND THEY’RE OFF!

  64. 64
    Brian08 Says:

    nice 90 point pop on the dow right away…

  65. 65
    zman Says:

    yes, what a drug these rate cuts are, lol. but the euphoria fades quicker and quicker as people realize just how sick the patient is.

    should have taken own advice and taken the APA today.

  66. 66
    apbd Says:

    Bloomberg says .5
    Ho Hum!
    apbd

  67. 67
    zman Says:

    Nice to see APC slowly recovering…a must hold in my opinion for earnings next week.

  68. 68
    zman Says:

    Bill – if your around, love to get an opinion on the dry bulk group now.

    Go DRYS Go

    ditto PBR which has finally gotten my $110 calls out of the red.

  69. 69
    zman Says:

    ok, PBR just insane up now compared to before the rate cut….no new news.

  70. 70
    freeflow Says:

    Any technical thoughts from Nicky?

    My charts say the rally should hit 13100 then turn down – way down to 11k.

  71. 71
    zman Says:

    ZTRADE: Out PBR $110 Calls for $7.20, up 44% since the 15th … thanks Ben. Will be long March calls soon.

  72. 72
    zman Says:

    FF – I’m curious as well as we could be one happy 3 digit afternoon and then out, lol.

  73. 73
    zman Says:

    DRYS now well through the midpoint on the bolly bands…love to have the thoughts of my more TA inclined readers.

  74. 74
    freeflow Says:

    I agree Z – the trend has shown a major reversal the next day for the past few rate cuts.

  75. 75
    jiveyjr Says:

    Z..you feeling better; hopefully so!!

  76. 76
    zman Says:

    FF – based on that I was thinking of taking the money and running on the DRYS but, if it is breaking trend (and that would be in line with the fundamental improvement I’m thinking of for near term rates) then I don’t want to get out just yet…very torn.

    Jivey – it would take a coroner to keep me away for very long, lol.

  77. 77
    scoop006 Says:

    Z #76 as you once told me “when in doubt, sell half”

  78. 78
    zman Says:

    RIG and ATW made a sad effort on green but for only 15 minutes before the sellers swarmed them … I’m missing something on the deepwater drillers, some under current (no pun intended) keeps pulling them lower. very annoying.

    Analysts bullish: check
    Longterm demand up: check
    rates up: check
    too much building: maybe
    but big new discoveries to absorb it: check

    wyo – thoughts on this?

  79. 79
    zman Says:

    Scoop – you can’t fight the logic…will do… in the morning…they are March calls after all, lol.

  80. 80
    freeflow Says:

    Another technical analysis chat room is saying that DRYS is a buy over 70 – with a target of 130 – but they are just watching until it breaks 70. Take that for what it’s worth.

  81. 81
    freeflow Says:

    We may get a nice reversal today – leaving tomorrow open for upwards movement.

  82. 82
    zman Says:

    wow, market already entering hangover phase?

    thanks FF, they have a point and so do with #81…holding it for tomorrow.

    may get a chance to get my March PBR calls on as well, thing keeps dropping.

  83. 83
    zman Says:

    HK cleaned up by the end of the day popeye. Analysts are going to be adjusting estimates, probably slightly downward to account for the deal and the increased deal size but will also be reiterating the buy now, buy it cheap, buy it before earnings premise.

  84. 84
    zman Says:

    market red…what now Ben?

  85. 85
    freeflow Says:

    Take back the cuts! Raise rates!

  86. 86
    Dman Says:

    Z- on the deepwater drillers: maybe just a momentum hangover = source of funds?

  87. 87
    zman Says:

    dman – that’s not a bad thought…very regular selling, low volume rallies…could be the answer. In that case you should get a nice pop when the first of them reports.

  88. 88
    TTupp Says:

    look at this reversal…… wtf

    ive formally decided there are no trading strategies to make money in this schizophrenic market. im retiring.

  89. 89
    zman Says:

    wonder if this panics the Asian markets

  90. 90
    scoop006 Says:

    Z re RIG Yesterday Cramer sold some of his shares and was somewhat pessamistic for short term growth

  91. 91
    zman Says:

    Thanks Scoop – that guy is such a flip flop…he was touting it at the top just a couple of weeks ago.

  92. 92
    kaman Says:

    Think the market is now saying it needs more than the Fed. Institutional level bailout or (other extreme) line one or two of them (e.g. Ambac) up against the wall for execution…some kind of serious, unspinnable catalyst.

  93. 93
    kaman Says:

    Sorry, meant to include Fitch alongside Ambac at that wall…really impeccable timing guys. Have a cigar tonight, you showed Ben who’s “pitchin'” and who’s “catchin'”.

  94. 94
    zman Says:

    S&P futures falling like a stone now…I guess AMZN won’t save us. Starbucks looks bad, ANN closing a bunch of stores and Fidelity National reports a loss…of course MUR in energy land beat on higher prices and production but I’m thinking that won’t help this market.

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