22
May

Thursday – Gas Preview & Oil Review

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Profit taking. A four syllable phrase that can make or ruin your day. I did a little profit taking yesterday and I can honestly say that not one bit of it was for fundamental or valuation purposes. Simply put, the need to reduce exposure to a once again staggering broad market, made me increase my liking of cash. $135 oil, which we breached overnight, is not good for the economy or the broad market and nothing goes straight up. In my simple way of viewing the world the energy stocks should key off the merits of their own individual stories and not just the rising tide of commodities. When they all start to move more herd-like fashion I get concerned and raise cash. I am not running from the table with all my cash but I am taking the weakest, long shot positions out of play and will be slow to bottom fish for the next few days except for a few, very story driven plays (like CLR and NFX). 

In Today's Post:

  1. Holdings Watch - busy
  2. Commodity Watch
  3. Stocks We Care About Today
  4. Odds & Ends

Holdings Watch: Conducted a little profit protection exercise yesterday afternoon.

  • (DO) - Sold the DO June $140 Calls for $9, up 157%
  • (DO) - Sold the DO June $150 Calls for $4.20, up 14%
  • (SLB) - Sold the SLB June $110 calls for $2.80, up 93%
  • (HAL) - Sold the HAL June $50 calls for 1.73, up 26% to two purchases made in the last week. Still holding the July $50 calls here and am likely to buy these Junes or the $47.50s back on further weakness.
  • (PQ) - Sold the July $17.50 calls for $5.30, up 62%. I continue to hold the $25 July calls here.
  • (OII) - Entered the OII July $80 calls for $4.60. Last bid $3.80. I plan on moving slowly in a position here in this largest ROV operator on the globe. It's also a hurricane hype play and likely to rally somewhat irrational the first time a tropical wave approaches the Gomex. 

 

Commodity Watch:

Natural Gas rallied with crude closing yesterday up $0.27 at $11.64. No gas moving news, just the pull of the oil rally. This morning gas is trading up another $0.04 and natural gas remains ensconced in its uptrend.  

Natural Gas Storage Preview:

  • My Number 90 Bcf Injection
    • Year Ago: 101
    • Last Week: 93
  • Weather: It was unseasonably cool last week with heating degree days more typical of mid April than mid May.
  • Imports: 8.3 Bcfgpd last week, down only 0.2 Bcfgpd from the prior week; down 2.6 Bcfgpd from year ago levels.  
  • Street Consensus: 86 Bcf Injection

ZComment: Unless the number comes in above 100 Bcf I don't see much chance of natural gas separating itself from the pull of crude oil at the present time. Even if it does, the trend will likely remain higher, with gas supported above $10 despite the near double digit percentage production growth profile for the Lower 48 States. Moreover, if you think speculators have a hand in moving the global crude market, then the local natural gas market should be more easily run up so La Nina summer stories regarding heat and hurricanes would only play into the speculators hands. 

Crude Oil shot the moon in the wake of an unexpected decline in crude inventories and a smaller than expected build in distillate inventories. Oil closed up $4.19 to $133.17. This morning crude is trading up another $0.50 to $1.00.

  • IEA Slashing Supply Estimates Watch: The Wall Street Journal reported this morning that the International Energy Agency is in the midst of a comprehensive review of the world's top 400 oil fields. The article says the IEA is preparing "a sharp downward revision of its oil-supply forecast".  The final results will be released in November but the WSJ says "crude supplies could be far tighter than previously thought", so sue away Congress, for all the good it will do you. IEA goes on to say that the globe will struggle to surpass the 100 million bopd production mark over the next two decades (the world produces about 85 mm bopd now) and that investments needed to get us to even the 100 mm bopd level may be "much, much higher than what people assume." It's a great article if you get the Journal or have access on line its worth the five minute read.

Oil Inventory Report Review

exp-vs-act-051508.jpg

What I Wrote In Yesterday's Post Happened Watch, aka Sometimes I Get Lucky Watch:

ZComment: Utilization is expected to continue the beginnings of its seasonal (albeit anemic) rebound climbing to 87.1%. If this occurs without a rebound in crude imports to levels back above 10.25 mm bopd look for a draw on the crude number and not the slight build that is anticipated.

However, the real money is on distillates and anything short of a 1 million barrel build there will more than likely yield a bounce in HO contracts and a run on at least $130 crude.

ZFollowupcomment: Perfect storm.

  • Utilization hit 87.9%, the second highest level of the year but still low on a seasonal basis,
  • imports failed to rally,
  • giving us a drawdown on crude stocks and
  • distillate inventories only increased by 0.7 million barrels.  

CRUDE OIL: Much bigger than expected draw due to low imports and very slightly higher refinery demand. 

Utilization Rose Sharply / Inputs To Refineries Not So Much...Yet: Refiners are accepting the lower crack spreads and ramping production as we approached the advent of the 2008 driving season. Though utilization showed a big jump week to week, refiner inputs only inched higher and diesel production fell while gasoline production continue to lag year ago levels. I expect a sizable increase in crude demand  

util-vs-inputs-051608.jpg

Imports Tumbled For A Second Straight Week. Imports fell by 700,000 bopd week to week accounting for the lions share of the miss on the crude storage estimate. This is likely to reverse itself next week.

crude-imports-051608.jpg

crude-stocks-051608.jpg

GASOLINE: Small drawdown in stocks 

gasoline-production-051608.jpg

gasoline-demand-051608.jpg

 

gasoline-stocks-051608.jpg

DISTILLATES: Smaller than expected build. Higher exports driving stocks lower and prices higher here. Seasonally diesel production declines this time of year as refineries focus on building gasoline inventories ahead of summer. At present, diesel demanded for exports is running at record levels and this has brought inventories into the lower levels of the normal range and is supportive of high heating oil/diesel prices. 

dist-stocks-051608.jpg

Stocks We Care About Today:

(STO) Building First Floating Wind Turbine. Dubbed Hywind, the project combines a standard wind turbine with a spar bouy (used in offshore production). A two year test in a variety of water depths ranging to as deep as 2,000' begins soon. Siemens is providing the turbine while Technip supplies the spar. I have a short list of names in the wind space: (ZOLT), (TRN) and (AMS) and would appreciate any additions you guys/gals can provide as it is clear that wind is getting a second or third wind and its not just T Boone doing the blowing.

(PBR) Announces Another Sub-Salt Discovery.  Light oil discovered on Block BM-S-8, Santos Basin. This is in the vicinity of the 5 to 8 billion barrel Tupi discovery and maybe a part of their Sugar Loaf discovery, it's not clear from the currently available news. No reserve estimates were provided (maybe Brazil's Energy Minister will pull a number out of the air like he did at Carioca, maybe not). One thing is clear is that (PBR) is able to image the sub-salt successfully and that this area is a target rich environment. No one knows the full potential here more than PBR, especially not Wall Street analysts who have taken shots at their recent discoveries just get their name in the headlights. I'll be trading in and out of the name for quite some time.

(CLR) Speaking At UBS.  I think they will give be able to give people a better sense of where under their acreage they have Three Forks Sanish potential and how much in terms of recoverable reserves that could translate into. They speak at 11:20 CST.

(X) - Took a good tumble yesterday and I may reposition on this weakness as I stated earlier this week.  

Thursday's UBS Schedule of Presentations I Will Be Listening To Today:


  • (SFY) - 7:30 - post New Zealand divestiture Swift.
  • (KWK) - 8:40
  • (VLO) - 9:25
  • (SD) - 10:00 
  • (PQ) - 10:35 - Not expecting anything new,
  • (APC) - 10:35 (replay)
  • (CLR) - 11:20  
  • (VQ) - 11:55

Link to the UBS Conference Webcast Presentations.

Odds & Ends

Analyst Watch: All quiet on the energy front.

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

  1. 1
    Sambone Says:

    8:40 am EST

    Nymex Crude Tops $135/Bbl On Supply Concern

    By Nick Heath
    Of DOW JONES NEWSWIRES

    From MARKET TALK:

    [Dow Jones] Nymex crude trades above $134/bbl amid supply worries, the latest stirred by a report the International Energy Agency will be sharply lowering its oil output outlook. The Wall Street Journal reports the agency now worries oil companies could struggle to pump 100 million b/d over the next 2 decades, far less than world demand projected to top 116 million b/d by 2030. Nymex Jul crude +$1.47 at $134.64/bbl, after peaking at new record $135.09. (greg.meyer@dowjones.com)

    LONDON — Crude oil futures pushed further into record territory Thursday, climbing more than $2 as declines in U.S. crude stocks rattled market supply concerns.

    Uncertainty over the world’s ability to meet future oil demand was also fanned by a Wall Street Journal report the International Energy Agency is preparing a sharp downwards revision to its oil supply forecast.

    The developments served to further fuel already-strong investor momentum that has helped propel crude to its string of recent highs.

    “Investors doubt that the market will be able to meet ever-growing demand in the long run, with booming emerging market economies underpinning robust demand for energy, while OPEC remains resilient to hike its output and production is declining among non-OPEC producers due to under-investments and lack of development of new oil reserves,” said Andrey Kryuchenkov, analyst at Sucden in London.

    At 1106 GMT, the front-month July Brent contract on London’s ICE futures exchange was up 99 cents at $133.66 a barrel, retreating from its new record high of $135.14 a barrel.

    The front-month July light, sweet, crude contract on the New York Mercantile Exchange was trading 64 cents higher at $133.81 a barrel, down from a new high of $135.09 a barrel.

    The ICE’s gasoil contract for June delivery was up $30 at $1,283.50 a metric ton, while Nymex gasoline for June delivery was up 195 points at 341.60 cents a gallon.

    The U.S. Department of Energy revealed Wednesday U.S. crude stocks unexpectedly fell 5.3 million barrels last week, news that propelled near-term prices to fresh records Wednesday and into trading Thursday.

    “The stock draws in the weekly DOE statistics and a sharp fall in the dollar (Wednesday) were not the kind of data required to cap an oil market under renewed positive momentum,” said Olivier Jakob of Swiss consultancy Petromatrix.

    Weakening in the greenback against most major currencies has been perceived as major supportive factor for crude prices in recent months, with crude futures identified by some as a hedge against its fall.

    Crude prices for delivery dates further into the future also continue to climb, meanwhile with the highest crude oil futures prices currently to be found on the Nymex December 2016 contract, which settled at $142.09 a barrel Wednesday.

    “We see this as reflecting a growing recognition that the supply-side looks increasingly challenged to meet a continuation of present rates of non-OECD demand growth,” said analysts at Citigroup.

    According to a report from the Wall Street Journal Thursday, the Paris-based International Energy Agency is concerned aging oil fields and diminished investment mean oil companies won’t be able to keep abreast of booming demand.

    “The oil investments required may be much, much higher than what people assume,” said Fatih Birol, the IEA’s chief economist and the leader of the study, in an interview with newspaper. “This is a dangerous situation.”

    Such reports provided a fundamental rationale for rising oil prices some said.

    “The financial market also agrees that the reasons why the oil futures are increasing has…[a] fundamental basis,” said Roberto Ranieri, analyst at IntesaSanPaolo in Milan, Italy. “The speculation and geopolitical risks only enhance a tight supply-demand situation.”

    The inexorable climb in crude prices is nonetheless expected to prompt a demand response at some point in the future, as burgeoning energy costs toll on individual, corporate and government budgets. Clear signs of a demand slowdown could pose a downside risk for crude prices, some suggested.

    “The oil market has gone up so quickly that we have not yet seen the demand destruction from the triple digit price,” said Boris Shrayer, managing director of energy at Morgan Stanley in London. “Serious signs of demand destruction will lead the market lower as speculators will liquidate, and there is a lot to liquidate.”

    In the meantime, however, speculative investor flows remain a source of upwards price pressures, some said Thursday, with this week’s stellar rise in prices hard to link to fundamentals.

    “Yesterday’s (U.S. Department of Energy inventory) numbers set off this latest blast higher, but we suspect that prices would have gone up almost in spite of the numbers,” said Edward Meir, analyst at MF Global in New York. “The market now has the technical feel of being in “acceleration mode” whereby we could see sharp, $3-$5 advances setting in almost each day.” .

    —By Nick Heath; Dow Jones Newswires

  2. 2
    Sambone Says:

    7:42 am EST

    Futures Curve Signals Long Scorching Crude Run

    By DAVID BIRD
    A DOW JONES NEWSWIRES COLUMN

    NEW YORK — If ever there was a clearer signal of just how bullish oil market momentum has become, consider this: Front-month July crude oil futures on Wednesday were the cheapest of the 72 contract months listed on the New York Mercantile Exchange. But these days, cheap means more than $133 a barrel.

    What’s more, the day’s $4.19-a-barrel leap to $133.17 at settlement left the lowest-priced contract at the highest-ever price for a front-month benchmark and double the year-ago price. The front month hasn’t been the cheapest on the board since last July 3.

    That means no relief is in sight from scorching gasoline and heating oil prices, which also set fresh records. Bleaker still for anyone hoping for a quick turnaround, crude oil futures are priced higher in each successive month, meaning a lot of money is betting that prices will be going higher for a long time.

    In the race to the $150-a-barrel level flagged by many analysts, the only question seems to be which end of the market curve will get there first. The back end is winning.

    The longest-dated December 2016 contract was the priciest Wednesday, settling at $142.09 a barrel, and putting both ends of the market at record highs.

    Relatively cheaper near-term prices could spur refiners to build up inventories, which may eventually drag down prices, if high products prices slash demand. But by themselves, rising inventories won’t translate to lower prices, analysts said, noting that crude stocks were relatively high last summer as crude marched relentlessly higher from $60 a barrel.

    The back end of the curve, just two weeks ago, was trading at a steep $8-a-barrel discount to the front month, reflecting strong near-term demand for crude. But signs of a looser near-term market shook confidence in the front end, dramatically reversing the spread and placing far-out December 2016 at $9.31 a barrel above June-delivery crude at its expiry on Tuesday.

    Big speculators, such as commodity funds, are now more comfortable buying into the back end of the market, analysts said, and oil producers have had to move in to cover short positions — or bets that crude would fall — amid crude’s relentless climb.

    Not All Signs Are Bullish
    The latest U.S. oil inventory data showed the near-term market is tighter than previously thought, igniting a further rally.

    The Energy Information Administration’s data for the week ended May 16 was far out of line with analysts’ expectations. Crude stocks fell 5.317 million barrels, against a survey forecasting a 500,000-barrel rise. Gasoline stocks dropped 755,000 barrels, against an expected 400,000-barrel rise. Distillate fuel (heating oil/diesel) rose 728,000 barrels a day, below expectations of a 1.2-million-barrel rise, in a further reminder of voracious appetite for the fuel coming from China, Europe and South America.

    Despite the shock in the stocks, some parts of the picture don’t look particularly bullish. U.S. oil demand in the latest four weeks is lagging a year ago by 1.3%, the weakest showing since the end of March, EIA data show, with only distillate demand (+0.7%) showing a gain.

    Even with the unexpected decline, which widened the year-to-year gap in crude stocks to 6.5%, the most since Feb. 1, stocks are sufficient to cover 21.2 days of current refiner demand. That’s down from 21.9 days of cover a year ago, but above the five-year average of 20.6 days.

    Outright crude oil stocks are just 0.2%, or 785,400 barrels below their five-year average, as refiners appear reluctant to both boost imports and crude throughput.

    Crude runs inched up a negligible 29,000 barrels a day in the week, to 15.083 million barrels a day, but were at the lowest level for this time of year since 2002. Crude runs were down more than 600,000 barrels a day from a year ago and 560,400 barrels a day below the five-year average.

    Crude imports were down nearly 700,000 barrels a day for the second straight week, to 9.237 million barrels a day.

    Eye On Gasoline, Heating Oil
    Heading into the Memorial Day weekend, gasoline demand recorded its highest level since December, but still lagged the year-ago level by 0.8%, at 9.359 million barrels a day, while output was the lowest for the week since 2005.

    Gasoline inventories are enough to cover 22.4 days of demand, in line with the five-year average.

    The record high settlement of $3.3965 a gallon for front-month June futures translates to a retail gasoline price of $4 a gallon, and forward prices of summer 2009 suggest similar prices then. Gasoline now retails nationwide at $3.807 a gallon, according to the AAA Daily Fuel Gauge Report, up 18.6% from a year ago.

    June heating oil, which also serves as a proxy for diesel fuel, used to power trucks, trains and ships, settled at a record $3.9084 a gallon Wednesday. Futures prices for December 2008 through February 2009 topped $4 a gallon. Based on last winter’s differential between futures and retail diesel prices of around 78 cents a gallon, that suggests retail diesel could sell for around $4.80 a gallon, up from $4.50 a gallon now, which is 60% higher than a year ago.

    —By David Bird, Dow Jones Newswires

  3. 3
    Nicky Says:

    Morning all. The WSJ reports on a report that is not gonna be complete until November – great timing guys. These guys just can’t help themselves can they.

  4. 4
    zman Says:

    Nicky – its interesting that the IEA has never undertaken a study of this kind before. Maybe instead of telling OPEC to produce more oil for short term needs they should have focused on supply and understanding the global resource prior to this juncture.

  5. 5
    zman Says:

    Anybody see a broker comment or news on FTO. Called to gap up 5%ish at the open. Rumor yesterday was SU for FTO and this may be just follow through but someone is taking a bet early today in an uncertain market. Interesting.

  6. 6
    Sambone Says:

    Nicky – You have to remember who owns the WSJ now.

  7. 7
    Sambone Says:

    (From THE WALL STREET JOURNAL)
    By Tennille Tracy
    NEW YORK — Options traders circled Frontier Oil Corp. Wednesday, thinking
    that the refiner’s slumping stock price might make it a good takeover target.
    The possibility of a future buyout pushed the daily trading volume to 10 times
    the normal level, with investors picking up 32,000 call contracts that allow
    them to buy Frontier stock and 4,000 put contracts that allow them to sell it.
    Market players rallied around June $30 calls in particular. Priced at $1.20,
    those contracts make money if Frontier stock climbs above $31.20 before
    expiration on June 20. Investors also bought large amounts of June $35 calls,
    which cost 35 cents.
    Frontier and its stock have suffered as the price of oil has skyrocketed to
    more than $133 a barrel. At Wednesday’s closing price of $27.93, Frontier
    shares have dropped well below their 52-week high of $49.13, making the company
    an attractive candidate for a buyout, said OptionMonster co-founder Jon
    Najarian.
    Market players suggested that Suncor Energy Inc. could surface as a potential
    buyer. Frontier and Suncor said they don’t comment on market rumors.
    Options traders also took positions in Anheuser-Busch Cos. The beer company
    has been the subject of buyout rumors for months, with Belgium’s InBev cited as
    a possible bidder.
    Wednesday, investors picked up nearly four times as many calls as puts. Among
    the most active contracts were the June $60 calls, which are priced at 50 cents
    and make money if Anheuser-Busch trades above $60.50.
    The company ended the session at $52.65, up 4%.
    Some options experts are skeptical of a deal involving Anheuser-Busch. They
    point out that much of the activity in the company’s options contracts has been
    driven by retail investors, who are less likely to have insight into a possible
    transaction.
    Anheuser-Busch and InBev declined to comment on the speculation.

    (END) Dow Jones Newswires
    05-21-08 1933ET

  8. 8
    zman Says:

    Thanks Sam. I think the Journal would have published the IEA story prior to rupert.

  9. 9
    Dman Says:

    Wow, I’ve been wondering when they would get around to floating wind turbines. Looks like “already” is the answer.

  10. 10
    Nicky Says:

    It would also be interesting to know how many people were told of this report and that the fact that the WSJ were going to publish this – may have something to do with the run up in price in the last two days.

  11. 11
    scoop006 Says:

    Re FTO Jon Najarian last night on fast money pointed to the heavy volume of June call and this morning Pete Najarian said FTO may be a buyout candidate since they are the only money making refiner.

  12. 12
    zman Says:

    Dman – I hear ocean water current is the next frontier but this floating idea is great as you could move them around seasonally or in case of storms.

  13. 13
    bill Says:

    fro came out with good numbers

    its time to get back into tankers

    I like tnp,fro,tops

  14. 14
    zman Says:

    Scoop – thanks, sounds familiar …

    Nicky – hey, maybe Goldman has a better subscription to the Journal than I do!

    Thanks Bill – is Iran taking noticeable capacity off the market with its little floating storage project?

  15. 15
    VTZ Says:

    z – This is completely unrelated to anything anyone is talkign about today. But I was looking at the woodford/caney areas and I was curious as to why nobody is targeting Caney shales? Are they terrible to complete? Nobody ever mentions it.

  16. 16
    Nicky Says:

    Broader market – spx now has resistance in the 1400 area and then 1406 – 1409. Support at 1385 and the the 1370 – 75 area.
    I expect this market to find a low and then bounce towards those resistance levels. Then fall to most likely 1320 – 1340 region. Then it could get interesting!
    Dow likely to test the 12200 region after a bounce.

  17. 17
    reefguy Says:

    iran- physical storage hedge with prices rising on backside of curve

  18. 18
    zman Says:

    VTZ – Newfield talks about it a bit but pretty quiet. I can ask them about it if you like. I have not heard of it being anymore difficult to complete, will dig a little.

    Nicky – thanks for the levels!

    Reef- makes them look pretty smart now, eh!

    FTO – thanks for the responses, I’ll continue to hold what I have here, had meant to double on weakness but got distracted. This may result in run ups in ALJ, WNR but I would not buy into that. VLO has been talking about divesting facilities and FTO is a pretty unique situation.

  19. 19
    zman Says:

    SFY and DVN presentations listened to this morning, solid stories, no reason to run them down now.

  20. 20
    Dman Says:

    Z – the thing about all these ocean based wind power or water-current ideas is that the oil & gas industry already has a lot of know-how when it comes to platforms etc. Whether there will be any spare capacity to build them is another matter.

    I was thinking that maybe GE will ulitmately be a good play for wind+other alternatives, as all possibles forms of powergen are ramped up in coming years. I haven’t done a company analysis, but when people are ordering turbines in 600 lots, it makes me pay attention.

  21. 21
    zman Says:

    ZTRADE: Entered SD July $55 Calls for $1.75. Wide spread but easily split. Stock is running pre presentation at UBS and I think is one poised to beat guidance, especially on the cost side going forward. This may just be a quick trade depending on the market but I like them long term (see reports on the site).

  22. 22
    isleworth Says:

    Problem with GE is their massive exposure to financial sector. Otherwise would be a great play.

  23. 23
    zman Says:

    Isle – agreed, need better leverage and hard to get it with that behemoth.

    CLR trying to wake up before their presentation.

    OII suffering along with the deepwater non-rig service names. I’m going to be patient adding here.

  24. 24
    uop Says:

    zman:

    at what levels is PBR interesting for you ?

  25. 25
    zman Says:

    Uop – good question, maybe 68 or so to fill the gap on the chart and get really invested. A lot depends on oil. Would really like to see $5 to $10 come out the price before getting heavily long any big oil name. Otherwise, for little short term trades, right here would be fine.

  26. 26
    Sambone Says:

    Cane season starts June 1. Currently too much shear in GOM. Next week we’ll see the Jet stream move north and shear should drop. GOM is heating up. Hurricane center will be out today with their forecast for this years season. Watching small wave off africa currently. Also front off western south America which could enter the GOM at some point. Of interest is the air pressure off of Corpus Christi, TX. Very low with no storm.

    http://www.ndbc.noaa.gov/show_plot.php?station=42020&meas=wdpr&uom=E&time_diff=4&time_label=EDT

    http://www.ssd.noaa.gov/goes/east/watl/loop-rb.html

    http://www.ssd.noaa.gov/eumet/eatl/loop-rb.html

  27. 27
    ram Says:

    Add SEPT CLR’s on a little weakness?

  28. 28
    Sambone Says:

    9:52 am EST

    Nymex Crude Lower After Touching $135 A Barrel

    By Gregory Meyer
    Of DOW JONES NEWSWIRES

    NEW YORK — Crude oil futures flattened after soaring to a new record above $135 a barrel Thursday in a market rattled by supply uncertainties.

    Light, sweet crude for July delivery was recently up 3 cents, or 0.02%, at $133.20 a barrel on the New York Mercantile Exchange, falling back after touching a new intraday record of $135.09 in early trading. Brent crude on the ICE futures exchange was up 36 cents to $133.06 a barrel.

    Nymex crude settled above $130 for the first time Wednesday, making its fourth record in a row. It’s up 39% so far year to date, and has more than doubled in price from a year ago.

    The market’s latest spurt came from a report that the International Energy Agency, the energy watchdog for the world’s most industrialized nations, is in the process of lowering its forecast for long-term world oil supply. The Wall Street Journal reported the Paris-based agency is worried oil companies could struggle to produce more than 100 million barrels a day over the next two decades, far less than the IEA’s demand expectation of more than 116 million barrels a day by 2030.

    “Although the agency’s official assessment isn’t expected until later this year, the market’s interpretation is that global supply may be significantly tighter than previously projected by the major oil market monitors,” said Jim Ritterbusch, president of energy trading advisory service Ritterbusch and Associates in Galena, Ill.

    Concerns long-term supply may not keep with future global demand may partly explain the strong premium the market has recently placed on futures contracts dated years into the future. Nymex crude for December 2016 delivery, for example, recently sold for $145.60 a barrel Thursday, though the total daily volume was a lone contract for 1,000 barrels of oil.

    Demand for distillates continued to support the oil market. China’s customs administration Thursday reported a 17-fold jump in diesel imports last month. Paul Ting, president of energy consultancy Paul Ting Energy Vision in Short Hills, N.J., said the diesel imports totaled the equivalent of 130,000 barrels a day, growing in part because China is stockpiling the fuel ahead of the Summer Olympics in August.

    “The requirement for diesel imports over next few months is going to be very, very strong,” Ting said. “I don’t think there will be slackening at all in terms in terms of diesel imports.”

    Nymex heating oil for June delivery, which often reflects distillate prices including diesel, was recently up 6.78 cents, or 1.7%, at $3.9762 a gallon.

    In the U.S., the world’s largest energy consumer, oil demand is down 2.3% year to date as the economy decelerates. But the market took off Wednesday after government data showed crude stockpiles declined by 5.3 million barrels last week.

    Front-month June reformulated gasoline blendstock, or RBOB, was down 1.10 cents, or 0.3%, to $3.3855 a gallon.

    —By Gregory Meyer, Dow Jones Newswires

  29. 29
    zman Says:

    Morning Ram – if I was going to fish for more it would be in that name. Group is acting a little hinky here with some continuance of yesterday’s profit taking and general disbelief in the current crude strip.

    Natural gas off nearly a dime as we approach inventories at the bottom of the hour.

  30. 30
    Nicky Says:

    I suppose that article in the WSJ now gives the speculators a chance to justify their positions in the mounting pressure that this market is being fueled by speculators. Of course those same speculators appear at every opportunity to deny this. Nobody seems to really know how much of this is being fuelled by speculators except I did see that Hedge Fund manager – Masters – reported to the Senate yesterday that the size of the speculator position in this market is the equivalent to the increase in the demand we are seeing from China. I still expect to see a blow off top.

  31. 31
    ram Says:

    Is the CLR presen. on now?

  32. 32
    zman Says:

    Sandridge (SD) at 10 CST
    Petroquest (PQ) at 10:35
    CLR at 11:20

  33. 33
    uop Says:

    zman:

    how is presentation on SD ?

    are those times listed by you: Eastern Standard time ??

  34. 34
    zman Says:

    central standard time, SD starts in 40

  35. 35
    kyleandy Says:

    reef – did u notice how i made IOC take off by selling a little at 26.50. hope u did better!!

  36. 36
    zman Says:

    No leadership in energy save a small bounce in the refiners. Not an out and out bludgeoning yet but this is the action I was talking about when I wrote that I would be slow to fish the group right now.

    85 Bcf injection. In line with expectations.

  37. 37
    Dman Says:

    There was a good piece in RealMoney yesterday by Dan Dicker in which he walked through the effect that speculation by long-only funds has had on the futures markets. A crucial point, (which was lacking in my oversimplified theory yesterday), is that in futures, as with options, there is unlimited “supply” of contracts. If a long fund wants to buy, it only requires a counterparty to write (create) the contracts at a price they agree on. Dicker noted that futures traders who have written contracts to “supply” the long-only funds had been badly mauled if they arrived at a price for these contracts solely based on traditional futures-pit pricing theory and on their own experience.

    I would point out that essentially all the accumulated oil futures trading experience on the NYMEX floor has occurred during the era of expanding oil supplies over the last 100 years or so. Now that the supply-demand situation has reversed, it is not surprising that their experience has proven costly. The speculators, on the other hand, got into it precisely because of the new situation they saw, for which copious evidence has been readily available online for some years, denials from oil majors notwithstanding.

    So my take-away is that actually Nicky is right to say that prices have been driven by speculators, but here is the catch: the speculators were right!

    How do I mean they were right? Well, lets close the loop here by asking: if speculators are wrong and actually supply is not tight, why hasn’t the recent doubling of oil led to a flood of new supply to take advantage of these prices? Why hasn’t cash-strapped Russia taken advantage of $130 oil? Why hasn’t China tapped previously uneconomic supplies and exported them to grab $130 per barrel? The reason is of course that these untapped supplies don’t exist or at least not in sufficient size to make a difference. Of course independent operators in the US are drilling like crazy and they *are* taking advantage of these prices, but the total amounts are small in a global sense.

  38. 38
    Sambone Says:

    D – #37, The problem is that those that have the long postion on the futures contract are not selling back to close the postion. Those that are short are getting killed (Margin calls). As I mentioned yesterday from the TGL, “The elephants are playing and it’s wise for the mice to leave the field”. Since we’re on “Contango”, it seems to me that the market is telling us that down the road crude will be higher.

  39. 39
    zman Says:

    Dman – good thoughts. On your last paragraph I would say that we have seen new field production abroad and in the U.S. that was previously uneconomic come to market with higher prices. The Canadian oil sands are a good example of this but they don’t work (economically) at prices we saw just 5 years ago.

    The problem is that those 400 mega fields the IEA is looking at are tiring. Many measures have been taken to extend their life: infill drilling, water and CO2 floods, SAGD, steam assisted gravity displacement, etc and its just not enough to meet rising demand.

    Also, high prices don’t necessarily lead to burgeoning capital investment. So as the NOCs, national oil companies, increase their hold on acreage and reserves, capital spending that could go for further investment in the oil patch gets tapped at a greater and greater percentage for other, non energy projects. The oil is there … at a price. By the way Russia did a great job of getting oil production up over the last decade but is now starting to falter as well. It’s not that new projects aren’t coming on line, its that the baseline production continues to deteriorate.

    But there is plenty of oil still out there, it just costs more to get it out of the ground. A lot of oil fields see 10 or if they are lucky 20% recovery of OOIP – original oil in place. Getting the next 10 or 20% is the expensive trick.

    Then you have the whole heavying up and souring up of the global crude supply picture. That’s a real problem too. As the phrase goes, “a barrel is not a barrel is not barrel” and quality of oil produced is in aggregate declining. This drives up the cost of refined products.

  40. 40
    Sambone Says:

    Anybody noticed “Tapis” today. I must have a misquote of 141.09, up 6.42.

  41. 41
    zman Says:

    Ram – I bidding July CLR calls

  42. 42
    zman Says:

    ZTRADE: CLR July $65 calls (small) added for $3.80.

  43. 43
    Dman Says:

    Z #39, yep, I should have been clearer in phrasing the question as: “Why hasn’t additonal *net* production been brought to bear?”, since most producers are indeed also working like mad to tap new supplies, but usually they are on a decline treadmill. To be fair, oil hasn’t been above $130 for very long (!) so maybe the typical economist’s magical notion that high prices somehow automatically generate supply will prove to have a grain of truth. But how far does a grain get ya?

  44. 44
    uop Says:

    zman:

    is HK getting into buying range ?/

  45. 45
    antrimshale74 Says:

    MXC is looking like a nicely pumped getting dumped.

  46. 46
    Sambone Says:

    Uncle Phil

    http://www.321energy.com/reports/flynn/current.html

  47. 47
    zman Says:

    Uop – probably, I’m holding what I have for now.

    Antrim – those little names are just so hypey, its like musical chairs with the shares.

  48. 48
    Sambone Says:

    NEW YORK (Dow Jones)–The upcoming Atlantic Hurricane season will feature near
    normal or above normal activity, with a 65% chance of an above-normal season,
    from June 1 to Nov. 30, the National Oceanic and Atmospheric Administration
    said Thursday.
    NOAA sees 12 to 16 named storms, including six to nine hurricanes, including
    two to five major hurricanes, with sustained winds above 111 miles per hour.
    NOAA said there is just a 25% probability of a near normal season, meaning a
    90% chance of normal or above normal and only a 10% chance of a below normal
    season.
    Last year, the hurricane season featured 15 named storms, six hurricanes and
    two major hurricanes, with sustained winds above 111 miles per hour. The
    long-term average are 11 named storms, six hurricanes and two major hurricanes.
    Last May, NOAA predicted 13 to 17 named storms for the 2007 season, with seven
    to 10 hurricanes, three to five of which expected to be intense.
    Widely watched forecasters at Colorado State University said April 9 they
    expected the upcoming season to be “well above average,” with 15 named storms,
    eight hurricanes and and for major hurricanes.

    – By David Bird, Dow Jones Newswires, 1-201-938-4423, david.bird@dowjones.com

    (END) Dow Jones Newswires
    05-22-08 1111ET

  49. 49
    zman Says:

    SD Call – east side of the Pinon in the West Tx Overthrust.

    $0.61/Mcfe finding cost on 7 Bcf type curve and they are drilling 0% CO2 wells here that are coming in above the 7 Bcf EUR. That’s phenomenal and inched lower on the cost since last I listened a month or so ago.

  50. 50
    isleworth Says:

    Director Jordan bought 45,000 shares of SD

  51. 51
    scoop006 Says:

    Cramer sold his remaining 1000 shares of BP. Could not resist the 23% short term gain and will look to repurchase on a pullback

  52. 52
    jazzkool Says:

    Z, what is up with FTO? Other oils tanking.

    Jazz

  53. 53
    zman Says:

    SD Call – they’re getting more excited by this east side and they have added 5 rigs to the east WTO play in the last 30 to 60 days and will aggressive expand this area. The western side (which is the Pinon field) is $1.80-$1.90 finding costs and loaded with CO2 which limits their ability to grow production volumes from the field as you have to strip out the CO2 from the gas stream to get down to methane. The east side is sweeter gas, and like I said above, the F&D costs fall by 2-3rds. Coming data points are continued strong drilling results on the east side.

  54. 54
    zman Says:

    Jazz- buyout rumor. SU for FTO. Not that bizarre an idea. I’m holding mine but may take half off the table if it gets silly up.

  55. 55
    zman Says:

    PQ in 2

    Got a note from a savvy character I know who has a smart set of friends who said that:

    if he was Paulson and wanted to raise the margin requirement on oil he’d do it this weekend.

    just food for thought

  56. 56
    Dman Says:

    CHK now in the lower Bollinger channel. I am getting strong buying urges on a range of names but the fact is I’m always early to buy so trying to stay patient.

    Great cartoon (albeit a bit weird) shows two vultures sitting in a tree. One turns to the other and says “Forget patience, lets kill something”.

  57. 57
    zman Says:

    Dman – am thinking similar on CHK but reference 55. They all drop in oil opens $10 lower Monday morning. Could happen.

  58. 58
    Dman Says:

    Z – if margin requirements were raised, wouldn’t this hurt those short more than the longs? Maybe cause a short squeeze?

  59. 59
    zman Says:

    I think it would take size out of the contracts on both sides.

    tempted to take those June HALs back into the portfolio for a nice 30% discount to yesterday’s sale.

  60. 60
    apbd Says:

    DRYS is getting a 10% haircut. Ouch!
    apbd

  61. 61
    zman Says:

    PQ – goal this year to start testing the Caney shale in the Arkoma – Woodford.

  62. 62
    jazzkool Says:

    I put your price in a HAL sell order and went back to work, and they had dropped .40 cents from your number when I pulled up TOS again. I have to talk to my boss about my workload.

    Jazz

  63. 63
    zman Says:

    CHK getting whacked, anyone see a broker note? Ditto HK

  64. 64
    QUARRYMAN Says:

    Is CHK on sale yet, Z.?

  65. 65
    scoop006 Says:

    Re #55 Interesting and plausible. Would best defense be to liquidate call positions?

  66. 66
    zman Says:

    Q – its definitely on sale, not sure why the bigger hit there.

    Scoop – probably so. I’m not doing that but I may take more June calls out of play.

    PQ should have their second horizontal buda oil well on line within 2 weeks. If this comes in as last well (1,200 bopd) it should move the needle on P/CF multiple a hair higher, market forces willing. Otherwise, pretty standard rah-rah presentation.

  67. 67
    Nicky Says:

    If one was to look at the contrarian call which so often marks the turning point in a market then we must be getting close to at the least a short term pullback. CNBC now have ‘The Great American Oil Crisis’ scrolling across the screen and they are talking nothing but oil.

    Broader market – it looks like having done a small iv we need another leg down to complete v. 12500 – 12550 Dow and 1385 SPX may find support before a more substantial 3 wave bounce…

  68. 68
    zman Says:

    ZDAYTRADE: CHK June $60 calls for $0.60. Stock is down 5% and I will be quick to close this out, likely either today or tomorrow.

  69. 69
    zman Says:

    Nicky – true enough. Wonder when they start talking about natural gas then as it’s up 9 cents to $11.73 with the July contract up the same at $11.87…these are massive prices. Company that is relative unhedged here is EOG, must be loving this. Who knows maybe CHK being sold down b/c they are 70% hedged in the around $8-9 for 2008.

  70. 70
    Dman Says:

    Z – are there any NFX catalyts on your near-term radar?

  71. 71
    zman Says:

    yes, bakc in a bit, on clr call

  72. 72
    Sambone Says:

    Bonds getting spanked on inflation worries. Glad I own TBT.

  73. 73
    zman Says:

    CLR – next round of drilling will see several Three Forks Sanish wells, said this could double their reserves in the Bakken.

    333 bopd IP – 2007 wells
    455 bopd IP – 2008 wells – better completion tech, cased liner, swell packers

  74. 74
    Dman Says:

    Nicky, the silver trade from the other day worked out nicely. I watch SLV for silver price but actually trade SLW (easy to confuse ’em, which I did in my posts). It’s now down some from where I sold. Fundie guru maintains buying opportunities ahead.

  75. 75
    ram Says:

    CLR not reacting well to Conf.

  76. 76
    zman Says:

    CLR not reacting to conference, CLR reacting to oil which dropped about $0.80 in the last 10 minutes.

  77. 77
    ram Says:

    Oh, I feel better, thanks.

  78. 78
    zman Says:

    CLR – Michigan, just tested another well at rates of 23 barrel per hour last night.

    Ram – you’re welcome.

  79. 79
    uop Says:

    zman:

    HK must be ready for a buy ?agree ?

  80. 80
    ram Says:

    Is there a break even rate per hour to justify a well – $2k to $3k per hour or so?

  81. 81
    zman Says:

    UOP – HK is one of many, almost all that are off today in the E&P patch. I wrote in the post I see no reason to rush back into the group yesterday. I’ve taken some small pieces today and see no reason to go feet first.

    It depends on much the well costs to drill, its generally measure in IRR or in terms of months to payout. Those wells CLR is drilling in Michigan are extremely high IRR and production is limited by the state to 100 to 300 bopd depending upon the acreage but they could produce well over that. They had one well producing 100 barrels per hour (2,400 bopd).

  82. 82
    Fred Says:

    This might help offset the IEA reductions from the WSJ if peace would breakout:

    Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.

    The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”

  83. 83
    zman Says:

    Fred – yeah, I saw that. I’d be hard pressed to believe the numbers but I do know that under Kurdish territory in the north, there are large untapped reserve pools. Addax has drilled a number of 30,000 bopd wells there.

  84. 84
    ram Says:

    Since CLR is approaching a $10B market cap., is there an expectation of X BOPD to justify?

  85. 85
    zman Says:

    News of the hour:

    Bodman blames high prices on supply failing to meet demand.

    OPEC rejects supply being the problem

  86. 86
    ram Says:

    This is like groundhog day all over again.

  87. 87
    ram Says:

    The DB energy conf next week as influential as the UBS? It would seem investors would get turned off by hearing the same info week after week.

  88. 88
    zman Says:

    Ram – That’s a great question. The short answer is no but you are on the right track.

    Valuation metrics – an example on CLR

    P/CF or TEV/EBITA: about this time of year E&P investors, the big fund managers, start to shift from 2008 to 2009 estimates.

    You get a higher multiple for the following:
    Long reserve life
    Production growth
    Repeatability/sustainability of your plays
    Operating Cost Structure
    Reserve upside potential
    Management

    Other metrics
    reserves per share
    production growth per share
    NAV = which is basically net worth and is less useful, in my book, for trading as your data points on reserve life gets crusty as the year goes on (for most companies on run reserve reports at the end of each year)

    I’ll run through the P/CF and TEV/EBITDA stuff in tomorrow’s post for these guys and for the other E&Ps I hold and for several of the ones we frequent.

    Re – the conferences. The big dog is Howard Weil which is in April, then there are these others, most energy pm’s will go to several but not all and generally the food is good and there’s golf.

  89. 89
    Sambone Says:

    Bubbleheads on CNBS

    CNBC is carrying a special tonight at 8:00PM Eastern Time on “America’s Oil Crisis”. Will run in place of Fast Money. Should make an interesting show.

  90. 90
    ram Says:

    Thanks – that would help me understand the allowable near term high PE ratios. Right, golf, shmoozing, et all.

  91. 91
    Sambone Says:

    It was just nine years ago that the Economist Magazine published one of the
    great contrarian cover stories of all time by predicting that then $12-a-barrel
    crude would collapse to five dollars.
    (END) Dow Jones Newswires
    05-22-08 1314ET

  92. 92
    zman Says:

    Ram – 5 years ago none of the E&P names had earnings of any size. Cash flow is much more important to looking at the E&Ps. You get into a lot of non-cash taxes (deferred taxes) with them that skew EPS lower. CFPS adds those back because they are in fact not a cash expense, unlike the current taxes all companies pay.

  93. 93
    zman Says:

    Still no one see anything re a CHK comment, I’ve run some traps and heard nothing back from outside the site either except that the group is exhausted after a good run which is as good a reason for a sell off as any other.

  94. 94
    ram Says:

    The news is littered with info about how Congress must remove the E&P tax breaks. What do the E&P companies actually get in tax subsidies?

  95. 95
    zman Says:

    Put CLR and CL/N8 on a minute chart together and you will see what I mean about CLR not reacting to the conference but to oil. If anything since the close of the call, CLR has reacted not at all to positively relative to oil. They didn’t say anything wrong, this is just a red day.

  96. 96
    el_vogel Says:

    Are these conferences open to the investing public? Say I wanted to play golf with the oil execs – am I dreaming or is that possible?

  97. 97
    Sambone Says:

    Z – Only thing I see is large blocks trading on CHK. No news

  98. 98
    BossmanG Says:

    Z, regarding SD, based on this news at the conference, does it have potential to run up? assuming money starts coming back in…

    Also in determining costs, how do you judge if drilling/exploration costs are cheap, or expensive based on what the company says? Are you using historical data? Thanks.

  99. 99
    zman Says:

    E&P and Majors get certain state and federal tax breaks for trying to extract certain hard to develop resources. Some of these include exclusion periods for state taxes on shale plays (in some states none for the first 10 years of the well) or like in the deepwater, some smaller developments are tax free through a certain number of barrels. The idea was to incent the oil company to try and extract (there is no guanrantee) smaller pools of reserves from the deepwater gulf of Mexico. The companies analyzed seismic, bid on the leases and paid for them with the terms on the least (such as the tax free purpose) calculated into the price of their bid. They may have bought the leases years ago or in a more recent sale but in my book a deal is a deal. If the government wants to change it the oil company should have the option to give the lease back and get the sometimes hundreds of millions, (often $10s of millions per lease). This is a bait and switch and not right. Service prices have escalated right along with oil prices so to say “oh well, they can afford to pay the taxes now with oil at $135 per barrel” is just naive and dishonest.

  100. 100
    zman Says:

    El – Vogel. It varies from conference to conference but it is mostly for fund managers. You could go to IPAA’s twice a year conference (I’m going to the one in October) but its less fancy.

    Thanks Sam

    Bossman G – they didn’t have much new other than a sense of further confidence in the expansion of Pinon like structures to the east and those well results are very impressive.

    Costs – is a general feel thing on my part from years of doing this and escalating what I remember from back in the day to now for some inflation. You’ve got operating costs and finding costs to really consider. Obviously you want both low. How low is really low depends on the play. $1 / Mcfe may be good for a shale play but would be lousy for regular cotten valley production say in Elm Grove where it could be close to $0.30.

  101. 101
    zman Says:

    CHK has cut its losses in half. Hmmm. In hind site I should have taken a closer to the money call. Continuing to hold these $60s.

  102. 102
    uop Says:

    zman:

    are you taking any action on FTO ?

  103. 103
    zman Says:

    Somebody asked about NFX catalysts earlier:

    Mancos shale test in 2 to 4 weeks expect some results, they should be able to work if STR has which they have for some time now.

    Bakken tests – sounded to me like they have 3 successes that I would expect them to PR before the 2Q call which is in mid to late July. I’d bet they get these out in June.

  104. 104
    Dman Says:

    In #20 I floated GE as a possible play for wind+other alternatives. Just looked at the chart & it has a big gap down in April. Anyone got the full skinny on that?
    Also, do down gaps fill just like up gaps?

  105. 105
    ram Says:

    ZMAN – Thanks. Can I quote you verbatum on that tax info to my tree hugger friends?

  106. 106
    Dman Says:

    Z – thanks on the NFX

  107. 107
    zman Says:

    Uop – just holding, I understand both sides declined to comment so it doesn’t like you have the risk of the company coming out to quash the rumor but I guess they still could. Not chasing either as 99% of these rumors don’t pan out and that’s not why I bought it anyway.

    350K trade just went through on CHK

  108. 108
    zman Says:

    Ram – sure. Nothing wrong with loving trees. I love trees. My house is largely made out of them. The problem I have with tree huggers is that as a group I have found them to be sorely uninformed. This is not to say they are unintelligent although those exist as well but they are emotional and they let emotion rule over facts.

  109. 109
    Sambone Says:

    D – 40% of GE is financials. Toxic paper.

  110. 110
    Sambone Says:

    Off subject – Need a laugh

    http://abcnews.go.com/Travel/story?id=4910091&page=1

    http://news.yahoo.com/s/nm/20080522/od_nm/naked_dc;_ylt=AhjSF6Uk2F98XKvldxPfvwWs0NUE

  111. 111
    Dman Says:

    Thanks Sam. OK, need to look at wind component suppliers, tower fabricators etc. Trouble is, Cramer keeps pumping them just when they look good to buy.

  112. 112
    zman Says:

    Too bad Pinnacle doesn’t fly to Israel.

    Dman: like I said in the post, all I have is the three wind names, seeking more.

  113. 113
    zman Says:

    Oil getting dropped, now down $2.50 front month, $3.50 in the December contract. Going to be an interesting close in 30 minutes.

  114. 114
    Sambone Says:

    1:16 pm EST

    Energy Investors Signal Crude Is In A Bubble

    By SPENCER JAKAB
    A Dow Jones Newswires Column

    It’s hard to label a group of investors riding the crest of the decade’s biggest stock market bonanza “conservative,” but that’s just what shareholders of oil and gas producers may be — relatively speaking, at least.

    The roughly 40% gain so far this year for large U.S. exploration and production (E&P) companies and the greater than tenfold return for many of them over the past decade looks heady, but is actually modest considering the big shift in commodity prices during the same time. It was just 10 years ago that the Economist Magazine published one of the great contrarian cover stories of all time by predicting that then $12-a-barrel crude would collapse to five dollars. Instead, it has soared 1,000% even as oil and gas investors are paying valuations that imply long-run prices of just $75.

    Either equity investors are being overly fearful or there is a bubble in the world’s leading commodity that is set up for an epic collapse. One veteran analyst has little doubt which side has it right.

    “The bottom line is that oil is in a bubble and oil stocks are not,” said Tim Evans, an energy analyst at Citigroup. “Is there a trade here where you buy the equities and short oil? At some point there is.” “The Numbers Just Get Silly” Equity investors may be seen as more emotional and less grounded in reality than their fixed-income brethren, but they act like widows and orphans in comparison to traders in the commodity pits. At every major milestone for crude oil during its multiyear bull market, shareholders of E&P stocks have waited for more evidence of the sticking power of record prices.

    “The stock market has a hard time catching up to the real world,” said Dan Rice, a managing director at investment manager BlackRock. “In a short time, it’s gone from discounting $20 oil to $75 oil.”

    Take the predicament of an equity analyst following the sector like Stacy Nieuwoudt at Houston-based Tudor, Pickering & Holt. Her firm’s valuation model for an exploration and production company like Apache Corp. (APA) assumes long-term crude prices of $75 a barrel and natural gas at $8 per million British thermal units, well below near month futures prices of about $132 and $12, respectively. On this basis, their target for Apache is $172 but it would rise to $235 if they raised their forecasts to $100 and $10, respectively, indicating upside of about 64% for the stock. Prices have moved so quickly that Nieuwoudt’s published matrix of valuations stops well below the current price of crude, and she has no plans to plug them into her models anytime soon.

    “If you run today’s commodity prices, the numbers just get silly,” she said.

    Rice says that a good rule of thumb for pure E&P companies like Apache, EOG Resources Inc. (EOG) or XTO Energy Inc. (XTO) would be that each $10 increment over $75 a barrel should add 25% to the value of the stock. On this basis, the current 12-month “strip” — the average of the next year’s futures contracts — would imply something like 125% upside for producers and less for integrated players like Exxon Mobil Corp. (XOM). Unlike Evans, he sees a mismatch between the two but is hesitant to say which group of investors is more wrong.

    “I look at it and I say a little bit of both — longer-term prices will come down and the equity values will come up,” he said, predicting that crude will settle down at between $80 to $100 a barrel.

    Flavor Of The Month
    The distance between the New York Mercantile Exchange and the New York Stock Exchange is less than a mile in downtown Manhattan, but the gulf between their traders’ assessment of energy prices is huge. Evans says that this is in part due to the massive rush of fresh cash from hedge funds, endowments and even private individuals into outright holdings of commodity futures or related products. A plethora of new ways to gain exposure have outpaced the need for legitimate players in the physical market to hedge prices.

    “The current fad or flavor of the month is to buy commodities rather than the shares but, because the supply and demand curve for the commodity is very steep, that means that, basically, some group of players piling into the market shifting the demand curve slightly have a big effect,” said Evans. “It’s that flow that’s driving it higher.”

    At the same time, companies or investors that tried to lock in prices at what seemed to be once unimaginable levels like $50 or $80 or $100 a barrel crude have suffered hugely, making them hesitant to renew a negative bet on prices.

    “Almost all hedging to date is under water,” said Rice. “One reason prices are like they are is because producers have stopped hedging, and that’s allowed speculative commodity fund buying to go unchecked.”

    At the same time, some equity investors have acted the same way as the unfortunate hedgers by remaining underweight oil. A recent Taking Stock column highlighted legendary fund manager Bill Miller’s big underperformance versus the Standard & Poor’s 500, due in part to his tiny 0.3% weighting in oil and gas stocks. The sector is now just over 15% of the index, up from less than 6% in 2003. Rice said he is comfortable with the sector and says it should outperform, rising to 20% of the index based on its outsized profit contribution. When he started in the early 1980s, during the last cyclical energy price spike, he said it was about 28% of the index.

    A surge to $200 a barrel as predicted by Goldman Sachs analyst Arjun Murti, labeled a “Cassandra” for his implausibly correct calls in the past, would boost energy shares in a hurry whatever equity investors may think about the long run. But with a reserve life of close to a decade in many cases and costs making sub-$60 crude problematic for some planned ventures, equity investors may have good reason to be conservative.

    Another reason is that old hands like Evans, wary of stepping in front of the commodity locomotive, can’t help but see it losing steam at some point. Making short-term predictions about crude prices is difficult in the best of times, but he thinks that prices eventually are bound to correct to a level close to $75 a barrel. He notes that many of the fundamental arguments for higher crude like Chinese demand and the weakening dollar are either old news or are not strong enough to explain a 90% surge in prices since the summer.

    “There’s all kinds of handwriting on the wall here,” he said.

    (Spencer Jakab writes Taking Stock, a global column that gives insightful analysis about equity-related topics around the world. He has spent nine years working in the financial markets as an analyst and has written about European equities from London and energy and markets from New York for the past six years.)

    —By Spencer Jakab, Dow Jones Newswires

  115. 115
    ram Says:

    X JUN 180’s down to 7.20.

  116. 116
    Sambone Says:

    By Lynn Cowan
    Of DOW JONES NEWSWIRES

    In a first-ever for the U.S., a company focused entirely on wind energy is
    planning to come public, with Noble Environmental Power Inc. registering an IPO
    to list on the Nasdaq later this year.
    Based in Essex, Conn., Noble Environmental registered earlier this month with
    the Securities and Exchange Commission to raise as much as $375 million through
    an initial public offering. The amounts actually raised in IPOs can vary
    dramatically from the registration figure; Noble Environmental has not set a
    price range, share size or date yet for its offering, which it plans to list
    under the symbol “NEPI.”
    Noble Environmental currently operates 282 megawatts of electrical generating
    capacity in New York state and has 950 megawatts that it expects to bring
    online in 2008 and 2009. By the end of 2012, it expects to have 3,580 megawatts
    of capacity by expanding to other states, including Maine, Minnesota and
    Wyoming.
    No other company focused exclusively on wind power generation has ever
    launched an IPO in the U.S., although there have been 17 such offerings in
    other parts of the world since 1995, according to data tracker Dealogic. But it
    was inevitable that a wind-related offering would come to market in the U.S.,
    given the growth in the industry and a rise in private investments in the
    sector, says Randall Swisher, executive director of the American Wind Energy
    Association, a trade group that promotes wind power.
    Europe has about three times the amount of installed wind power capacity of
    the U.S., but the U.S. has been the largest market in the world for new wind
    turbine sales in the last three years, reflecting the growth in wind farms
    across the country, says Swisher. Worldwide, established renewable energy
    companies are eyeing the U.S. as a future source of wind farm growth due to its
    size, the available space for wind farms and expectations for changing
    government policies favoring more renewable energy investment, say experts.
    A report earlier this month by the U.S. Department of Energy forecasts that in
    2008, wind energy will generate about 1% of the nation’s electricity; it
    modeled a scenario under which the U.S. could generate 20% through wind energy
    by 2030 “if significant challenges” are overcome, including major changes to
    the transmission system to deliver it to the electrical grid, improved power
    turbine technology and expanded markets.

    Political, Equipment And Location Obstacles

    Wind energy has had its share of challenges already: Federal tax credits have
    been allowed to expire three times in the last decade, turbine production is
    having difficulty keeping up with demand, and environmental and local community
    concerns can be a barrier to locating wind farms. But supporters of wind energy
    say that they believe the U.S. government will soon shift toward more permanent
    policies to support clean energy sources and reduce carbon emissions, laying
    the groundwork for more industry growth.
    “We already have renewable portfolio standards (that dictate how much
    renewable power utilities must use) in 26 states, and no matter who becomes
    president, there will be a national renewable portfolio standard next year. I
    believe with certainty that this country is ready to commit to reducing carbon
    emissions, and that would change the playing field for renewable energy,
    leveling it out” in terms of price competition with fossil fuels, says Phil
    Angelides, a principal at real estate investment firm Canyon Capital Realty
    Advisors LLC and chairman of the Apollo Alliance, a group that is focused on
    promoting renewable energy and job growth in the sector.
    Apollo communications director Keith Schneider says Noble Environmental was
    established in large part because state policies in New York expanded the need
    for renewable energy. The company was founded in 2004, the same year the
    state’s public service commission voted to adopt a renewable portfolio
    standard.
    But Noble Environmental only began operating wind farms three months ago. It’s
    hoping that growth in demand for alternative energy sources, as well as
    legislative incentives for wind power, will benefit its business. Increased
    energy demand, rising fossil fuel costs, improvements in wind energy technology
    and an abundance of wind in the U.S. are among the industry strengths Noble
    Environmental cites in its prospectus.
    However, Noble Environmental has no financial track record and is essentially
    a development-stage company. It has never generated any annual revenue, and net
    losses have been rising at a fast clip, doubling to $42.5 million in 2007 from
    2006. The company expects to incur “substantial” pretax losses over the next
    several years as it constructs new wind farms, hires new employees and expands.

    Awaiting New Legislation

    Legislatively, the wind farm industry is facing the possibility of losing some
    tax benefits. Federal production tax credits for the wind energy industry are
    set to expire at the end of this year. The House of Representatives passed a
    bill extending them this week, but President Bush has threatened to veto it
    unless provisions he opposes are removed. Noble Environmental doesn’t have the
    taxable income to use the tax credits anyway, but it warns that in the future,
    if the credits aren’t extended or are renewed at a lower rate, its financing
    and development options for wind farms will be hurt.
    The company currently finances its wind farms with a tax equity structure that
    channels ownership of the farms through limited liability companies. The method
    allows investors of the limited liability companies to use the production tax
    credits and allows the company to accelerate tax depreciation.
    But investors in the limited liability companies – as opposed to investors in
    the IPO – typically receive all of the cash flows from the wind farms until a
    targeted rate of return is reached, reducing the cash available to Noble
    Environmental. The period of time during which the cash is diverted to these
    investors can drag on longer than expected if the wind farms underperform,
    according to the company’s prospectus.
    Noble Environmental’s primary owners, underwriter JPMorgan Chase & Co.’s (JPM)
    private equity division and the Canada Pension Plan, will continue to hold
    stakes in the company post-IPO, but that level hasn’t been determined yet. In
    addition to JPMorgan, Lehman Brothers Holdings Inc. (LEH) and Credit Suisse
    Group Inc. (CS) are the co-lead managers on the offering.
    -By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com

    (END) Dow Jones Newswires
    05-22-08 1415ET

  117. 117
    zman Says:

    Sam – thanks for posting that article. I did some work for Dan Rice back in the late 90s/early 2000s on natural gas demand. He’s a very smart guy and not just because what he says about E&P going higher while the commodity drifts lower agrees with me completely. He’s one of the savvier E&P oriented fund managers in the investment community.

    Re X – I see the weakness and am still waiting to buy back in. Not going to be today.

  118. 118
    Fred Says:

    Since WNR was mentioned with FTO here’s notes from the WNR shareholders meeting held this morning PF is CEO Paul Foster:
    Meeting lasted 9 minutes. Then 20 minute presentation by PF.
    Then Q&A.

    Of note;

    One individual who did not clearly pronounce his name or institution tried to put PF on the spot by suggesting that he should be worried about hedgefunds owning the debt. PF did not bite. Basically his feelings seem to be that whoever owns the debt will enforce the covenanents which he expects to meet.

    A local individual investor addressed the shelf. PF stated that there should not be too much read into the shelf. No decisions had been made yet and that there were definitely options that did not involve dilution. PF stated several times that we should not forget that he was a shareholder also. One of the Western executives volunteered that the were not headed in the direction of a private equity offering.

    All in all a quiet meeting attended by about 50-60 persons.

  119. 119
    Sambone Says:

    US Gasoline Pump Prices Poised To Catch Up With Crude Boom

    By ANNA RAFF andJESSICA RESNICK-AULT
    Of DOW JONES NEWSWIRES

    NEW YORK — Signs for gasoline stations tower over U.S. highways, but the prices on the boards are dwarfed by the prospect of surging crude oil trickling down to the pump.

    While the gap between the pace of growth of gasoline and oil futures has vanished, U.S. retail gasoline prices still lag. Since the beginning of the year, benchmark oil and gasoline futures on the New York Mercantile Exchange have both increased by more than a third, but the average retail gasoline price in the U.S. has risen by only 22%.

    So far, oil refiners and petroleum product distributors have absorbed much of the increase but their ability to continue to swallow losses and operate at razor-thin margins is limited. Many analysts consider $4-a-gallon retail gasoline across the U.S. a foregone conclusion this summer driving season, a period of typically peak demand, but those estimates only take current record-high oil prices into account. On Thursday, light, sweet crude futures breached $135 a barrel, more than double the price a year ago.

    If oil hits $200 a barrel, the upper end of Goldman Sach’s prediction for prices over the next six months to two years, the gasoline picture changes quite dramatically. At $200 a barrel, crude alone would cost $4.76 a gallon. Add in the costs of refining and distributing as well as taxes, and pump prices could rise well within the range of $6-7 a gallon, according to analyst estimates, a level that’s unfathomable for most Americans. In some states, where gasoline tax is a percentage of the per-gallon cost, rather than a flat tax, prices could be even higher.

    U.S. drivers haven’t yet radically changed their behavior and it’s unclear at what price it becomes unprofitable for Americans to go about their usual day-to-day activities, said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey.

    “Maybe at $6 or $7 a gallon, it becomes less attractive to go to work,” said DeGesero. “We haven’t hit that point yet but we might soon.”

    Critics of the U.S. lifestyle and dependence on fossil fuels — the U.S. is the world’s largest oil consumer — often point out that Europe is able to sustain growth with motor fuel prices that are much higher at the pump due to significant taxes built in. But even Europe’s popular and economic resilience is showing some cracks as gasoline, known as “petrol” in the region, broke through 1.50 euros a liter, or roughly $9 a gallon, earlier this month.

    Fishermen in France and truckers in Bulgaria and the U.K. are protesting against high gasoline and diesel prices, demanding that European policymakers cut taxes to soften prices. Italy’s new government on Thursday unveiled policies to cut fuel taxes and return to nuclear power.

    The Pumping Point
    Retail gasoline prices have topped $4 a gallon in Alaska, California, Connecticut, Illinois and New York ahead of the Memorial Day holiday weekend, according to the AAA Daily Fuel Gauge Report. Nationwide, gasoline averages $3.831 a gallon.

    Consumers have already taken note, with U.S. gasoline demand down 0.6% so far this year compared with the same period in 2007, according to the U.S. Department of Energy. Some industry watchers have cited an even larger demand decline, up to 1.5%.

    Anecdotally, there’s evidence that fears of higher pump prices are moving beyond water cooler chat as a focus of consumer fears, feeding into general concerns about the outlook for the economy. The most recent gauge of U.S. consumer confidence from the Conference Board posted the fourth straight month of declines.

    “Not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns,” said Lynn Franco, director of the Conference Board’s Consumer Research Center.

    The erosion in demand is likely to accelerate if gasoline prices shoot above $6, but a radical cutback in consumption will only occur if high gasoline prices weaken the U.S. economy further and contribute to increased unemployment.

    At $6 a gallon, it would cost the owner of a 2008 Chevrolet Suburban $186 to fill the tank. The driver of a Toyota Corolla, which has a much smaller tank, would spend about $80.

    During past recessions, unemployment rates had to breach 7% before Americans significantly scaled back on their driving. On Wednesday, the Federal Reserve revised upward its 2008 jobless rate forecast to 5.5%-5.7%.

    In regions of the U.S. that have been particularly hard-hit by weakness in the housing market and economic instability, the fall in gasoline demand has already outpaced the national average, said Ann Kohler, an energy analyst with New York investment bank Caris & Co.

    “There would still be additional hurt if there was further escalation in gasoline pricing, because other parts of the country would become involved,” Kohler said.

    A Refiner’s View Of Crude Prices
    Oil refiners and industry analysts aren’t so bullish on crude-oil prices because they consider $200-a-barrel levels to be untenable for most companies. During the first quarter, high oil prices pinched the profits of refiners, who are the leading users of crude oil.

    If oil hits $200, refiners would be among the first businesses to feel the impact, and would cut back production in anticipation of even weaker demand if recent history is any guide. Most are optimistic that prices won’t get that high. Bill Klesse, chief executive of Valero Energy Corp. (VLO), the largest independent refiner in the U.S., back in March forecast that the national average price of gasoline won’t reach $4 this summer, let alone $6.

    This year, Valero has already switched some of its capacity to diesel from gasoline and had shut or reduced rates of key gasoline-producing units due to margins made thin by surging crude prices.

    Sustained prices at $6-$7 a gallon would have a dramatic economic impact, said Lynn Westfall, chief economist for Tesoro Corp. (TSO), an independent refiner based in San Antonio, Texas.

    “If it sustains that for any amount of time, it will throw us into a recession, if we’re not already in one,” Westfall said. The first change will come from drivers who have the ability to switch to public transportation, he added.

    Demand won’t plummet just in large metropolitan areas with comprehensive mass transit networks. Drivers have shown that they can cut back even in states such as California, the largest gasoline consumer in the U.S. and the third-largest gasoline market in the world. California, home to many areas suffering from the housing slowdown, has seen demand fall each quarter for the past two years. Apart from Hawaii and Alaska, California has the highest gasoline prices in the nation due to its stringent environmental standards.

    Even if the U.S. refining hubs and production infrastructure along the Gulf of Mexico are damaged in a hurricane as destructive as the 2005 storms Rita and Katrina, crude oil may spike to $150 a barrel, but it won’t go much further, Westfall said. He’s long maintained that the fundamentals of the market don’t support current high oil prices. But given the market’s tendency to react to small changes, any news of significant supply concerns could send oil soaring to the higher projections, he added.

    “If there’s a perception that there will be continued demand growth in parts of the world that aren’t supported by our ability to find resources, then that’s the basis for the super-spike,” Westfall said.

    -By Anna Raff, Dow Jones Newswires

  120. 120
    zman Says:

    Thanks Fred

    Pretty unremarkable “rally” in the broad market given the sale on crude.

  121. 121
    zman Says:

    The forward oil curve went into backwardation this afternoon. It’s very flat but definitely slightly lower at the December contract now. What does this imply? Building bullishness on the part of traders.

  122. 122
    uop Says:

    zman re 107, where do you see the trdae info, was it buy or sell on CHK ?

  123. 123
    zman Says:

    Uop – I just happened to looking at a minute chart when the volume spiked. I would assume it was crossed.

  124. 124
    zman Says:

    Uop, another thing you can see from the minute chart on CHK is that the volume spikes come during the recovery runs and just before them and NOT during the declines when the specialist just lets it fall on little to no volume. That’s not a bad sign.

  125. 125
    uop Says:

    zman:

    PBR down 3$ to previous low and holding ??

  126. 126
    Nicky Says:

    Z – re #69 and nat gas. After the inventory data was released they interviewed a trader on CNBC who announced we would not have enough natural gas to get through next winter now!
    Pullback in energy looks corrective – this is not what i would expect to see at the top of a parabolic wave ie a gentle rolling over. I suspect it may go a touch lower – there is support at 130.30 and 128.60 – but will be surprised if this gets sold off ahead of a holiday weekend. More likely we have another leg up next week which I expect to be a blow off and most likely coincide with options expiration in products.
    Dman silver went higher than I expected -blew happily through the 50dma and is poised along with gold and oil. It could still make another high above yesterdays high at 18.20 or has rolled over here and we just make a lower high than yesterdays high. I am watching it carefully as I think the metals will soon present a great short opportunity. Either that or oil goes straight up to 200 and gold and silver do a final wave v and gold hits 1100. Just don’t see that on this move to be honest.

  127. 127
    Nicky Says:

    Another move up in energy would coincide with the move down expected in the indices too.

  128. 128
    zman Says:

    UOP – not sure of your question

  129. 129
    zman Says:

    Nicky – that makes good deal of sense on your oil timing of blowoff.

    Saw that trader and people like him are doing the straightline math and not getting back to 3.4 Tcf in storage. Big deal. We have a cold winter. We are producing more, even net of low imports and higher exports each day. We’ll top 3 Tcf and I would hazard a guess 3.2 Tcf which should be adequate. What can you say for the guy, he’s long and has been right on price so far.

  130. 130
    zman Says:

    stepping out for 20 min.

  131. 131
    apbd Says:

    I can’t stand watching red anymore. I’m going to play golf. At least there I get high numbers for each hole.
    apbd

  132. 132
    VTZ Says:

    Z – I’ve done some rough calcs based on imports/exports and what I expect as some reasonable numbers for supply/demand etc and I can see storage in the 3-3.4 range easily.

    That being said, the longs have no risks of seeing 3.8 or a number like that so they will likely tout the hurricane season and forecasts for an unusually cold winter will likely keep the bulls on parade, imo.

    Next year is a completely different story though if prices still stay where they are. You will see a glut of supply and not much incremental demand, if not a decline lending itself to crazy inventory builds.

    That’s just my trading hypothesis

  133. 133
    Dman Says:

    Nicky, not much of a pullback in NG, that’s fer sure. Not exactly lemmings over a cliff just yet.

    Unless my monitor has a dud pixel, it seems NOV has filled the gap from the PBR 40 rigs blowoff yesterday & is now barely up on the news

  134. 134
    zman Says:

    CLR green

  135. 135
    zman Says:

    V – that’s exactly how I read the storage and gas price scenario. Makes you glad you don’t own a LNG regas facility too unless you can switch directions on the thing.

  136. 136
    Hoss Says:

    Afternoon Z

    Re: Blackbeard

    Any reason to prefer MMR over PXP on that play.

    Thanks

  137. 137
    Brian Smith Says:

    For those who might be interested, here is a 24hr real time screen for the major currencies, gold, silver, and brent crude. The numbers shown for daily gains and losses are not tied to US trading, so they will differ from the daily changes on the US markets.

    http://www.netdania.com/quotelist.asp

  138. 138
    zman Says:

    in the middle of something, back to you on that in an hour or so.

  139. 139
    kyleandy Says:

    brian s – thks i can use this

  140. 140
    zman Says:

    Hoss – not other than I’m more familiar with what’s going on at MMR’s other plays, Flat Rock etc than I am with PXP and that at $2.4 billion TEV for MMR, success here will mean a lot more to them than to the bigger $10 B enterprise value of PXP.

    MMR: operates the well with a 32.3% working interest,
    EXXI: 20% wi
    PXP: 35% wi
    leaving 12.7% interest unclaimed

    Reef – any idea who has the remaining interest? I assume NFX has a small piece but I doubt its the full 12.7% in the last well having opted to farm out much of the cost and operatorship to XOM, BP and PBR and may have a small piece left.

    Here’s another backgrounder on Blackbeard

    http://www.petroleumnews.com/pntruncate/286537781.shtml

  141. 141
    jazzkool Says:

    Z, SD coming back nicely. Had been down to $49.14.

    Jazz

  142. 142
    reefguy Says:

    z- The 12.7% is unknown to me, sounds like a carry of those big boys. EXXI is down 5% today. Three days of drilling over weekend, i may add here

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