Archive for November, 2006

 

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Thursday Morning - Gas Inventory Day (Spin,Spin,Spin)…

Posted by zmann on 30th November 2006

 

…and I’m staying away. We had expectations of builds in oil product inventories for no good reason and what do ya know, we get draws instead. Oil goes ballistic settling above $62 and breaking a 2 month down trend. The good news is is that this rebound will inspire more opecies to cheat.

Natural Gas Shot Up With Oil and Is Trading Slightly Lower This Morning. I’ve made my bed with a withdrawal of 20-25 Bcf. The Street, last I saw, was spread over a wide range of withdrawals from 5 to 40 Bcf . CNBC will no doubt spin any size withdrawal bigger than 10 as bullish so why fight it. Although I’ll to take on opportunistic put additions if prices go crazy again after the report, I’m staying away from new trades until the current “cold weather mania” relaxes a bit.

Gas is due a retrenchment. January natural gas was up $0.31 yesterday to $8.87 and is up $0.77 (10%) in the last four days. Gas has more than doubled since the end of September. That’s one helluva bounce in a very short amount of time since the Amaranth collapse inspired low in September.

Holdings Watch: VLO is shutting down coker unit in Pennsylvania for “needed repairs”. The outage will cut gasoline production by 300-450,000 bls and distillate by 250-400,000 bls. That’s sure to jack up products prices this mornings.

Meanwhile the four gassy names I laid out as longs on Monday have in aggregate outperformed their benchmark index this week (APC - up 5%, CHK- up 4%, KWK- up 7%, and SWN up 4% vs XNG up 4%). Near the money calls have jumped on these moves and I’d be reducing positions by at least half this morning before the inventory report. That is if I’d minded the store and bought any of these. Instead I was too cheap and missed them all, including SWN after its Goldman downgrade that hurt the stock for all of 30 minutes on Tuesday.

Opec Watch: Angola Wants A Piece of the Action. Angola announced it’s intention to join the cartel.

• The country has been a rapid grower and currently produces 1.4 mm bopd and is expected to top 2 mm bopd by next year. They want more recognition and power on the international stage because growing their economy by 18% in 2005 wasn’t enough?
• Angola is the third largest importer of crude to the US after Canada and Mexico and while in the near term this means Opec’s spare capacity grew a bit it also means that cartel is gaining leverage on world supplies.
• This announcement comes follows on the heels of Ecuador’s intention to rejoin and is somewhat alarming.

Analyst Watch: MRO cut to hold at Citigroup, underperform by FBR - after hitting its all time high yesterday that takes guts. Citigroup essentially said that the story was all played out and that it’s performance should now track crude and crack spreads going forward. MRO’s announcement that’s its ahead of schedule in its buyback probably helped with those downgrades as well.

EOG downgraded by buy to neutral at UBS. EOG was only up yesterday after a long struggle and with the support of raging commodity prices and peers. The growth targets announced yesterday were met with typical “great what’s next? oh that’s it. hmmm” reaction from analysts at the annual meet and greet in NYC. Stick a fork in this one, it’s donnnneee.

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Natural Gas Breaks Out On Chilly Forecast…

Posted by zmann on 28th November 2006

 

…But Folks, We’re Almost Through The First Month Of Winter And It’s Been A Bust For Gas Demand.

Yes natural gas prices are up. A lot. Again. Traders can’t get their eyeballs unglued from the weather channel long enough to realize that from this point even the coldest winter on record would still yield above average trough storage levels in March.

• So far this month we haven’t pulled ANY gas out of storage.

• This week I’m expecting a draw of between 20 and 25 Bcf… Data from the Climate Prediction Center (CPC) shows it was indeed a bit colder last week and Wall Street analysts are looking for a draw of anywhere from 5 to 40 Bcf. Those guys at the low end don’t care much for accuracy but are instead engaged in a blatant effort to pull up consensus for an easy beat. I don’t think we’ll get the big draws expected by some because the data is skewed by where it was cold (the northeast) which is not as gas intensive as other regions of the country which were warmer.

• …but next week’s inventory reading will be a smaller draw since its been “short sleeves” weather in most parts of the country since Thanksgiving- say 10-15 Bcf.

• That leaves November with a smallish draw to kick off winter. Using the high end of my 2 weekly estimates for the remaining two weeks of November (and forgetting the fact that 2/5ths of the final week is really in December) that leaves November with a withdrawal of roughly 40 Bcf.

• On average November sees gas withdrawals from storage of 175 Bcf. Over the last 10 years this means that November has represented 8% of gas withdrawn over the winter months (Nov-Mar).

November generally sees sizable pulls from storage but not this year:

• Even with a repeat of the coldest Dec - Mar period on record, trough storage comes out at 1,235 Bcf which is above average. In the event of an average winter from here on out, we arrive at trough storage that is just short of last year’s record.

But Gas Prices Have Been Rocketing. So despite the facts that: 1) we’ve gotten off to a slow start on drawing down inventories this winter and 2) that gas will likely reach trough levels above average, gas pirces are racing ever higher. January gas is up $4.50, or more than 100% since late September to $8.57, a level not seen since last winter which was somewhat justified in the wake of Katrina and the devastation of production facilities in the Gulf.

This year those facilities continue to come back on line on an almost weekly basis. And don’t forget that the shale plays only continue to add production and long term reserves. The fall from these levels should be swift once traders realize anything but a severely cold winter will leave us right back where we started.

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Tuesday Morning

Posted by zmann on 28th November 2006

 

Oil: Up another $0.40 this morning and likely to test $61 today. Yesterday’s like sized rally was fueled by the first real batch of arctic air, rebels in Sudan this time, dollar weakness, Opec, and two pipeline explosions in Iraq. Look for more of the same reasons today. I’ll get more nervous if we cross $61.40 where a technical reversal could set the bulls on a $5 buying spree but for now the trend remains down.

Natural Gas: up on weather expectations as well. Historically natural gas is a big “buy the rumor, sell the news” commodity often peaking for winter during or slightly after the first serious cold of the season. Either way, $8+ gas is simply too high given storage levels and the lack of evidence that gas production is crashing. Remember this week’s weather is next week’s inventory number so although we’re likely to get a moderate draw this Thursday, December will open with a whimper as it’s been downright tropical over much of the country before and since Thanksgiving.

Opec Watch: Unlike the two weeks before the last meeting, Saudi has come out swinging early in favor of “additional” production cuts… Given their recent statements that supply and demand, not the price of oil is the deciding factor in this decision, I’d say they’re seeing a real lack of compliance towards the October cuts from the other opecies (not altogether bad news for the likes of FRO or OMM’s 4Qs but if Opec gets serious, day rates could tumble and then watch out for these guys).

…And If Opec hasn’t really cut yet this should mean that when the TAPS and LOOP are functioning properly and refinery maintenance season draws to a close both US crude and product inventories will march higher. This will be especially painful for the refiners as crude inventories rise more slowly than products (refineries will be consuming them to make more products) supporting oil prices while heating oil and gasoline prices fall. I’ve still got puts on VLO but HOC, TSO, SUN, and WNR should all be impacted.

Analyst Watch: Goldman apparently agrees with my call yesterday on several gas weighted stock and took KWK from neutral to buy but demoted SWN to neutral this am based on relative valuation. This should create a nice buying opportunity in SWN as further strength in gas prices will lift all four names mentioned in yesterday morning’s post.

Holdings Watch: Like I wrote yesterday, I’m not playing much until commodity prices start to make a little more sense, especially natural gas. The stocks had a bad yesterday (down with a down market) despite the rise in oil and gas so my puts scored with LNG, XOM, MRO (the company) leading the pack. If we get a good bounce down off $61 I’ll be looking hard at EOG for puts but a technical rally over the $61.40 mark could inspire me to take calls on the same names.

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Monday Morning - Welcome Back Everybody!

Posted by zmann on 27th November 2006

 

Wednesday was slow, Friday was dead.

Opec Watch:

• “Saudi Oil Minister Ali al-Naimi said yesterday Opec would cut oil output again when it meets in December if recent supply curbs failed to balance the market. Oil prices were not a decisive factor, said the oil minister of the world’s top oil exporter and Opec’s biggest producer.” My question is what other than price is going to tip them off over the next two weeks that supply and demand have stabilized? This could mean that in the near term, smaller crude builds could yield weaker oil and vice versa as traders start to anticipate Opec’s Dec 14 action.

• From the “you’ve got to be kidding me” files, India’s Finance Minister Accuses OPEC of Rigging Oil Prices. What about the word cartel does this guy not understand?

• Kazakstan (not a member) says its Kashigan oil field to peak 25% higher than expected at 1.5 mmbopd by 2010, another signal that non-Opec production is not only becoming increasingly more important but that it’s also growing faster than previously thought. Expect the biggest increases from Russia and Brazil next year.

• Ecuador (also not a member) -Correa won the presidency Sunday and is looking for readmittnce to OPEC (they dropped out in 1993). Correa is a leftist/isolationist and close personal friend of Chavez and has said he wants to strengthen the Ecuadoran national oil company…so expect production to fall. Ecuador produces about 535,000 bopd. This is probably not so good for OXY who got Ecuadoran oil production when they acquired Vintage Petroleum in late 2005.

Weather - Cold Snap Approaching. One more week of warmer than normal temps and then an artic air mass will bring the coldest air of the season though the mid west and into the deepsouth. Natural gas longs rejoice! Of course this won’t save gas prices but it’ll buy another week’s time.

Oil - January crude is off $0.50 at $59.40 and continues to trend lower. Reversal would be anything above $61.40 and new lows on the contract would be below $57.80 so we’re right in the middle now. Silly trading on Friday left the contract up just shy of a buck last week despite the 5 million barrel build in crude reported Wednesday. More trouble from Nigeria Friday was the culprit then and it along with Opec and the cold front will lend support here so I’m expecting range bound trading $58-60 through Wednesday when we get another look at inventories and refinery utilization.

Natural Gas - Still Too Expensive But If You Can’t Beat Em… Despite CNBC’s best efforts to put a bullish spin on a draw of 1 Bcf after the second coldest week of the year so far, January gas ended down $0.36 for the week at a still ridiculous $8.28. On the continued strength I like APC, CHK, SWN, KWK. The problem is that the continued strength is unwarranted. Still these make good short term trades and Thursday’s inventory report is unlikely to upset the bulls since they’re the ones setting the bar.

Analyst Watch: MRO -slight price target bump from FBR

Holdings Watch:

Refiners - Still like ‘em short here: heating oil cracks were down last week as the 1.2 mm bls draw met expectations and while gasoline was up on the week it’s strength really should be fleeting as utilization cranks back up (some day). The refiners are caught between the proverbial rock and hard place. Margins have eked back up because they’re cranking out less product and inventories have come off recent high levels (though they’re still above average) propping up product prices. If they don’t get their units back on line soon the quarter is going to slip and earnings numbers will have to come down. When they do, margins will slip unless crude continues to slide (which Opec is determined to forstall) and the quarter is again in jeopardy. Finally, when they do increase utilization, crude is likely to strengthen but without real winter weather products may fall behind, again pinching margins. I’m sticking with puts on VLO, TSO, and HOC.

Oil Plays - I’m not playing other than quick trades and a standing put in EOG that would cause me to lose sleep save that the position is small. Although it’s the least hedged sizable player in natural gas it trades with oil like glue in recent weeks. True it has outperformed oil over the last 2 months but not to the degree of its big brother XOM.

Gas Plays - REALLY not playing until this weather gets out of here. Except for the gas names mentioned above which I may be long but probably not short at any given time over the next two weeks, I’m still holding puts in LNG (the company) and think SU’s 4Q numbers are getting severely squeezed at this point by the combination of low oil and high natural gas prices.

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Gas Today

Posted by zmann on 22nd November 2006

 

I’ll make this simple so that even CNBC can understand it.

Anyone with an objective eye would have projected a withdrawal from storage today. The fact that we only got a 1 Bcf decline is shocking to me. Consensus was for a small draw despite CNBCs guest who said it was for a build and remarked that this was a bullish number. In no way is this bullish.

If anything, it demonstrates that high prices are again beating back industrial demand. Weather was much cooler than it has been yet storage was essentially unchanged. We had similar weather 3 weeks ago and managed to pull 7 bcf which was down from the prior week when weather had been warmer.

You can easily see the impact higher prices are having on demand when you look at the 2 charts below together,

CNBC, please do a little homework. Gas is lower because it should be but people see the stocks down and starting buying when you and your perma bull guest say it should be otherwise. Gassy stocks have paired their gains while gas is down after the report. You guys do a disservice to your viewers when you spin instead of report and especially on a light volume pre holiday trading session.

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Wednesday Morning - Inventory Day

Posted by zmann on 22nd November 2006

 

Oil Inventories, Light Draws Expected: Prices dipping back below $60 early and we remain in a downtrend channel. While TAPS tanker loading was shut down for the last week the pipeline system is operating at 25% of capacity (filling storage tanks I assume), not the 75% of capacity I stated yesterday. Also, you’ve got two major refineries unexpectedly down furthering the crimp on products inventories. Inventory expectations are still set up for light draws (less than 1mm bls) so the analysts are doing their job of bagging the street.

Gas Inventories: Today at 12:30. I’m looking for a draw of 15-25 Bcf. It’s pretty hard to estimate this time of year but last week was a bit colder than originally forecast. I’d make the point that inventories are near record highs and that we’re really not pulling anywhere near the normal amount of gas from storage as we get deeper into November but you’ve heard that too many times. Never-mind that weather continues to remain unseasonable warm just about everywhere:

Bottom line on gas prices: I think if we get a number of 30 or more on the draw side it supports $8+ gas, if not, gas will begin to sell off, slowly at first. You should have plenty of time to decide on stocks because 1) there’s no chance of a build in inventories that would absolutely shock the market, and 2) you, me and about five other guys are paying any attention to this today. Ok, maybe 10 other guys. Stocks will pick a direction within 30 minutes of inventories and drift that way all day.

TSO vs MRO. Walter asked which was the better short candidate so I looked at the two in a mutually exclusive vacuum. Up front I’ll disclose that I”ve got puts on VLO now and really don’t like the price tag on HOC. If I were going to short one of these two (buy puts in my case) it would be TSO for a longer term play and MRO for very short trades. Although MRO is tempting as a proxy for a longer term reversal in the group it’s too strong right now for puts and is a dangerous long term short (see below).

Here’s the short path to the thought process behind that decision with the acknowledgement that it was 20 minutes of work, and it’s not a recommendation of any kind. Both stocks move in generally the same direction (with oil) so I look for which one is more likely to be mispriced, which is more or less vulnerable to specific events, what the insiders have been doing at each, and a lot of other quick checks. Usually I don’t look for stocks to buy or short. Instead, I look at fundamentals of the industry and break that down into smaller and smaller trends letting buys and sells fall out of the process…but here goes.

Industry:

– TSO - straight up refining ; — MRO - integrated oil & gas

– forward P/E to 5 yr exp PEG:

– TSO (8.6x; 1.59) Peers: VLO (7.6x; 2.1), SUN (9.3x; 0.6), HOC (14.5x), WNR (11.5x, 2.5)

– MRO (8.8; 0.6) Peers: XOM (11.7x; 1.4) MUR (13.7x; 1.2) CVX (9.3x; 1.3)

– earnings revision trend:

–TSO - recent uptick in crack spreads has yielded a halt in eps reductions. TSO is set to make $10.69 for 2006 but only $7.88 for 2007 . Although the other refiners are also expected to make less next year (reduced crack expectations) this is the worst drop in the group.

–MRO - down slightly over last 3 months as oil has flallen, pretty steep drop to outyear estimate as analysts are expecting lower price decks to prevail next year. While the near term reductions are pretty much in line with its peers, the outyear drop is cause for concern.

– Insider activity: - TSO - 1% sold last 6 months - meaningless; MRO - sold a little more but who could blame them up here.

–Technical - TSO - just made a minor breakout although it’s on the back of a very short term trend (holiday gasoline demand); MRO - pretty strong, within a stone’s throw of all time highs.

— Options - both are expensive with larger than necessary spreads but both are liquid.

– Events: MRO is part E&P company so you have the risk of them hitting it big somewhere although given their size it would have to be really big. Also, they’ve long been rumored to be a takeout target and while I wouldn’t worry about that happening during a trade (it’s like worrying about lighting on the golf course) it does lend support to the stock.

Analyst Watch: ECA price target raised from $53 to $58 at RBC. This come’s on the heels of Encana completing the monetization of its storage assets which produced a $1.5 B in cash but is curious in the face of declining oil prices which are more damaging to oil sands projects thn conventioal oil development. I guess RBC is counting on natural gas prices remaining high.

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Tuesday Morning

Posted by zmann on 21st November 2006

 

Oil Inventory Forecast Boosts Oil. January crude is trading up $0.60 this morning to $59.40 but remains well withing its recently steepened downtrend. I’ll get more concerned if it can break $61. Bloomberg’s inventory survey is looking for crude supplies to build by 700,000 but for distillates to fall 1.1 million and for gasoline to fall 750,000 barrels.

—Analysts are pointing out that this would be the 7th straight week of declines in distillate inventories. I point out that inventories remain 6% above average and that the declines are a function of refiner maintenance cycles (which are dragging on and on this year but should end soon or refner’s are going to have a hard time making volume numbers) and higher than normal secondary and tertiary demand.

—CNBC should start hyping AAA reports that this Thanksgiving will see more people on the road than ever before. They say this just about every year and the increase is a last hurra of the year for gasoline and may cause a brief spike in prices. I’ve noticed prices around the pump in my corner of the world are up a nickel retail despite the recent plunge in crude and marketers get one last chance to offload pricey inventories.

Oil’s also rebounding due to:

—OPEC statements saying most members now favor additional production cuts in December.

—The Trans Alaska Pipeline System (TAPS) is operating at 75% of capacity due to bad weather. For the last 7 days NO offloading has taken place. Tankers are queued up for oil but no time frame for full capacity has been released. TAPS loaded 739,000 bopd on average in October so there’s 5.2 mm bls of crude (and growing) that hasn’t reached the market yet. BP, TAPS’ operator, should join Opec; they’d be at least as effective as those rebels in Nigeria.

— A Canadian high pressure system is expected to plunge into the nation’s mid tier early next week break cooler temperatures (however the east coast is expected to remain balmy)

Analyst Watch: Shhh. Don’t wake them. They’re dreaming of higher crude and a world without need for ratings changes.

Holdings Watch: Took on small opening put positions in EOG and VLO yesterday and attempted to in REP. EOG being the least hedged, super independent with the largest exposure to natural gas and REP being simply overvalued and due for a comeuppance.

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Monday Morning - Turkey Week Expected To Be Quiet

Posted by zmann on 20th November 2006

 

Warning: Short holiday week to be highlighted by light volume so be care not to fall asleep and hit your head on your keyboard put too much faith into price fluctuations this week.

Oil - down another 1% this morning as the front month rolls to January. Opec says that it will definitely makes a decisive decision at its Dec 14 meeting. Aftere some sabre rattling induced volatility, I expect the January contract to close around $55 one month from now. Perceived excess OPEC surplus capacity is now as much or more in control of oil prices than bloated US crude inventory levels. Even US crude production has shown a recent uptick!

Natural Gas - down $0.18 in early trading - after Friday’s highly unwarranted $0.42 rebound (no news) that drove the December contract to a three week high of $8.17. Cold weather has not really arrived yet and we remain at peak storage. Wtih the cooler weather last week (HDDs apparently rose to 114 vs 87 in the prior week) I expect traders to defend the $8 level. If we get another flattish gas storage report on Wednesday (holiday schedule) then look of $7.50 to become the new Maginot line of defense. If logic ruled gas prices we’d be well below $7 but don’t hold your breath, especially approaching a holiday that sees huge gasoline demand, and thus supports oil and to a lessor extent natural gas prices.

Analyst & Holdings Watch:

—BBG - Goldamn 13D this morning shows a reduction in their ownerships from 2.8 shares (6.5% of outstanding) to 2 million shares (4.5%) . Classic case of “do as I say, not as I do” or do E&P analyst and the fund managers at Goldman not talk?

—REP downgraded to sell at Citigroup. UBS cut them to reduce on Friday. B of A cut them to sell in late October. What do these guys sell anyway, oil? This stock has had a better ride than XOM and sell ratings are almost unheard of among analysts so I’m officially taking notice. What’s up? Well not oil prices and not REP’s production. They’re also facing oil worker strikes in Argentina that are small at present but which could spread. Anyway without the benefit of a giant buyback (like XOM) or being part of an exclusive, 30 stock index (also like XOM) these guys are ripe for a retracement of at least 10% from current levels.

CFTC Trend Could Signal Pending Gas Price Reveral. Both long and short positions were up slightly as of Friday’s report but the overall recently established trend of declining net long positions remains intact. If this trend continues, the liquidation of non commercial long positions could prove to be a turning point towards lower natural gas prices. So far this hasn’t happened yet but as hedge funds quietly siddle to the sidelines and increasingly go short they will begin to feed lines to CNBC and other mouthpieces, talking prices lower.

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Friday - T.G.I.E.

Posted by zmann on 17th November 2006

 

Thank God It’s Expiration
These days are usually uneventful and, while I’m not a big fan of “max pain”, the stocks seem to be meant for certain levels by days end but often get there early. Then they trade sideways on light volume. In other words after 11 am its pretty boring and only cheap gambles on volatile stocks are worth your time and money.

Oil is getting hammered this morning in Europe and on its last day of trading, December crude is in the mid $55s in electronic trading at present. I’ll bet we get more Opec threats, rebel rebellion, a massive production disturbance from BP (it’s been almost 2 weeks now and the technicals are getting pretty dire), a statement from Bodman saying oil’s too cheap now, or some combination of the preceding mid day so hold on to your butts and be careful with your trades.

Why did oil get snaked yesterday? Oil fell $2.50 yesterday and is down $4.75 (10%) over the last 5 sessions. To me it looks like a combination of five factors:

—Middle men & exports. According to the EIA, middlemen and customers have been taking on inventory to take advantage of current low prices in advance of winter weather. Moreover, an inordinate amount of gasoline is being shipped to Central and South America.

—Opec cheating. Ok so that’s not really new but word from CNBC that liftings were actually up as recently as a week ago made CNBC and may have contributed to the slide late in the session.

—LOOP closure. Its open, wait, there’s a strong breeze and some fog, better shut the biggest oil receiving port we’ve got. It was closed through Wednesday but was supposed to reopen Thursday. Who knows for how long.

—End of contract and technicals. The December contract expires today so some of the sell off is attributable to that. This is like the third month in a row to end on its lowest levels for 2006. Moreover, the USO ETF, which is based on the price of the WTI futures contract continues to make all time lows. I’m not very impressed with this argument since the January contract got sacked for $2.15 yesterday. If traders are selling December to buy January, then why did it tank 3.5% as well?

—IMF reduced forecast for US 2007 GDP growth. Cut from 3.4% to 2.9%. Keep cutting Opec, you’ll get to the right number (about 25 mmbopd to get to $60) any day now.

American Petroleum Institute shows crude inventories increased by 6.7 mm bls yesterday! That’s a big gap to the EIA number. API says its a matter of different survey methodologies (more careful) for the weekly change but that the overall inventory amounts are very close.

From an AP story last night: Even as oil prices fell through the low end of that range ($57 to $61) Thursday, many analysts remain bullish in their outlooks, citing concerns about instability in Nigeria and Iraq, a recent drop in U.S. refinery output and trading patterns that suggest the market is preparing for a late-year upswing. Comment: Talk about grasping for straws to keep from breaking the oil camel’s back. Fellas, that’s just sad. Just about as sad as the parade of pumpers CNBC hauls out every time oil hits a new 2006 low. Of course they’re bullish, 80% of ratings are buys and bonus season is just around the corner. Sell ratings don’t generate a lot of commish, capiche?

Natural gas got whipped. December gas fell $0.365 to $7.75 on the unexpected build.

—We got a build of 5 Bcf versus an expected draw of 1.5 Bcf (come on CNBC say 1 or 2, you can’t get a half!). I get style points but no dollars for hitting the number spot on in comments yesterday morning. Whoopty do.

—Anyway, looking at the weather I’d say we are likely to see a number of around flat to down 10 next Wednesday (they moved it up for the holiday) as the old forecast looks to have been a little warmer than what actually happened this week.

—My point is that it doesn’t matter as long as we’re staying near record levels and not chewing through storage yet. The average November sees gas supplies fall by 181 Bcf. Last year, with the aid of supply crunching hurricanes, November inventories fell 328 Bcf (the second biggest month of demand in November on record). We’re 10 days through November 2006 and we’re up actually up a few B’s.

—Even if we have the worst winter on record, gas in storage should only fall to just below the middle of the average range. Looking at this chart you can see where a warm winter will leave inventories. $8 gas is hard to explain in either scenario.

Analyst Watch: B of A says E&P capex to rise 4% in 2007 vs 38% in 2006. Get your OIH index puts here. Drillers should get macked on this news as it’l put the breaks on day rate advances which have gotten out of control of late. Ditto service. How these guys issue this kind of a bombshell and don’t downgrade a single stock or cut a single earnings estimate or price target is simply beyond me. Plus, why issue this on a Friday, don’t you want people to read it?!

Holdings Watch:

—Still have puts on (and like to the downside) SU, PTEN, HAL, HOC, FRO, LNG, GSF, and OMM. Have puts and calls on XOM.

—Gassy names that should retreat from here: EOG, KWK, BBG, and DVN.

—Oil names on the downside hitlist: BRY, TSO, SUN

—Names I like long but not necessary today: CHK, SFY, SWN, and CRR. - for now consider them waiting for lower entries but definitely not short candidates.

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Thursday Morning

Posted by zmann on 16th November 2006

 

Crude Up Early. The December contract is trading up $0.42 or just over $59 per barrel as I write this. Opec is reiterating it’s threat to cut production at the December 14 meeting in Nigeria and traders are said to still be digesting yesterday’s large draws on products.

Product Demand Is Not Accelerating. Contrary to what CNBC, Bloomberg, and every analyst with a keyboard is screaming from the roof tops the large draws of late on products inventories do no represent increased demand.

–EIA explains “high demand”. In its weekly petroleum status report, the EIA foucsed on two factors in explaining recent high demand despite a lack of winter weather. First, secondary and tertiary sources of demand for distillates have taken advantage of recent low prices to stockpile inventories. These inventories are not measured by the EIA but will lead to a slower draw down of EIA measured inventories when winter arrives. Second, exports to south Anerica are running higher than usual (this goes back to Chavez’s inability to meet his contractual obligations with customers including Cuba- he’s been buying gasoline to send to Cuba!).

–LOOP closed due to choppy seas. Details are sketcyhy but the LOOP was closed again for part of last week reducing oil imports by as much as million bopd.

–Refinery maintenance cycles are running long. Normally refinery maintenance would be wrapping up this time of year so refiners can concentrate on producing a greater percentage of heating oil (their winter mix). This year, high inventory levels and low prices have incentivized refineries to take their time with the process making them defacto cartel members. Somebody call Pelosi.

Natural Gas Inventories Today. Up early as well but it’s inventory day so everything before 10:30 is meaningless. As I wrote on Tuesday I’m expecting a small build in inventories today. Analysts however are expecting anywhere from a small draw to a build of as large as 40 bcf. Given the distribution of warmer temps last week but the coolness of the north east, I’d shy away from that big number. It does however drag the consensus injection upwards playing nicely into the bull’s hands.

I’m not playing the gassy names until after the report. Maybe an hour or two after it. Hopefully we get an injection of such small size that it disappoints resulting in a pop in the stocks. Once that happens, APC, DVN, EOG, LNG, BBG, and KWK puts come to mind. I’m shying away from SWN and CHK as their organic growth stories and hedge positions remain too good to bet against.

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