Tuesday Morning

No picks today. The XOI and XNG continue to be led around by the broader market despite continued weakness in their underlying commodity. While some of this weakness can be attributed to approaching contract expiry the near term trend is showing lack of support from shoulder season weather, a somewhat cooled geopolitcal climate, and the disappearance of OPEC from daily headlines.

The OIH raced higher yesterday on the THE takeover but I'm not playing as I don't think the rally has staying power beyond a week or two. I could be wrong but I don't lose money if I miss out, only if I make the wrong play. I'm spending a majority of my time working up long ideas for the time after both oil and natural gas hit their low for the year (later this Spring).

Tuesday Topics:

  1. Oil
    • gasoline
    • early inventory expectations
    • more on Mexico
  2. NaturalGas
  3. Odds & Ends

Oil: Below $57. Crude had another down day yesterday with the April contract finishing $0.52 lower at $56.59. The oily stocks followed the market higher with the XOI actually jumping 1.7% and further widening the outperformance of the stocks versus that which they sell. Despite the continued decline in the front month contract the 12 month strip edged up $0.24 to $62.85, the first increase since March 8th as trader's attention shifted from China's rate hike and it's impact upon global oil demand back to expected strong demand in the driving season.

  • Gasoline, on the other hand, had a banner day closing up a nickel to reach a 6 month high of $1.96. El Diablo posted a list of potential reasons on the snafu page ...take your pick. The fundamentals remain strong and gasoline is now up $0.42 (27% since mid January).
    • I've got puts on TSO - still a relatively small position (and getting smaller by the day) but I'm being patient with my May 90s. That doesn't mean I'm adding here. THEY want this one to got to $100 and it either bounces off that like it's a rubber coated ceiling or slices through it with renewed vigor on the logic that because it's up, it should go up more. Either way I wait.

Good follow up article on the state of affairs with regard to oil production in Mexico from Upstream. In a nutshell...not good. Pemex's head says they won't see 100% reserve replacement until 2012 and that without foreign investment in costly deepwater Gulf of Mexico projects they have no hope of growing production. Someone please forward this to the Mexican congress.Early read on the crude inventory report from Reuters:

  • Crude:Build of 1.2 million barrels.
  • Gasoline: expecting a draw of 1.8 million barrels. To arrest further price gains we need to see an increase in refinery capacity utilization as well another increase in imports from Europe. Inventories remain high relative to five year averages for this time of year:

March 9 Inventories relative to March 9 spot wholesale gasoline prices


  • Distillate: Seen declining by 1.2 million barrels. Not very important and less it's way off the mark as it is completely overshadowed by what's going on with gasoline.

Natural Gas: Continuing To Drift Lower. Natural gas slid $0.077 to $6.85, it's lowest closing level since mid January. There is no weather to speak of to support current prices and despite recent large draw downs gas storage remains comforatably above historic avearges for this time of year. I would imagine there will be a broad range of estimates for the gas storage withdrawal this week so I'll be keeping a sharp eye on estimates. With only 3 weeks left in the traditional heating season I expect trough storage to fall to just under 1,400 Bcf.

This is not a good weather pattern for gas as we rather quickly exit the heating season.


Odds & Ends

Opec Watchers Watch: Everyone from analysts to the oil ministers themselves are saying that oil prices are likely to drift higher over the summer as the oil production quotas remain in place. Of course I think they'll cheat and it'll start showing up in the tanker rates (already rising) and tanker loadings (we should see some data in two or three weeks).

Putin Watch: More Gas Opec Talk. Dignitaries from Russia, Iran, Venezuela, Algiers, and Qatar will meet in Doha to discuss forming a "gas OPEC". I'd say it's logistically impossible given the localized nature of gas and is more of a power trip for all involved.

Oil Sands Watch: Tax breaks to fade away more slowly than originally thought but tree huggers still have reason to rejoice. Not great news for the likes of ECA, SU, NXY, and PCZ but iinvestors and analysts have known this was coming for months now and the phase in period should help ease the pain until long term higher oil prices can alleviate the need for the tax breaks. At least that's the theory.

Analyst Watch: COG from strong buy to buy at Matrix. OMM downgraded to neutral at JP Morgan.

13 Responses to “Tuesday Morning”

  1. 1
    zman Says:

    TSO down this am on: 1) lower gasoline (down $0.016) and 2) an interview with CEO Bruce Smith who said the company is still feeling acquisitive but not in 2007. This year will instead be spent paying down debt and adding a coker to their Ca. refinery

  2. 2
    zman Says:

    Crack Spread Watch:

    1Q to date cracks are obviously way up except in the Gulf Coast.

    Out west they’re up a lot: 51 to 60% for the quarter and the most recent week shows them well above that.

    I don’t think it’s sustainable given that gasoline stocks are exactly perilously low right now.

    Anyway, those cracks are what’s behind the 50% move in TSO since year end. When they fall, I’d think the stock would retrench.

    I’ll have more on this tomorrow. It simply got too late last night to add it today’s post.

  3. 3
    Jon Says:

    Good morning Zman,

    RSS feed: Arrived at 5:43 AM PDT, immediately after is was posted to your site.

    It is only a summary, unlike the feed from the old site that sent the complete content of the post. It shows the first few lines of the post and then a message to visit the web site for the rest.

    The RSS comments are complete.

    The gal on Bloomberg said crack spreads hit $26, is that right?

    The DOE says gas prices will be coming down even before driving season. Hope they’re right, but I’ll believe THAT when I see it.

  4. 4
    zman Says:

    Thanks Jon,

    She’s talking about in the Pacific NW almost for sure. They’re on the West Coast: $35.55 as of last week which is simply amazing.

    The rest of the country is up as well but not really breaching $20.

  5. 5
    zman Says:

    Hi Leslie,

    Would you mind posting on the main site? It’s easy for me to miss these unless they’re over there.

    The THE acquisition drove oil service higher yesterday but there’s not a lot of follow through today. It was a couple of smaller, primarily offshore rig guys getting together to achieve scale and was a good idea for them.

    There will likely be further consolidation. Now, I’m not an oil service analyst but you have to wonder if the smaller players are feeling pressure from the E&Ps and majors to cut prices. Capex budgets are flattening a bit and the smaller service players may need to “get bigger” to stave off that pressure. Just a theory for now.

    As to an IPO, not sure which one you’re talking about. Norther star, or Pinnacle, or someone else?

  6. 6
    dave Says:

    Got stopped out of NE

  7. 7
    foo Says:

    HAL getting crushed on lowered earnings! OIH is following.

  8. 8
    zman Says:

    Dave – it’s amazing what a difference a day makes.

    Thanks Foo!

    Back into the BHI APR 60 puts for $2.30 before they come in further. It’s my perenial favorite OIH proxy with an 87% correlation to the group and it’s actually down the least in the group 15 at present.

  9. 9
    nltd Says:


    I know it’s old news now, but no comprende last comment. BHI Apr60p @ .35/.40 where I’m looking…


  10. 10
    zman Says:

    Sorry N – I took the 65s

  11. 11
    nltd Says:

    OK then, I’m not cracking up after all.


  12. 12
    dave Says:

    Kind of an odd day in the markets. Tomorrow should be fun !

  13. 13
    zman Says:

    Stopped out of BHIs at $2 . ;-<

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