Thursday Morning Comments – Welcome Home Brits

Thursday Topics:

  1. Big News of the day Watch: Shell Sets Timeline For Nigerian Restart
  2. Natural Gas Inventory Preview
  3. Odds & Ends
    1. Analyst Watch
    2. Ethanol

Nigeria Watch: Shell expects to resume full production from the western Niger delta in five to sixth months. This production was shuttered after attacks and harrassment by MEND in early 2006 and would add 500,000 bopd to Nigerian production taking it above the countries OPEC quota of 2.2 mm bopd.

  • Said Shell's managing director for Nigeria, "I don't see anything standing in our way of restarting our production." Comment: Sir, how about the MEND board of directors seen in this rare file photo: mend-in-a-boat.JPG
  • Shell plans to increase the amount of work it offers to local companies which is much the same tactic as Addax Petroleum (AXC), has used all along. Addax has never suffered a supply disruption in Nigeria. Comment: What took you so long?
  • Shell also noted that the level of violence in the Western Niger Delta has gone down recently and that dialogues with the communities have been fruitful in making them understand that everyone benefits when the oil flow. Comment: the 70+ hostages taken year to date were treated pretty well so I guess that doesn't count as violence.

Natural Gas Inventory Report Day

I expect a small build of 20 to 30 Bcf. Natural gas prices are likely to hinge on what is likely to be the season's last withdrawal from storage next week (in other words, don't expect a drop below $7 in the next couple of days).

  • It looks more and more like 1,500 Bcfe is going to be the trough for the year.
  • Prices however have been buoyed by oil and by increased talk about hurricanes and a warmer than normal La Nina influenced summer.  I wouldn't expect a big move in prices today as traders will be heading out early to enjoy the long weekend.

Speaking of oil I'm going to do a review of the whole inventories, demand, supply, utilization, imports ball of wax this weekend. I think oil is going to slowly slide back to $62.50 now that the British hostage "crisis" is over. After that it's up to the domestic refinersto increase production and not catch on fire anymore this season (BP had another fire at Texas City yesterday) which was part of the casue of the 9 cent rally in gasoline to a new 6 month closing high but again I wrap that all up this weekend.

Odds & Ends

Analyst Watch: (PXD) upgraded to neutral at BS, (DVR) upped to overweight at JP Morgan.

(MCF) shot out of a cannon yesterday, up 32%. If this gets any kind of a near term question I'll take a small piece.

A couple of friends asked me my opinion of ethanol industry over the last few days. This is an amalgamtion of excerpts from my emailed responses to them.

Ethanol Quick Facts.

There are between 110 and 120 ethanol plants running now in the US and 80 more in various stages of permitting or construction. The latest estimates I've seen are for ethanol growth in a range of 30 to 60% this year which is starting to depress ethanol prices a little. However, ethanol is likely to rise or at least follow gasoline into the summer months.

Ethanol plays range from producers like little Pacific Ethanol (PEIX) to massive Verasun (VSE) and to enhanced corn seed providers like Monsandto (MON) and Archer Daniels (ADM). There are a ton of penny stock plays that combine ethanol and biodiesel plays into one and many of them won't survive if ethanol prices come in too severely. I'd shy away from these unless you know someone in management...lot of stories and dreams out there in penny land. Not saying they're all dooomed but the play attracts the gold rush types and snake oil salesman alike.

The more interesting long term plays are the cellulosic ethanol producers (hardy grasses, wood chips etc) like Sunopta (STKL) that essentially use "crops" no one wants and are easily renewable.

Corn is actually pretty bad for making ethanol since it takes so much to move the needle and people and animals compete with ethanol for it. It's a 7 to 1 trade off: 7% of the US corn crop is needed to replace 1% of US gasoline consumption.

By way of comparison you get 370 gallons of ethanol from an acre of corn vs 700 from sugar beats, 1,150 from Swithcgrass and 1,500 from Miscanthus (another grass). The grasses actually build up the soil and re-grow wheresas corn has to be reseeded annually.

Acre for acre sugar beets are the way to go (Brazil does this) if you want bio ethanol and even better would be jeruselem artichokes, an invasive perenial tuber and not an artichoke at all but a member of the sunflower family although I haven't seen a play there in the US.

chart of ethanol

chart of corn

Have a great weekend everybody.

44 Responses to “Thursday Morning Comments – Welcome Home Brits”

  1. 1
    tom2oc Says:

    Good morning Z,

    I updated the big oil TA on the blog if you’re intested. My take is that if crude confirms the kiss on 64 and clear 67, get ready for crude at 87 if there is an hurricane heading towards the gulf later this year.

    Have a nice long weekend!

  2. 2
    zman Says:

    Tom – $87?! That would crush the economy. I really hope not.

    Oil should be slowly eroding on the release of hostages and lower tensions and the fact that’s it’s not tells me the gasoline rally isn’t done yet.

    Send you’re link to your blog will you?

  3. 3
    tom2oc Says:

    Z, it’s just a IF! It can also slice through 64 to start a new downtrend until the crooks find something to reverse it. Time to wait and see now. Could go both ways.

    Here’s the link:

  4. 4
    zman Says:

    Thanks Tom

    Opposties day in effect right now. Not chasing puts on refiners or anything else for that matter.

    Shell plans to get Nigeria up: oil up
    Hostages back: oil up

  5. 5
    tom2oc Says:

    Well, that proves that I should continue to see FA stuff as irrelevant. As Phil said this morning, the return of the hostages shows that this is not what triggered the run up. Was all in the chart as shown on the blog. TA odds in action are tough to unwind.

    But many ways to skin a cat, each our own..

  6. 6
    zman Says:

    I, of course, respectfully disagree. The hostages were the trigger. Hostages aren’t a part of the Fundamental Analysis, Fear Analysis, but not Fundamental. They shot oil off $60 and rumors of a stalled election process in Nigeria helped as well.

    Maybe we need to have FA + TA + PA (psych)?
    = price action.

  7. 7
    tom2oc Says:

    LOL! If you can figure out a black box automated program on that trading equation, I’ll fund the programming and the testing phase to be your partner and we’ll be so rich we’ll have the power to bankrupt the oil crooks!

  8. 8
    zman Says:

    Tom – Deal. We know our roles, now how to handle the PA and how to manage it? Seems a bit like we’ll need someone from NASA on the case.

    Hows MON look to you Tom? I like the story but am close to making a bet it drops with ethanol as corn prices slide.

  9. 9
    bill fraser Says:

    Thank you Zman. I made 1500 today shorting gas futures based on your build forecast

  10. 10
    sane Says:

    That Texas City fire was a non event. Didn’t affect production


  11. 11
    tom2oc Says:


    MON above 56 the chart is bullish. Below it, bearish. Don’t jump the gun.

  12. 12
    zman Says:

    58 Bcf – took the May $45 APC puts for $2.10 and will likely add there today

    Taking the May $45 BTU puts.

    Way to go Bill!!! Seriously? How’d you manage it? They’re not letting it move much.

    Exactly Sane

    Thanks Tom and thanks for the caution tone.

  13. 13
    foo Says:

    Z – Been looking at BTU also. It’s running up despite build in nat gas. What’s going on? Something doesn’t smell right.

  14. 14
    zman Says:

    ACI saying it’s going into acquisition mode plus you’ve got a strike at Foundation Coal (FCL). Given that BTU is about 3x times the size of ACI it won’t be them getting scooped but the price is up on that strike (I guess). Doesn’t seem right to me.

  15. 15
    JC Says:

    I’ll start with the caveat that I’m an energy newbie. Question for z-man and anyone else willing to share wisdom.

    I don’t really get why crude oil would follow gasoline prices higher in this market. If gasoline prices are up mostly due to decreased reserves principally due to decreased refinery utilization and persistent outages, why would crude oil go up?! First, there’s more crude oil stock. Second, ultimately, higher gasoline prices should result in some demand destruction leading to limits on demand for crude oil.

    Is there a problem with this logic?!

  16. 16
    El Diablo Says:

    This price action is like a roadside bomb, meant to scare and intimidate, yet harmelss to the ‘overall’ market. Like real terrorists, its a primary tool of the financial terrorists, who are experts at detecting and exploiting market fears.

    The ‘market convoy’ was stopped in its tracks yesterday when a roadside bomb detonated on the gasoline report. While the number itself raises suspicion, the real force of the explosion rested with a relatively few trades at the moment that sent gasoline $0.02 higher. That action stoked market fears, which carried prices higher throughout the rest of the day.

    My point is that all it takes is a very few well-timed trades (well-placed bombs) to snap the market back into ‘fear’ mode, just as roadside bombs keep our troops (and our whole country, apparently) on edge.

    Another case in point, today’s nat gas report. Within 5 mins of the report, simultaneous buying in crude, gasoline, and nat gas. The relief of the inventory build (hostage release) was quickly relinquished to the fear of rising prices.

  17. 17
    dave Says:


    Do you think the Russian nat. gas cartel can hold up the nat. gas prices ?

  18. 18
    zman Says:

    Dave – no. In the end oil is global and gas is local. It’s effect is limited to the amount of gas we import via lng (not total imports which is lng and pipe).

    That’s the fundy answer. The psych spin is that it is “yet another bullish variable along with hurricanes and a hot summer”.


    JC – it’s not bad logic. I’ll review what’s going on in oil in greater detail this weekend.

  19. 19
    zman Says:

    Takeout rumor for GSF or NE for Monday lifting the OIH. Well, at least I’m not short service right now.

  20. 20
    zman Says:

    The sea drill rumor isn’t really driving the two stocks the company named it is in talks with however, how strange is that?

  21. 21
    zman Says:

    taking the May $55 MON puts at $1

  22. 22
    Jon Says:

    Z, your ethanol facts this morning prompted me to do a little reading. Here’s a recent press release from Novozymes, a Danish company developing enzymes that convert cellulose to sugars for fermentation. It mentions obstacles yet to be overcome to make cellulosic ethanol commercially viable. Still 4-6 years away from commercial viability in their view.

    Until cellulosic ethanol is a commercial success, the ethanol craze will be causing wild swings in the food economy.

  23. 23
    zman Says:

    Thanks Jon. My stuff on ethanol was mostly memory from the last craze and a little new research. by no means complete or an endorsement of the group.

    I think we need it and I think that cellulosic is the way to go. High corn prices are going to starve a lot of people south of the US border (or at least cause more cases of malnutrition in children) as tortilla prices have shot up like tulips in the 17th century.

  24. 24
    zman Says:

    Jon – its seems Europe is ahead in the cellulosic ethanol race. I saw several articles about firms in Britain and Spain testing grasses and even that artichoke I was talking about.

    http://www.abengoabioenergy.com has built a plant that will be the first commercial cellulosic one consuming wheat straw. They use STKL’s process at the front end.

  25. 25
    Bih H Says:

    good day all…Zman And Co.

    Whats going on with all this 12pm pop I’m seeing in oil complex?? Geopolitcal News TakeOuts?

  26. 26
    zman Says:

    more on STKL

    plant in Spain up very soon
    USA Celunol should start in May

  27. 27
    zman Says:

    Bih H – what pop? I’ve got oil and even gasoline slowly drifting lower.

  28. 28
    dave Says:

    Well I will call it a day. Again, thanks to everyone for your posts. Quite a bit of info. that I shall review this weekend.

  29. 29
    zman Says:

    END – just went through HW presentation and I don’t see any changes to drilling program or guidance. People just don’t seem attracted to North Sea compnaies right now.

    Next bit of interest is still the May spud of a size prospect. Other than that, 1Q numbers should be in line with expectations.

  30. 30
    Bih H Says:

    I don’t know I just saw a lot of oil and drilling names flying buy on the days high screen( Looked like something may have been going on ) even through it was just a few more pennies on the day”

  31. 31
    Bih H Says:

    Zman and others ….I am not into tech but I see rack hetting killed again today, never been their or done that! Anyone Have opines?

  32. 32
    Bih H Says:

    About those 15Apr calls are getting killed( they warned big and will report before expriey) but I’m thinking if they lose another 25-50% next week on they might be an intresting spec??

  33. 33
    Bih H Says:

    in the abpve message I ment RACK 15 apr calls

  34. 34
    zman Says:

    Sorry BH, don’t know anything about RACK. Pre-long weekend trading is pretty boring. I’m out for a while.

  35. 35
    Bih H Says:

    me too! O by the way….EVERYONE AND Z


  36. 36
    zman Says:

    Tankers clawing higher, even TK after an early 1% loss is back to par. Tell me people aren’t on to the OEC is cheating story?!

  37. 37
    zman Says:

    Got those MON’s for a buck earlier. It looks like it want to go lower before the close.

  38. 38
    zman Says:

    CNBC guest just said how odd it was that nat gas is getting some institutional buying at a time when the numbers are bearish and gas demand is seasonally falling. CNBC commenttator, “yes, that is odd”. My comment: her comment was useless.

    They used to ask critical questions and do some analysis. Now anytime something is up they go with it like that’s the natural way of things…to go up.

    If there is a story about a fire or a hurricane forecast etc they repeat it every 30 minutes. If their is no reason for the rally and it runs contrary to the fundamentals, they say that’s odd once and forget it.

  39. 39
    bill fraser Says:

    im shocked by the strength in gas today

  40. 40
    El Diablo Says:

    Nat gas statistics:

    1,569 Bcf: storage level on 3/30/07
    642 Bcf: lowest storage level ever 4/11/03
    58 Bcf/week: lowest average weekly summer injection rate (summer of 2002)
    109 Bcf/week: highest average weekly withdrawal rate (2002/2003 winter)
    2,530 Bcf: largest peak to trough winter withdrawal ever (2001/2002 winter)
    31.5: average number of injection weeks
    20.5: average number of withdrawal weeks

    Put all this together. Assuming most conservative injection rate, by the start of Hurricane Season (June 30), we will have 2,091 Bcf gas in storage. Subtracting the lowest ever amount (the ‘shortage’ point), we would have enough gas in storage BEFORE hurricane season even begins to sustain 13.5 weeks of highest weekly withdrawals ever and without drawing to a new ‘low’. Based on the average 21 week withdrawal season, we’d already be 2/3 to our worst-case storage requirement before the risk of hurricanes disrupting production. Further, if you assumed that we could draw working gas to 0 instead of the 642 Bcf low, we would have enough gas in storage on June 30 to sustain 19 of 21 weeks of the highest withdrawal rate ever.

    All this assumes that we do not produce a single Bcf of natural gas after June 30. Despite the damage of Katrina and Rita, production did not cease for a meaningful period of time (days, not weeks).

    This hurricane fear premium is unbelieveable. To justify it, one would have to believe that our entire natural gas production and storage capacity was located in a single mobile home park on the coast of florida….

  41. 41
    zman Says:

    Bill & EL D – madness, madness I tell you.

    I think traders are trying to put the shorts in jam here. I have not heard CNBC mention the CFTC record net short position once but the fact that institutions started buying within seconds of today’s report indicate that the fundamentals are not in charge and the hedge funds are.

  42. 42
    zman Says:

    No one will care about this either. From NOAA today: Third paragraph.

    The formation of La Nina could lead to more storms in the 2007 Atlantic hurricane season, which runs from June 1 to November 30, forecasters say.

    The weather anomaly could occur between May and July of this year.

    However, the latest computer models “indicate considerable uncertainty as to when La Nina might develop and how strong it might be,” according to the CPC.

  43. 43
    T-Tupp Says:

    BMO Capital Markets just upgraded ALJ, VLO, FTO, HOC & yes TSO to PT’s of: $42, $82, $40, $66, $130.

    I would probably stake my first born’s life on these LOL (if i had kids), although i do agree there will be a 20%+ correction inside of 60 days. these will most likely occur in August.

    I am reviewing a sizable position combination for my fund. The limited partners were blown away by the Q1 i sent out, because of the VLO money train (20% was allocated to a amassed bull call spread position; 300%+).

    all aboard!!!

  44. 44
    sponge bob Says:

    sponge bob 71…

    Hi! http://9.klwtniot.info/123_0.html . Thanks!…

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