Wednesday Morning – Gasoline, Natural Gas and A Whole Lot More!

Alaron's Two Week, $5 Oil Surge Countdown Watch Day 1: Yesterday on CNBC, Phil Flynn, of Alaron Trading espoused price targets of about $68 for oil (yesterday's price at the time of the interview + $5) and $4 retail for gasoline. He originally said $4 average retail gasoline but quickly hedged his bet by adding "somewhere in the U.S."

• His reasoning in a nut shell: WTI which usually trades at a $2 premium to Brent is now at a $3 discount to Brent. His assumption is that this will reverse as refiners increase utilization and bid up crude prices.
  
• One thing going in Phil's favor: the May contract expires Friday so he gets an automatic bump of $2 there as we switch to June! Tricky devil.
• O'grady from A.G. Edwards was the counterpoint analyst who is a very conservative guy. He stifled a laugh at the reasoning and said he didn't see that happening. He also pointed out that if Brent fell it would also serve to re-establish the relationship.
• Anyway, I love a good (and pointless) challenge. I'm betting June crude will be closer to the $62.50 to $64 range on May 1.

Sentiment Watch: I thought I'd do this at least a couple of times a week for those of you who aren't daily readers. From now on I'll stick it down in the Odds & End segment.

• Bearish on the refiners - sure they'll have a good quarter but they've a monster rally and I expect crack spreads to peak sooner than is typical.
• Bearish on the mini majors - (MUR), (HES), (MRO)
• Neutral on E&P but bullish on several of the gassier names.
• Neutral on drillers and service.
• Bullish on tankers: (TK). Although they bought half of (OMM) last night so expect a little weakness early today.
• Bullish after a bit of seasonal weakness on the gas names in yesterday's post plus (PQ). Favorite pick for now remains (NFX).

Oil Did An About Face Yesterday As The Enbridge Pipeline Leak Turned Out To Be A Non-Event. May crude hit a high of $64.65 in the morning before news came out around noon that the pipeline could be  returned to service later in the day. Crude closed down near the low of the day at $63.08, off $0.53. Oil is likely to continue to key off the gasoline market in coming weeks.

Inventory Report Expectations (Dow Jones Survey) 

• Crude. Up 0.5 million barrels.

• Gasoline. Down 1.45 million barrels. Today's number will be key to either rebounding May RBOB towards the $2.20 high seen Friday (I kind of doubt it but it's possible) or making a serious run at $2. Surging demand, an extended maintenance season for the refiners and lower than usual gasoline imports has kept the market tight. I think right now there is more downside than upside risk to gasoline prices.

• Utilization is rising albeit slowly. I expect utilization to rise to 89% for this past week and to top 90% in next week's report. The street is expecting utilization to creep up to 88.8% in today's report.

• Imports - need to hold above 1 mm bgpd. In last week's report gasoline imports again dipped below 1 mm bpd. Gasoline won't be able to make a concerted run on $2  without imports at least regaining the the million barrel per day mark.

• Demand - at a 4 week average of nearly 9.4 mmbpd, we're running 2.5% above year ago levels.  Recent rainy weather could put a bit of a damper on near term demand however, the consensus opinion is that no price elasticity will come into play until the consumer starts paying $3 per gallon.

• Distillate. Down 0.4 million barrels.  And no one cares. Just so you know we're near the high end of the range for distillate storage for the end of winter.  Demand has taken a hit of late due to a rainy April in the Farm Belt which has spread out the planting  season.

Natural Gas. Near term I still expect a seasonal pullback to the $6.50 to $7.00 range.

Yesterday I commented about natural gas production and gains onshore that have been accomplished with a high rig countthe response wasn't there to offset a long term slide in Gulf of Mexcio production. There's nothing like a few charts to better illustrate a point.

 Total Lower 48 Gas Production Remains Stalled Despite Onshore Success

Texas has seen an explosion in the number of gas directed rigs and lately in the number of horizontal gas directed rigs. Two words: Barnett Shale.

Wyoming has enjoyed a boon of CBM drilling.

And Other States Volumes Are Rising A Little...

...But It Hasn't Been Enough To Offset The Steep Declines Of The Gulf Of Mexico Shelf.

I realize this is a quick run through but I wanted to hit you with a few graphs to cover the majority of the supply problem with pictures. In a nutshell - we've had next to no growth while employing an ever growing number of rigs. While onshore production is growing the the Gulf of Mexico shelf continues to be a major headache for growing Lower 48 production.

Odds & Ends

Iran Watch: Despite U.N. sanctions Iran vows to increase nuclear capacity. In yet another effort to wrench the international spotlight  off North Korea and having no Brits left to trot out in front of cameras, Iran has once again taking to rattling its atomic sabre. Mahmoud that is so 2006 of you.

Not Everyone Is Bullish On Gasoline: "I've heard reports that refineries are coming back on line, that U.S. demand has slowed due to the high price (we have yet to hit the peak driving season), etc.," said Darin Newsom, an analyst at DTN.  

"Crude oil has no fundamental support, as the underlying supply and demand situation remains bearish as indicated by the wide June to July and July to August futures spreads, Newsom said in e-mailed comments, referring to the price differences between the monthly contracts. Comment: I was getting a little lonely.

Analyst Watch: Several service companies cut to hold at Citigroup: (SLB),(SII), NOV),(CAM), DRC),(FTI).

A Day In The Life Of Phil's Stock World:

My friend Phil of Phil's Stock World asked me to check out a penny oil stock for him the other day. A lark he had hear about over the weekend. At the time it was a $0.25 stock and it ran like a scalded cat from his first mention of it. I dropped the ball on him and the stock jumped to $0.70. Here's an excerpt from yesterday's action on the PSW site.

Phil ~ ...the penny stock was one I asked Z to look at, I don’t generally recommend those things because they are often death traps but that one, (DPWI) came to my attention over the weekend but it sounded too good to be true so I asked Z to look into it.

Z ~ "Phil - I looked at the lead in you sent and filed it under later. Sorry. I blew that one."

Phil ~ LOL Z - and that’s the only time I ever sent you one. At least next time I’ll get you’re attention! Truth though, did it actually look good or dicey?

Z ~ "I couldn’t determine experience level of management. It’s a pink sheet company that bought those reserves. They plan to frac em and get more out of the existing which is possible sure. Also plan to drill for oil in the New Albany Shale for oil making a claim about rates that I found extremely unrealistic.

Then they plan to explore and drill for oil in Asia.

Where’s the budget, where’s the 3D seismic library, where are the geologists and geophysiscits you need for that?

As to those reserves, I own a little piece of an oil field in Oklahoma. Last time I got a ball park on the field, it was thought to contain about 100,000 barrels. Value that at $10 in the ground which is conservative but fair and that’s $1mm value. We have 3 active wells in the field and a couple of water injectors.

By way of comparison APC has been selling high quality reserves for months now around the $2.50 / mcfe market which at the industry standard 6:1 conversion is $15 / barrel for in the ground reserves.

For these guys I’d split the difference and say $12.50 / barrel just to be nice. 750,000 barrels X $12.50 per barrel = $9.4 million.

Ok so that’s the reserves. Then you’d add some value for other assets and data. I couldn’t find a balance sheet. I stopped worrying about it there.

I saw mention of a billion shares in one filing but who knows how many shares they have since they haven’t filed a Q in 3 or 4 years. So at the time $0.25 X billion (or so) shares = $250 mm market cap. Vs 9.4 million worth of reserves???

So I would have told you stay away and I’d have been wrong but again, this isn’t about an oil company, it’s about a penny stock that no one has any idea what it’s worth. I can tell it’s not worth the $0.70 its at right now. No way. And it may double tomorrow."