Thursday – Oil Review, Gas Preview + A New Stock!

Yesterday's reaction to the changing fundamentals in the gas market: fleeting. If you were around for the the first few hours following the EIA's report the reaction in RBOB prices (down) would have reinstilled your in the law of supply and demand. It's sometimes hard to tell if the equation is still applicable in a world where speculators dominate prices and the fundamentals often take a back seat for prolonged periods.

And although I never had much faith in the ability of CNBC to report on the energy markets their onscreen antics yesterday prompted me to see if I can set a record for the number of exclamation marks I use. So here goes!!!

Oil Report Review: Across the board inventory increases.

  • Crude - expected up 1.5 million barrels, actual up 1.0 million. This is a meaningless number as far as price directionality is concerned at present. We had a mega-build last week to no effect on oil prices. Gasoline inventories are key right now and I believe that even when production of gasoline really starts cranking in coming weeks that that demand for oil will be supportive of crude prices north of $60 (though not of RBOB which should get laid down pretty hard).
  • Crude Oil Imports - Off significantly. Down 660,000 bopd. They've been running high and I'd chalk this up as an anomaly.
  • Gasoline - Expected up 900,000 barrels; actual up 1.7 million barrels! CNBC called the report "essentially in line". This inspite of the fact that it was "essential double the forecast" and quite the opposite of their resident guest bull Alaron's expecation of a 3 million draw!
  • Utilization - 89.5%. Third consecutive increase but still below the 90% level which is viewed by traders as key in reversing gasoline prices. The MSM press will do a good job of telling you this is the third straight increase in utilization and just when you get excited they scold you with the fact that utilization was in fact higher 4 weeks ago (for the week ended April 13th)! What they don't talk about is the FACT that gasoline production during the period four weeks ago ran only 8.7 mm bpd versus the 9.05 mm bpd it ran as of the week ending May 11th. Two words: product mix.

This Looks Pretty Weak...


...But Production Has Been Rising...Don't Be Fooled By The Headlines!!! 


I would point out that traders are rightfully concerned about the composition of the production growth as gains in the Gulf Coast and Midwest offset lower production on the coasts but I still don't think current lofty RBOB prices are justified by the data.

  • By the way, the American Petroleum Institute reported that for the first four months of 2007, U.S. refineries produced an average of 8.73 million bpd of gasoline, 4.4% above year ago levels for the period and a record. The confusion continues...By the way, if need to check this so you don't think I'm once again off my nutt check the EIA's own Snafu page, yesterday's edition here, they reported it as their top petroleum story of the day.
  • Time For Some Other Snafu While I'm On The Subject, These Drove Gas Higher on the Day Yesterday and Much Higher in the Aftermarket.
    • (COP) - Shut a unit for repairs at it's Sweene, Tx refinery, undisclosed volumes but it will take about a month to fix.
    • (VLO) - Failed restart of its Houston facility yesterday. This will keep 44,000 bpd of gasoline and 63,000 bpd of distillates off the market for 7 to 10 days.
    • Alon shut its 75000 bpd Big Spring, Tx refinery for an undisclosed period while repairs on made on one of its SRUs.
  • Imports - Up Big. At 1.528 million bpd, this was the highest level in a year (which would make sense given prices). This was a 33% jump over the four week average and a 25% increase over the prior week's number. We still have quite a bit of catching up to do year to date however as can be seen from the cumulative data in the following graph with table.


  • Demand Remains Robust. As this falls out of the rest of the EIA's equation it's a little hard to believe that $3+ retail gasoline hasn't impacted demand.


  • Gasoline Inventories Turning The Corner? Better Late Than Never.


  • Distillates: 1 million barrel increase: expected and actual. Stocks continue to skip along the top end of the historic range for this time of year yet heating oil and diesel prices have rallied by roughly one-third since mid January.


Natural Gas

Where I stand on gas before this report is almost cetainly where I'll stand following it. I see gas in the near to medium term falling as low as $7 (but probably not) and ranging as high as $8.50 (but not without a good blow in Gulf). To get more of my thoughts on gas click here.

Consensus: 97 Bcf. Seems a little low as heating demand all but went away and while some late Spring heat fostered a little cooling load, more nukes are springing back into service from maintenance turns relative to year ago levels. The over / under for gas will again be triple digits with a significant selloff only brought about by a significant injection (say 110+). Since the year ago injection was a stout 91 Bcf there's little opportunity to erode the current YoY storage deficit in any meaningful way this week.

  • HDDs - 23, this is really nothing. Down over 50% from year ago, "normal", and the prior week's levels.
  • CDDs - 26, coming up and warmer than normal but still pretty paltry.

Odds & Ends

Analyst Watch: I'll add anything intersting in comments.

Holdings Watch

Calls: (HAL) - yesterday's pairing against SLB did nicely after the company announced a 20% bump to their dividend and got a nod from that Stop Trading guy whose name I dare not speakest.

Puts: No action although looking back I'm playing a dangerous game of roullette with my TSO 115s and 110s.

Stocks: No action but (MCF) is gettng pretty tempting. I'll be taking a hard look at (CLR) today (see below)

All open positions are updated through last night on the ZEB performance tab.

E&P IPO Watch: Hmmm....two names in a week. I'll have to go look at a calendar to see how busy things are getting. Maybe it's a coincidence...

Continental Resources (CLR): Large and In Charge. This is a totally different animal than yesterday's  look at Pin. Here's the ten minute look on this as it's very late and I need to post.

  • Enid, Oklahoma based E&P focused on the Rockies and Mid-Continent with a small amount of Gulf Coast reserves, founded in 1967.
  • Both management and science are seasoned and deep.
  • Technically proficient in horizontal drilling, enhanced recovery
  • They operate 95% of their reserves.
  • Reserves: 118 MMBoe,  86% Rockies and 83% Oil. Nearly all reserve adds in the last five years have been through the drillbit. This is a low exploration risk, resource play. While the preponderance of reserves are in the Rockies the company has  substantial positions in several unconventional plays including the Woodford Shale.
  • Just over half of their current production comes from the prolific and vast CedarHills Anticline. Horizontal development with high pressure air and some water injection with very good results. Well density is low so there is potential to downspace the acreage.
  • They're attempting to produce the Lewis Shale in both conventional sand and siltstone intervals but also unconventional in the shale itself. Results to date have been encouraging.
  • Production: 26.5 Mboepd 4Q06, 28 1Q07. Production visibility is good for strong growth through at least 2009.
  • R/P of 13 years which is likely to fall a bit
  • They've managed to shrink per unit LOE in linear fasion from 2004 to 2006. Unreal.
  • Fairly massive Rockies and Mid-Continent undeveloped leasehold.
  • Balance sheet is clean, and following this offering they're probably a little under leveraged.
  • At $14.35 and with 168 million shares outstanding after the deal CNR is firmly planted in E&P midcap territory. Valued at a little over 5x trailing cash flow this seems very reasonable unless I'm missing something.
  • The CEO retains 71% of the company.

Obviously I need to delve a little deeper but I'll be dipping a toe in the stock today.  By the way, thanks to ED who reminded me they had gone public.

Note to SA Editor. Please do not break CLR out as a separate report. I'll do that myself in coming days. Thankyou.

58 Responses to “Thursday – Oil Review, Gas Preview + A New Stock!”

  1. 1
    zman Says:

    Morning N,

    Nice call copper. Is that housing permits and starts being down so much or is it a metals thing. I used to watch silver and it was a volatile trader too.

    Any thoughts re corn and ethanol?

    Be back shortly after the open.

  2. 2
    zman Says:

    Thank N. On corn it’s got to be the fact that even the cotton farmers are planting corn to chase the ethanol craze.

    TK caught a downgrade at B of A
    NE got a $10 price target increase at C. Suisse to $107.

  3. 3
    zman Says:

    END – move has been overdone, obviously somebody wanted out before Balgownie hit TD. I’d be a buyer here but I want to see something go right for them on the exploration front as a catalyst and I’m pretty heavy now.

  4. 4
    zman Says:

    WTF gasoline? Those refineries weren’t total shutters. This is incredibly strong action!

  5. 5
    ED Says:

    WOW! THANK YOU ZMAN for the writeup on the Continental Resources (CLR) IPO. I wanted to know if there is a website or book you could direct me to that has a solid backgrounder for understanding the oil business and/or evaluating oil stocks so I could get a deeper understanding. Thanks Again.

  6. 6
    zman Says:

    95 Bcf vs expectation of 97 Bcf, like I thought in today’s post, it’ll take a bigger number to hurt gas, which is now back over $8.

    Nice service rally underway.

    Gassy E&P like SWN and gassy major COP really enjoying the data. Can CHK be far behind?

  7. 7
    zman Says:

    Ahhhhhhh – Unions! Thanks N!

  8. 8
    zman Says:

    N – feels pretty spiky indeed and the refiners are recovering with it. ouch.

    Off Topic:

    I was bored so I nominated myself for the bloggers choice awards (somebody had to and I’m a pull yourself up by your bootstraps kind of guy). Anyway, the button at the bottom of the right column will take you can vote for this site. Best Business Blog was the most applicable of choices so if you get any value out of this site at all, please vote. Only one per customer, this isn’t Louisiana!

  9. 9
    Popeye Says:

    You have one vote, mine!

  10. 10
    zman Says:

    Thanks, Popeye. It’s a bit of rigamorole to vote but I would really appreciate it.

  11. 11
    zman Says:

    NE and SWN on fire, everything else doing quite nicely. TSO and SU as well. 🙁

  12. 12
    zman Says:

    Thanks N!

    Icahn into APC, new position

  13. 13
    zman Says:

    Israel lauches airstikes on Hamas. Sounds like things are degerating over there again with the onset of summer.

  14. 14
    zman Says:

    APC August $50 calls taken at $2.10

  15. 15
    Slick Nick Says:

    Where;s the button?????
    You will have my vote

  16. 16
    Slick Nick Says:

    Found it and voted.

    Thanks for your work, lots of great ideas.

  17. 17
    sane Says:


    Philly Fed showed expansion. The market continues to ignore all of the other not so good news. The only good things in the economic indicators where stocks and money supply. They keep printing that money to buy more stocks.


  18. 18
    zman Says:

    Had to step out for a minute.

    Welcome Slick Nick! I only recognize half your names but good luck and thanks for the vote!!!

    Morning Sane! I couldn’t agree more.

    SWN on fire and APC in rally mode.

  19. 19
    zman Says:

    In initial position of CLR at $14.25

    Out half HAL June 35 Calls – Six days, 209%

  20. 20
    zman Says:

    N – probably before the close. Phil jsut let me know that USO started trading options. I’ve been waiting for that for some time.

  21. 21
    zman Says:

    WNR – Out $40 May puts – 50%ish loss.

  22. 22
    Marie Says:

    is this the first day uso trading options, i never seen them before

  23. 23
    zman Says:

    Marie – good question. It kind of looks like it given the 0 open interest and volumes at most strikes. I’ll find out.

    Don’t forget to vote for the bloggers choice awards! Ok, ok, enought harrassment already.

  24. 24
    zman Says:

    SWN up 5%. Natural gas short squeeze in full effect.

  25. 25
    zman Says:

    UNG has options too!

  26. 26
    Marie Says:

    Z- You now have 3 votes 🙂

  27. 27
    zman Says:

    Thanks for the vote Marie! The gals are definitely the better citizens around these parts. lol.

    Art – re analysts vs public. The good analysts ask the right questions. data flows from there.

  28. 28
    zman Says:

    In nat gas the squeeze is definitely on. I think they’re going to try and break it out of that $8.11 gann level. What’s a gann anyway? I’m an FA guy. My TA is pretty basic.

  29. 29
    zman Says:

    Energy Group taking a little breather here now with the Nymex closed. Did something else in refinery land break today?

    SWN up 6% on that move in gas
    APC launched and is at HOD tempting me to DT it.
    CHK,CRK,HK, PQ all acting right
    NE and HAL very strong.

    TK still off a buck on the downgrade. I’ll take that bet tomorrow on the long side if it opens lower relative to the group.

    TSO – ugggghhhh
    SU – same

  30. 30
    zman Says:

    I think higher for crude through weekend.

    Gasoline is a bubble.

  31. 31
    sane Says:

    They always seem to swing too far in either direction


  32. 32
    zman Says:

    I just read BP and COP refinery fires on Phil’s Site.

  33. 33
    zman Says:

    and a MUR refinery according to CNBC.

  34. 34
    Art Says:

    Z-Thank you. I am a little more cynical. Also, I’m not convinced they even know where to look to ask the best questions. Were you able to find any info on that prospect? Thanks, Art

  35. 35
    zman Says:

    Art –

    I used to be one so if I say yes what does that make me? lol.

    As to the EI prospect, where’d you see they were drilling it? Was it in a presentation and did it have a name?

  36. 36
    Art Says:

    They are drilling on EI 346/347. Not to far from Apache’s Tanzanite platform. I heard about it from a presentation. I checked out NFX’s presentations and couldn’t find it. I have communitated with Steve at NFX and they had no comment other than what they have on their web site. I think the name is Sapphire.

  37. 37
    zman Says:

    As far a I know he’s talking about the June contract which expires on Tuesday.

    Art – Thanks…will do a couple of searches but probably won’t find anything. I assume it was a hefty predrill est reserves prospect.

  38. 38
    zman Says:

    Sapphire EI346/347
    NFX operates with a 25% wi
    Ridgewood has 50%
    12,890′ well, began drilling in April
    I found nothing on pre drill estimates or objective etc. oh well.

  39. 39
    zman Says:

    N – sorry, I was being obtuse. I think he’s tracking open interest in contracts vs the date they’d actually have to be delivered…I don’t keep up with that myself.

  40. 40
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