Tuesday – A Few Words About Gasoline & Refiners

Commodities Trading Off A Bit This Morning On The "Resolution" of the Nigerian Oil Workers Strike. I put no faith in the fact that anything was resolved. The people are oppressed, get little to nothing in the way of services from their government and wait in multi-hour long lines to buy gasoline (when it is available at all) in a country that can rank among the top 10 oil producers on the globe. The countries labor Unions began a planned two day strike yesterday but it shouldn't impact production as most of the facilities are automated.

I'm not adding new positions for now (except for the occasional trade) as I'll be out of pocket mid-month but if I were:

  • E&P - I look at any weakness in the E&P sector has a buying opportunity right now. Favorite name right now is (CRK) followed by (APC), (NFX), (CHK), and (PQ).
  • Refiners -  mixed sentiment here. See below.
  • Service - love it. No worries unless natural gas cracks $7 and that's not real likely with hurricane season (I really hate writing that but it's true) right around the corner. Favorites now are NE, HAL, GRP. See more on natural gas below.
  • Tankers - I generally like them right now. Operationally they are very busy but the stocks have been taking a breather of late. Look for them to get off the bench shortly.

Refinery Analyst Watch: I read an interesting BMO report on the refining sector last night. In a nutshell they like the group and are raising estimates due to recent higher than anticipated gas cracks. Important takeaways:

  • Imports have not kept up with the advancing crack spreads. Comment:  past tense. They've been catching up a lot lately and even chasing the higher crack spreads in the gulf coast and mid-continent by abandoning NY for ports in Texas and Louisiana. That ship is righting itself.
  • BMO increased estimates more for the mid-continent and gulf coast regions, where cracks have only recently outpaced (on a percentage of growth YTD basis) the coasts. Comment: Just what I've been saying about TSO having seen the best days of the year for it's mostly west coast priced valuation relative to VLO which could have more room to run.
  • Cracks have risen by 177% vs a 40% rise in the group. Comment: Wow, that looks sustainable.


  • Comment: Stocks like TSO are up a little more than that year to date.
  • The group, as defined by BMO [(ALJ), (FTO), (HOC), (SUN), (TSO), (VLO), (WNR)] is trading at 8.6x their 2007 estimates, below the traditional 10x forward multiple. Comment: I could argue that the peak multiple occurs once the estimates start falling.
  • The refining analyst has never had the sexy job of the E&P analyst since refining is a dull boring grind it out style business with no new discoveries of potential company maker proportions.   I like the BMO guys and I think they put out fairly accurate forecasts. With that said they too think these levels are unsustainable as their average 2008 EPS number falls > 30% from the "toppy" 2007 projections.
  • At present I hold puts on (TSO) and (MRO).

Natural gas broke through technical support in the low $7.80s last week and may be gunning for a test of $7.50. I don't see a serious break of $7.50 in the near future unless: 1) Canadian imports pick up to the extent that someone in the press takes notice, 2) the recent rising heat moderates considerably, and/or 3) Congress passes a bill outlawing storms in the Gulf.

CFTC Watch: The net position in natural gas futures and options on futures remained virtually unchanged as of last Friday's report and as such is still very short by historically measures.

Odds & Ends

Shameless Plug Watch: Vote for this blog as best business blog and continue to receive it free. Just kidding. But please vote.

Analyst Watch: (APC) upped to buy at B of A.

Holdings Watch: As I indicated above I'll be looking for chances to liquidate positions in the next two weeks and not rolling into out month contracts as is my normal patter about two weeks before expiry.  Last Friday''s activity:

  • CALLS: No action.
  • PUTS: (TSO) Added a 1x positions of the June 120s at $4.30.
  • Stocks: No action.

50 Responses to “Tuesday – A Few Words About Gasoline & Refiners”

  1. 1
    zman Says:

    Hello, anybody home?

  2. 2
    zman Says:

    APC upgrade – once again, an analyst is a week late and $4 short changing his mind. lol.

  3. 3
    zman Says:

    Morning Nicky

    Yep, looks that way after a Nigeria induced pre mkt sell off.

    I saw nothing but the 1.8% expected driver growth relative to last year’s numbers on Friday. I’ll dig around.

  4. 4
    zman Says:

    That’s funny b/c the memorial day weekend numbers won’t be included in this week’s report. The data each Wednesday’s report (this week to be released on Thursday) is through the previous Friday!

  5. 5
    zman Says:

    or mnaybe Flynn is assuming that everyone gassed up before the weekend.

  6. 6
    zman Says:

    Gov of Wisconsin proposing a 2.5% gross receipts tax on gasoline and a penalty to prevent oil companies from passing it along.

  7. 7
    jon Says:

    Lot’s of RV’s hit the highway last Friday, so there had to be a lot of gas (& diesel) sold late last week. Probably lots of home equity LOC’s were tapped to pay for it, too.

  8. 8
    zman Says:

    Continental Resources: CLR

    Nice quarter, cont strong prod growth, lower per unit LOE, better basis differential and a reference to cont improvement there.

    Activity: busy in alll areas, ramping in the Woodford.

    Guidance: later in June in an 8K

  9. 9
    zman Says:

    Jon – hear ya LOC’s lol!

  10. 10
    zman Says:

    check out the tanker stocks. en fuego!

  11. 11
    zman Says:

    Funny: June RBOB may have recovered but July is off 1.9 cents, Aug down almost 3 cents

  12. 12
    zman Says:

    N – what’s you best thought there. June gets sold and rolled taking the July’s higher?

  13. 13
    zman Says:

    July RBOB down almost 4 cents now.

  14. 14
    zman Says:

    N – right.

    Nigerian oil workers given 15% pay raise.

  15. 15
    H Says:

    Hey All !

    Whats Up ! I been eyeing things and yawning- Just would like to know if CNBC put any intresting spin on energy today, and /or how much wind they are giving it ?

    Thanks !

  16. 16
    zman Says:

    H – I keep missing the energy segment!

    Guys I need 6 more votes to push the site onto the first page of “best Business Blogs” If you haven’t yet voted please do! Plus, I’ll stop talking about. tia

  17. 17
    zman Says:

    Just saw June gas rolled over and is down $0.05. That’s pretty funny … unless your name is Flynn. lol.

  18. 18
    Denver Says:

    I got ya to 32 Z.

  19. 19
    Rob Says:

    Zman, if you have time in the next few days can you take a look at AENS. Yeah it’s an OTC-BB stock, but it does have potential. LMK good/bad, most likely for long term — wouldn’t sell before 09.(similar to your BQI/END picks)


  20. 20
    H Says:

    No way this oil/ gas selloff contiunes, maybe the stks get a litle sell off/pullback- but the commidity will bounce and by thursday its back up- why–

    well as simple as their not ready to give it up now, to little refining to much demand and not enough in storage- then oil will need be for refining-plu plus –

  21. 21
    zman Says:

    Denver – yau da man!

    ROB – I’d be happy too! I take it you voted?!

    Vote count now 33 – just 5 to go and I stop sounding like NPR begging for your lunch money!

  22. 22
    zman Says:

    RBOB down 9500 points!!!

  23. 23
    Kevin Says:

    Yahoo Finance showing oil inventory report tomorrow. It is actually on Thursday due to the holiday,..correct?

  24. 24
    zman Says:

    N – I saw it down just short of a dime not 5 minutes ago.

    K – yes, Thursday according to the EIA website.

  25. 25
    zman Says:

    Nicky – the RBOB out months are getting whacked as well.

  26. 26
    H Says:

    I just shorted some- nov do and ne-

  27. 27
    H Says:

    mt airlines are beginning to look good—brought them the past few weeks- used scales to but and all are ahead by 2 1/2 to 3 points! so I am booking a little

  28. 28
    zman Says:

    Good luck H but I thought you said back on post #38 that the group was going higher.

  29. 29
    zman Says:

    Russia successfully tested a new MRV style ICBM designed to penetrate any missile defense system.

  30. 30
    H Says:

    I said it won’t last,not that it can’t go lower – and I do think that thurs numbers are set to high~

  31. 31
    Fred Says:

    Short coverings sending WNR soaring after the judge through out the FTC case.

    A lot cheaper to build the MRV’s then it is stopping them. That’s the almost impossible task IMO.

  32. 32
    zman Says:

    H – which numbers Thursday?

    Welcome Fred! I agree completely on both!

  33. 33
    H Says:


  34. 34
    zman Says:

    From Bloomberg:

    Crude oil plunged more than $2 a barrel in New York on signs that U.S. gasoline supplies will be adequate to meet summer demand and after Nigerian oil workers ended a strike.

    Of course gasoline surged for the opposite reason Friday according to these guys. lol.

  35. 35
    zman Says:

    H – I saw a consensus build estimate of 1.43 million barrels of gasoline. Of course, Phil Flynn is out there saying it’s going to be a 2 mm barrel draw down.

    I’ll post the history of pre Memorial Day week changes in gasoline inventory in tomorrow’s post.

    As tomorrow will be a slow news day anybody besides Rob got any data requests or other things they’d like to see analyzed?

  36. 36
    zman Says:

    Vote count: 36. We’re #1 on page two of the ranks which equates to the 10th best business blog in the entire universe. Two more votes, just 2 more will tie us for 9th and 3 more votes will swing us to the front page of the rankings. Thanks to those who voted and remember that here, more than any place else, your vote counts!

  37. 37
    zman Says:

    Power outage at my host has kept the site down for the past 3+ hours. My apologies. Maybe someones’ bike fell on the powerstrip in the garage from which they keep their servers.

  38. 38
    JBosh Says:

    Quick question.

    HK is oil hedged…”floor @ 63 and ceiling @ 80″. If oil drops below 63, they just buy @ the market. Right?

    If oil goes above 80, they can get it for 80. Right?

    So I am having difficulty seeing why they would bother hedging @ 63 as a floor.

  39. 39
    zman Says:

    JBosh – Great Question!

    Floors and ceilings represent the lowest and highest prices they will receive for their production.

    In other words, if they have 1,000 bopd hedged with a costless collar at FL $63, CL $80 that means that for that piece of production if:

    * oil falls to $50 they get to “put it to” the writer of the floor at $63.
    * oil goes to $100 then they end up selling their oil at $80.
    * oil remains between the floor and ceiling they get that price.

  40. 40
    JBosh Says:


    That seems like a really big spread.

    But I guess we really haven’t seen it above 63 in while…..

    Thnx again.

  41. 41
    zman Says:

    JBosh – no problem. Think of it like they bought a put at $63 and sold a call at $80. At the time they were likely just worried about ensuring their capex program so they wanted to make sure to get $63 for a least a piece of their oil production. To make is a costless hedge, they sold a call at $80 (the higher the better as this limits their upside). So in other words, you want that spread to be big with as high a floor as possible. You’ll often see people like CHK with floors of say $7.50 gas and ceilings around $11.

  42. 42
    les Says:

    ANR appears to technically in good position probable cup and handle,triple ma cross and macd bullish crossover

  43. 43
    zman Says:

    Les – no doubt that’s a nice chart. Fundamentals look nice there as well. Thanks. I’ll take a closer look.

  44. 44
    JBosh Says:

    Oh….the spread is more clean to me when you think of it in those terms.

    VLO chart starting to look scarry. ADX strength starting to turn week and maybe stetting up for a trend cross. The MACD crossed a couple of weeks ago. VLO is up like 40% this year already….maybe time for some profit taking. What do you think?

  45. 45
    zman Says:

    Jbosh – as you know I’m not real fond of the refiners up here. The TSO is a little more expensive and has had a bigger run and it’s crack spread have stopped skyrocketting on a daily basis. So a safer play, I think is to take the long vlo, short tso. or just short tso. there are others in the group that are certainly more expensive than tso but you don’t get the option liquidity / small spreads as you do with it.

  46. 46
    zman Says:

    by the way, there’s a new post up this evening where I talk a little more about my thoughts on gasoline.

  47. 47
    zman Says:

    Sambone – don’t poke the bear-ett !

  48. 48
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  49. 49
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  50. 50
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