Thursday – Gonu, Brazil + Oil Review and Natural Gas Preview

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Brazil Watch: (PBR) Union Workers Threaten 5 Day Strike.  This can really rally crude. This is not a "warning strike" as it has the specific purpose of cutting oil production. The problem is wages (again), talks have "broken down", and the strike, while not a certainty, will take some time to get off the ground giving CNBC plenty of time to call your attention to it. The last time they did this was 2001 and Brazil was forced to import extra oil at the time. Brazil is the 8th largest oil consumer in the world and currently consumes all it can get out of the ground and a little bit more.  Obviously, the threat of this strike will be supportive of crude and to a lessor extent gasoline prices into the weekend.

Gonu Update: Weakening. Continuing to weaken, probably shuts the Strait of Hormuz for up to 2 days. No facilities damage reported or likely to be reported as it heads toward Iran whose loading facilities are located in the Persian Gulf and not in the Gulf of Oman. Here's an article on Gonu coming ashore in Oman that reminds me of that "Deadliest Catch" show on the Discovery Channel..."Cyclone Gonu battered Oman's coast Wednesday with fierce winds and torrential rains..." The author later points out that little actual damage has been noted.

More Gonu Hype. Another Gonu story talks about "winds lashing Iranian islands" and 220 knot winds when the storm had already been downgraded to a Cat 1 in it's opening paragraph but concludes with this little tidbit:  "All Iranian offshore oil platforms in the Persian Gulf are working based on their schedule without any interruption," Bahram Narimanian, spokesman of Iran's Offshore Oil Company, said. "However, we have prepared for any possible difficulty." Comment: The MSM (mainstream media) world has become dominated by drama queens.

Cracking Yesterday's Oil Report: An odd report. Massive build in gasoline stocks with slightly lower production and slightly higher demand. Hmmm. A rise in blending components is to blame but the refinery utilization number really got cracked while production of both gasoline and distillates were barely lower on the week. Puzzling math there EIA.  

  • Crude: 100,000 Barrel Build, just on the low side of expectations. I continue to expect oil prices to receive support from a combination of  higher international prices (due ostensibly to low OECD inventories) and refiner demand  here. Notably, imports picked up after the sharp drop last week.
  • Gasoline: 3.5 Million Barrel Build. More Than Double Expectations That Called For A 1.5 to 1.6 MM Barrel Build. The surprise jump in gasoline stocks resulted in the YoY storage deficit shrinking from 5.4% to 4.2%. From the chart below you can see that the gasoline stocks situation, while by no means in "safe" territory, is quickly righting itself.


  • Utilization Fell To 89.6%. This is a pretty big drop and it muted the impact on RBOB during the day (although not on the refining sector which suffered it's largest one day drop in recent memory). Gasoline production however dipped only 36,000 bopd to 9.222 mm bpd.


  • Imports Continued to Run High At 1.5 mm bpd. Off just 100,000 bpd from the prior week but still very close to a record.
  • Demand ...UP? Pretty Counterintuitive. The EIA's demand numbers fall out of an equation that includes four week moving averages and don't count the import of blend stocks. Pretty suspect. Either way, the number was only slightly larger and in no way reflected the "holiday driving surge" in demand some had been expecting.


  • Days Supply - First time in I can't remember how long that this indicator has risen. Ok, I counted the dots on the following chart. It looks like this is the first noticeable uptick in 17 weeks.


  • Distillate: up 1.9 million barrels, again more than double expectations. The entire build was attributable to diesel and CNBC was quick to point out that traders are worried about a possible shortage of heating oil next winter as reason for the recent strength in distillate prices. Last week it was a strong economy and more trucks on the road and one month ago it was a late start to the corn planting season which had a surge of tractors in the field. Once a bull, always a bull.
  • To be fair, higher sulfur content distillate stocks are low right now and the 500 ppm variety hasn't seen a build in many weeks as refineries are busy cranking out Ultra Low Sulfur Diesel as promulgated by the EPA since 10/06.  Refiners were required to produce 80% ULSD.
  • The old stand, Low Sulfur Diesel, was 500 ppm ... the somewhat oddly labeled LSD. Bearing that in mind it's not surprising to see a dearth of the dirtier stuff around.  So it's a structural thing with the lack of one type, LSD, being made up for by an abundance of the other Ultra LSD. And as such, heating oil prices look like this:

distillate-prices-060607.jpgclick to enlarge

  • You might be tempted to think that ULSD prices were low, given that there is quiet a bit of it around but sorry, that's not the case either.

Natural Gas Report Day

  • My Expectation: 90 -100 Bcf Injection. This would bring the YoY storage deficit down from 8 to 7%.  I'm way out on a low limb apparently this week as most estimates appear to be concentrated between 105 and 115 with some higher numbers. Given the drop in imports and an increase in cooling load induced demand I don't see it. Since analysts are setting the mark pretty high this week I'd say the over/under for gas is at least 105. My numbers would certainly be seen as bullish and would serve to keep gas over $8.
    • Imports - Gross imports fell 1.4 Bcfgpd from the prior week
      • LNG dipped a bit to 2.8 Bcfgpd, down 0.5 Bcfgpd from the prior week’s number. Obviously the drop has nothing to do with price but is almost certainly logistical in nature. Maybe the harbors were too crowed with pushy gasoline tankers.. LNG still ran 0.6 Bcfgpd high to year ago levels.
      • Canadian pipeline imports declined as well falling to 8.0 Bcfgpd, down 0.9 Bcfgpd from the prior week. Despite occasional fits of rising imports like the last two reports, this situation is only going to get worse.
    • Weather - Heating Up

      • Cooling Degree Days hit the high of the year at 44. Still nothing compared to summer but it made many more AC units come on for the first time this year.
      • Heating Degree Days fell to 6 from 20 in the prior week.  Note to Al, this is far warmer than normal.

Meanwhile, the forecast: It's Gettin' Hot In Here:


Odds & Ends

Analyst Watch: I'll add in comments.

Admed Watch: Iran has built over a 1,000 small attack craft armed with "anti-cruise" missiles. (read zodiac rubber boats with outboard motors and a guy at the bow with an RPG) apparently with the idea of disrupting traffic through the Strait of Hormuz by using swarming, kamikaze style tactics designed to overwhelm the defenses of the U.S. Navy. Two words for long range: Daisy Cutter. One word for close range: Phalanx.

70 Responses to “Thursday – Gonu, Brazil + Oil Review and Natural Gas Preview”

  1. 1
    bill fraser Says:

    on tankers


  2. 2
    zman Says:

    N – they’re shameless

    Bill thanks

  3. 3
    bill fraser Says:

    are you on the radio today?

    do you have a link for yesterdays replay

  4. 4
    cowboy Says:

    The only thing I’ve seen is the N Korea missile firings. Perhaps they were aiming at a tanker.

  5. 5
    zman Says:

    Nicky Thanks for the levels!!!

    I think the run is the brazil strike

    Bill F – I still don’t know, there may have been a scheduling conflict but it’s kind of like Wayne’s World over there! I don’t have link to the old show either

    N Korea – they’re just feeling neglected in the “most popular nutbag of universe” contest.

    I agree with the oil trader.

    Hey N – did you read my thoughts on heating oil above. Since there’s no combined distillate future you can’t arb it against HO. Too bad. Will people be burning the low sulfur stuff in their homes this winter?

  6. 6
    Kevin Says:

    CNBC will just make up stories to move the market the way they want. Their loyalty lies with the institutions. And yes,…they are shameless.

  7. 7
    zman Says:

    FTO reiterated at underweight at Lehman, TSO and VLO at equal weight

  8. 8
    zman Says:

    big gas number: 110. Man I bricked that one, don’t see how. Should take gas a little lower

  9. 9
    zman Says:

    UNG looking weaker. Gassy stocks seem to be taking it as “in line” and holding up with higher oil.

  10. 10
    bill fraser Says:

    ng res 8.12 8.13 8.14 8.15,8199 903.6275 lol

  11. 11
    zman Says:

    guest analyst on CNBC spot on with his thoughts. market driven by fear and greed, not by the amount of gas in storage or the higher than expected injection rate. He said that even if injections keep this strong pace nat gas may not fall because people won’t let this go.

    I think if $8 falls as a close gas may start to wake up to the fundamentals (sell off a little) but it’ll be brief and just a short covering opportunity for a shorts and a dip buying op for the many longs who have gone to the sideline with fat profits of late.

    Stocks will take a hit initially with that fall through $8.

  12. 12
    zman Says:

    Bill F – red that article re tankers. Charter % of business varies from co to co. Do you know who is most exposed. As I understand it, contract rates are up this year and for most companies, contract far outweighs charter business. Am I wrong?

    Before OPEC decides to open the spigot (Sept 07), the tanker rates should start marching higher.

  13. 13
    zman Says:

    With that said it’s probably wise to have close stops on CHK, CRK, SWN, KWK, CRZO and other gassy stocks if you’ve got em.

  14. 14
    H Says:

    I got great news today,….My uncle who is a senior cit, and been around the block, a few times, who is one of those old wise men,did something I didn’t —

    I give him 5 to 15K , each december to invest in my IRA, and he called me today , and told me he brought CROX with it, at around 41–in jan —and that he sold 85% of it this morning for more then a double!!!!!! Now he’ll sit with the cash…he put me into vanguard Winsdor2 about 10 years ago, and its been great …hes been adding and reinvesting the payouts in the fund and its just peachy!

  15. 15
    zman Says:

    Nicky – Re NG. I’d be shocked to see it make a run below $7.50 this summer. Too much heat demand, storm fear, falling Canadian imports making the news.

    However, if injections keep running triple digits nothing can save it from a sharp correction in the Fall, maybe even sub $7.

  16. 16
    zman Says:

    NG teetering. Hit sub $8

  17. 17
    H Says:

    CSFB is rasing , OXY price target today along with kbr…they rasied oxy from 55 to 63, and kbr gets a 30 and an outpreform-

  18. 18
    zman Says:


    Good story on coal drivers this summer. SO2 allowance prices have gotten out of hand. If we get an energy drop it’s probably worth looking around for PRB (low sulfur) dominant coal players – BTU is the biggest there. It would be nice to find a smaller player with a higher % of low sulfur coal reserves.

  19. 19
    zman Says:

    TSO through $60 despite the rally in RBOB.

    MRO falling fast after a $2 low volume surge this morning.

  20. 20
    H Says:

    Whats with the bleeding in OIH?

  21. 21
    zman Says:

    OIH cares a lot more about the price of natural gas (which is looking a little shaky) than the price of oil.

  22. 22
    zman Says:


    Hear ya massive complacency. The problem is that I just don’t care. 😉

  23. 23
    H Says:

    Thanks Z , what I throught, just looking to see if anyone made a comment on the street or some news….

  24. 24
    H Says:

    I siad yesterday the oih will go down and sell off more today, and get some hoy money and air released…tuning in further !

  25. 25
    J Says:

    Z, you are correct about people burning ULSD HO this winter. One issue is going to be distribution. Shipping HO through pipelines and storage at terminals is going to be dicey. Just a little LSD cross contamination can turn a batch of ULSD into LSD pretty quickly. I’m hearing that transmixers are maxed out, so it will be tough to recover ULSD once it is contaminated.

    I guess if there is enough contamination of ULSD, that could produce a glut of HO. Looks like it might turn out that it is just cheaper to produce ULSD HO than deal with contamination issues. I think we will start seeing the spread between HO and ULSD start to disappear over the coming months.

  26. 26
    bill fraser Says:

    z..Tanker companies employ 2 strategies. One locking up their ships with long term charter deal 1 to 5 years, other’s play the spot market. Some employ both.

    So in a period of rising rates, you want to buy the spot players. In a period of declining rates, i think you want to avoid them all , but the charter time companies will lose less.

    Some companies pay out all their cash flow in dividends and some investors pay up for the dividends, NAT is like that 100 % spot and 100 % payout

    Actually rates are softer this year vs last as more new ships are delivered to meet the demand. Actually rates drop in the summer months as less oil is shipped relative to the winter months

    the analyst has been a perma bear but eventually he will be right

  27. 27
    zman Says:

    J – Thank you very much!

    NAT 100% spot?! So you don’t see spot rates rising from the current summer lows in September in the even OPEC ups production quotas?

  28. 28
    zman Says:

    CNBC just said the big port in Oman is close again. They really need to read this blog!

    MRO finally starting to weaken as n gas takes a little further trip below $8.

  29. 29
    Stephen Says:

    That Daily Sentiment Index is a very worrying number. I’m still hoping for the pre-election year summer rally before an autumn crash.

    I was just wondering Nicky, do you know what the name of the technical pattern is in a bull market, where there is a rally, followed by a correction, then a steeper rally and correction, then a steeper rally and correction, until the rally is almost vertical, then a crash?

  30. 30
    H Says:

    FRO Getting taken to the woodshad again, z…you metioned it for a trade the other day, althrough you did say you were just toying with the idea and its something you would watch…what do ya think now…I’m a bit negtive-would like to buy and flip it for a bounce..

  31. 31
    zman Says:

    H – I got spooked by the broader market on that one (thankfully). Bill F is pretty negative. I think they get a bounce when things settle down although they had some news out this morning which took them down again early. Haven’t really figured out the impact of it. You’re right though it was just for a bounce. Still toying.

  32. 32
    H Says:

    OK I did it got my but into fro at 41.1…

  33. 33
    zman Says:

    H – gutsy move mav. Still it’s down like 13% from Tuesday’s close.

  34. 34
    bill fraser Says:

    I loved the tanker stocks. in fact, that’s where I invested first about a year and a half ago. That interest, spurred me to investigate the whole energy sector which brought me here, recently.

    My negativity is mostly due to price of the underlying stocks rising above the tangible values of the companies.

    Topt,osg,and TNP trade at a discount..all others a premium to their “assets values”

    So if i had to own one, id buy one of these Topt,osg,and TNP.

    i think rates will go up in the fall, but the rates always go up in the fall, but i think they will be flat to down on a year to year basis 2007 vs 2006

  35. 35
    H Says:

    O My looks like more drubbing on oih to come-

  36. 36
    H Says:

    Hey anyone have puts?

  37. 37
    Fred Says:

    The news out was they sold off their Sea Production company for $67 Million. FRO also paid a $1.50 dividend earlier this week. I think folks were hoping for a share distribution, like with SFL, but seems to have been sold off instead. FRO debt matching market cap, i don’t own.

  38. 38
    zman Says:

    Sieg! MRO finally negative.

  39. 39
    zman Says:

    Thanks Bill and Fred.

  40. 40
    zman Says:

    Half out HK ~ 50% gain.

  41. 41
    zman Says:

    got stopped out of my little CRK call position for a 15% loss.

  42. 42
    H Says:

    Like I said yesterday. OIH will sell off more today, and my reasons are simple, as what gose up sooner or later comes down, plus mix in some t&a and other concerns, I have, I am not seeing the selling I think is about to be unleashed, yet, but we may see it soon…bar any oil news thats ultra bullish.

  43. 43
    Denver Says:

    Pleaaaaassssseeeee Nicky,
    Don’t give up.

  44. 44
    zman Says:

    Sorry Nicky – I have been locked out my site since around noon. Power failure at the remote host server site I’m told. My host promises to be better tomorrow.

  45. 45
    Denver Says:

    Thanks Nicky

  46. 46
    Kevin Says:

    Nicky,..With all due respect,..I heard the same stuff in Feb regarding the subprime mortgage issues and the overseas market “collapsing”. Interest rates are an issue because this market (for whatever reason) has priced in a rate CUT and it is clear that the bond market isn’t suggesting that anymore. Suffice to say, This will be a blip once the rate hike possibilities are digested and the panic is stripped out. Something REALLY BIG has to happen to break this Bull market run. May I suggest a Democratic President in office (thus wiping out GW’s economic incentive package (capital gains tax sut for the rich)) or Christmas Retail sales that are Horrible,..etc… Bond rates fluxuate and this ultimately,..to me,..will be a buying op next week. GL all.

  47. 47
    scoop006 Says:

    Nicky Please continue to share your thoughts on this board. I for one find your analysis informative and educational.

  48. 48
    zman Says:

    Nicky – I, of course, could not second Scoop’s sentiments enough.

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