Wednesday – Oil Inventories

Phrase of the second half of August 2007 so far: Cash is king.  Jittery market participants continue to sell the bumps not only in equities but also in commodities from crude oil to gasoline. I'm still not ready to bargain hunt and the last several tests of the waters have been met with immediate reversals.

Crude Oil Trading Just Under $70. The September contract went with a sharp decline yesterday. October fell a little less and is up slightly in early morning trade at $69.80. A much weakened Hurricane Dean is about to hit the Bay of Campeche and the Cantarell oil field in a story I read this morning "analysts" don't expect much damage to the Mexican offshore fields despite the fact Dean is expected to quickly strengthen in the warm southern Gulf waters because "those platforms are in shallow water"...so I guess we should all breath easier. 

Oil Inventory Day (from the Bloomberg Survey)


Crack Spreads Are Beginning To Firm Up After A Three Month Slide. Cracks appear to be making a stand at levels which put them roughly in line with 3Q06. I'm not jumping back into the refiners on the long side just yet but I am getting less bearish as the slide flattens. In coming weeks, attention will increasingly shift to distillate stocks which are at pretty middle of the road levels for this time of year in aggregate but in short supply in the higher sulfur variety due to regulations passed last fall. 


Refiners Have Suffered Since Their Market Topped In Mid July. Way back on July 13 I wrote this about the refining sector. Since then the independent refiners have fallen on average 20 to 25%. They probably will be targets for more sales until Bernake comes to the market's rescue as fund take profits from whatever they have that's up to meet cash needs. Further, estimates have finally started to fall in tribute to the preceding crack spread charts and the high demand season for gasoline is coming to a close. Finally, some of them as you can see from the following table, are still expensive (well, as refiners go) and I think they need to fall more before I'd be interested. But I am warming up to the idea and I think that later this summer or perhaps early this fall, assuming we have a calmer broad market, these stocks will make another leg up. For now patience rules.


Holdings Watch:


(APC) bought the September $50s for $1.40. Last bid $1.05. Bottom fishing is for the birds right now. Anadarko did announce a second deepwater discovery off Ghana this morning (actually a long range stepout to their previous Mahogany discovery potentially meaning this structure is larger than previously thought) but it probably won't get much attention.

Odds & Ends

Analyst Watch: (TLM) cut to hold at Matrix (well, there's no accounting for taste...maybe this gives me a buying opportunity), (E) raised to outperform at Credit Suisse.

China Play - Thank you Jimbo, Stephen, Bill, Dr T & Co! Got a question or thought about a sector but you're uncertain as to how to play it? Post it here! Someone (in this case several someones) from the community always has a quick response and it's often not me! In response to my question about dry bulk carriers that could help China meet their growing new for imported coal I was inundated with names and I'll do some reading over the weekend on them. Thanks gang!

Congrats To Bill On His Dry Bulk Score! Yesterday in comments Bill responded to my query for dry bulk plays (he's been good with the tankers so I thought I'd check) and he responded with:

I am in (DRYS) in a big way (dry bulk shipper). They release earnings tonight and i expect them to beat the estimates. how does 3.00 vs 50 cent’s sound to you? Caveat big run up and leveraged and most everybody is expecting a pop in the stock so it may be priced

After the close, they beat and rallied 6.5% before the open. Nice Bill. Hey, while I've got your attention, how'd the (FRO) quarter look?



84 Responses to “Wednesday – Oil Inventories”

  1. 1
    zman Says:

    Tullow Oil, the operator of that APC discovery (Hyedua 1) off Ghana calling it a significant find and says wireline logs indicate this well and the previous Mahogany well are linked.

  2. 2
    bill fraser Says:

    Thanks Z.

    Regarding Fro..not to bad. here is a link to their presentation. It should be up a bit today but Id avoid the tankers for the time being. check out page 25 and fro’s comments on current spot rates ..their words “in doldrums”


  3. 3
    zman Says:

    Thanks Bill…I’m trying to look through the value on them but I’m not in yet. Also, looking at some of the LNG haulers (TGP, GLNG). Talk about busy times ahead: short, med, and long.

  4. 4
    Jason Says:

    Z, any feeling on natural gas? We have heat in the Southeast (you recently mentioned it as the most ng intensive cooling area), we’re approaching peak Hurricane season, and we’re nearing a price level when some wells shut down. Seems like it’s all lined up.

  5. 5
    zman Says:

    Jason – agreed it’s lining up BUT we do have some near term pressures: higher than expected imports, a bit of overall cooling form the record temps of the prior weak, no hurricanes currently visible, and a crappy broad market despite today’s Ben rally. Everyone is focused on storage levels and not what the cost of getting it this high has been nor the weather factors that contributed to the surplus (ie, weak start to summer).

    If men and machines are stretched pretty much to the limit (ask Markkk if you don’t believe me) how do prices come down and operators afford those men and machines. It took 20 year record activity level to boost production at all and now that we’re here gas prices are weakening. Not for long. As you say, it’s all aligning but its at my support levels which always makes me nervous. And traders don’t care about the costs, just the high levels. It may take a PR or two to stabilize this market.

  6. 6
    Nicky Says:

    Nat gas – there WAS support at 5740 and next is 5460. We should be near the end of iii of i of iii down.

  7. 7
    zman Says:

    PBR / PTR – would have been good as speculated in yesterday’s post but I didn’t bite.

    XOI bouncing nicely but does it hold?

    Nat gas continues to fall.

    I’d say we get another big crude draw expectation next week with Mexico ostensibly down for at least 5 days this week. Of course, if Mexico really gets hit the DOE says it stands ready to open the SPR.

    By the way, if we get a bigger than expected draw in crude (again) a rally in crude/uso should yield a nice pop in EOG and OIH. EOG is currently flat on the day and I’ll have my finger on the trigger at $2 for the EOG 70 calls. In OIH, I already have the OII $60s and HAL $35s.

  8. 8
    zman Says:

    Also, VLO long if distillates disappoint again.

    On nat gas, it’s pricing in some pretty big injection numbers now through Oct. No support on the September contract as you can see here


    at least until you get back into late 2006. This is where Nicky sees $4 and I eat a hat which WON’T HAPPEN.

  9. 9
    Nicky Says:

    It won’t get to $4 or you won’t eat your hat?

  10. 10
    Nicky Says:

    WTI build of 1.9

    RBOB draw of 5.7

    Distillates build of 1.3

  11. 11
    Nicky Says:

    Ha! Now interviewing traders at the Nymex who only two weeks ago were saying WTI was going way higher. Same guys now saying way lower!

    Joe Kernan took Addison Armstrong to task this morning about his $85 call for WTI. When asked if he was putting his own money on the line he said definetely not I only invest other people’s money.
    How reassuring!!

  12. 12
    zman Says:

    Back from the MN1.com show. Anybody listen to that thing?

    This report is not bad news for refiners.

  13. 13
    zman Says:

    Nicky – it won’t reach $4 so I won’t be eating any hats!

    That crude build makes sense in light of the last couple of week’s big draws. I think oil is moving up a bit now b/c this lessons the likelihood that OPEC will need to move (of course this also depends on the degree of any disruptions from Mexico)

    In the cross hairs for new longs:

  14. 14
    sane Says:


    2.5 Build in Crude
    4.6 Draw In Gasoline
    1.1 Draw In Distillates

  15. 15
    zman Says:

    Thanks Sane – pretty close except on distillates and since I give them more credence than the EIA it’s another bit of bullishness for the refiner argument.

  16. 16
    codydog Says:

    z-I tend to think OPEC and the Fed are in the same boat – they dont want to be seen influencing an election and then suffering the wrath of the losing party. Simplky too much at stake. Although i disagree with El D’s thesis, he’s right in that energy prices will subside.

  17. 17
    zman Says:

    House expected to pass energy bill chock full of clean coal incentives today. EEE benefits from this kind of talk and I like what’s left of the new management team there (Collins is very smart) but I’m a little unsettled by former CEO Sexton’s departure. Anyway, these are the clean coal (Kfuel) guys and the stock has been just battered. Might be worth a little bump. The bill will never pass the president however but it may give the coals some boost.

  18. 18
    El Diablo Says:

    A word of caution: won’t and never have no place on an investing site…

    Maybe it should be added to Sambone’s list:

    Rule #x: Forget the words “won’t” and “never.”

    Welcome back, Z, didn’t think I was gonna let you get by with that one did you? $4 is my ‘re-assess’ point…

  19. 19
    zman Says:

    Cody – I’ve been saying $67.50 oil for quite some time now as a near term level. Below $70 I don’t think OPEC lifts a finger but they need to get a handle on the cheating which has become increasingly more obvious in recent weeks.

    As far as natural gas goes, I don’t see it a whole lot lower but I’m in the minority and it is a highly volatile commodity. If it spikes lower I think that’s all it will amount to…a spike and then the mechanisms for higher prices I’ve outline will come into play.

  20. 20
    zman Says:

    EL D – I think it’s safe to say I won’t eat my hat but otherwise you’re right, those words have no place just about anywhere.

  21. 21
    sane Says:

    Gasoline demand jumped, but looking at it by PADD the big draws were in the lower atlantic and gulf coast, which to me looks like people in hurricane areas were stocking up for generators and etc…

  22. 22
    zman Says:


    When I was in Houston the big electronic signs read: HURRICANE FORMING IN GULF, KEEP GAS TANKS FULL. There were lots of gas lines.

  23. 23
    zman Says:

    XOM and EOG are trading in lockstep with USO which is breaking down now.

  24. 24
    El Diablo Says:

    There is still a stubborn notion (in the market) that energy will never (and can not) be bad again. And not only that, but that it really won’t be bad for the next couple years from this historic peak. Forget about my non-consensus thesis, just contemplate that notion, and how (nearly) every time that any market has held that belief, the end was near.

  25. 25
    sane Says:


    A lot of storms here in the midwest here too, knocking out power all over. Lots of generators running.

  26. 26
    zman Says:

    This big swath of storms is eating into demand in two ways: reducing heat and to a much smaller extent, knocking out power according to the EIA’s nightly report.

    Anybody got a lead on gas storage consensus. I’d think it’ll be in the 30 to 40 Bcf range but I haven’t worked it up yet.

  27. 27
    jimbo Says:

    FDG is up almost 9%. The power of the zman board! 😉

  28. 28
    Sambone Says:

    Lesson Six – “It isn’t as important to buy as cheap as possible as it is to buy at the right time.” Jesse Livermore

    PS Did you ever think you would see a headline in the Wall Street Journal like this?
    “Rise in T-Bill Yields Is Some Relief”

  29. 29
    zman Says:

    Jimbo – LOL!

    Sambone – I never need to catch the bottom or top 10% of a move. Especially in options.

  30. 30
    Nicky Says:

    Z – nat gas hit 4.050 a year ago so I therefore see no reason why we can’t get there again.
    From a TA point of view it needs to undercut that level to put in a final low. There is a more bullish alternative but it is fast fading.
    If there is no disruption from hurricanes I see absolutely no reason why we can’t be at that level in September/October.
    FWIW my favourite amateur weather forecaster says that whilst we are going to get more storm activity he is not expecting one to make a US landfall.

  31. 31
    ndog Says:

    fdg got a couple of upgrades today. like the div but its a perennial disappointer on the earnings. if its not tire issues its something else

  32. 32
    zman Says:

    If it happens, it’ll be very brief. From that chart you can see it was down there for all of a few minutes. That’s a purely technical move and I would say it sets up one hell of a buying op. I think the press releases have been formatted for months from the E&Ps and will come out sooner rather than later given the higher differentials to Rockies this year over last.

  33. 33
    zman Says:

    TRADE: VLO $65 September calls at $2.40.

  34. 34
    DrT Says:

    Z, what about lost mexican ng production? Over 2bcf/day lost for a least a week. And I thought the water being shallow meant more likely underwater pipes disrupted. And the famous mexican construction.:>

  35. 35
    zman Says:

    Dr T – I agree on the shallow water …sorry if the sarcasm didn’t come across well about breathing easier over analysts thinking that shallow meant less damage.

    Their production stays local as far as I know. Don’t think it would impact us much but if there is damage they could be pulling a little more across the boarder from Tx to Az to Ca.

  36. 36
    zman Says:

    Nicky – any thoughts on TA on XOI, OIH?

    Also, anybody see the gas consensus injection number?

  37. 37
    Nicky Says:

    An injection of 30 bcf.

  38. 38
    zman Says:

    Thanks N.

    Was thinking of you when I came across this:


    I think I could use rice paper or maybe sushi seaweed rolling materials.

  39. 39
    zman Says:

    PBR up 4% on yesterday’s news plus it was due a rebound. PTR in the same boat and marching higher.

  40. 40
    Nicky Says:

    Z – that is so funny! We are gonna want photos you know!

  41. 41
    Nicky Says:

    XOI and OIH both look like they are working on their corrective retracements and look like they have further to go before turning down again.

  42. 42
    zman Says:

    The whole anonymity thing kind of precludes photos! But again, I don’t think it’ll be an issue.

    Thanks re the two index comments. That’s what it looked like to me too. What do you make of heat and RBOB here?

  43. 43
    Nicky Says:

    RBOB is further along in the count than both WTI and distillates ie it has been leading the way for months now.

    Distillates has a lot of support in this area but if it goes we should see a move back to the 19150 area if not 18900.
    It looks to me as if it is need of another leg lower but like WTI should be nearing the end of this move and we should then see ii higher.
    RBOB too looks in need of another maybe small leg down. Support is at 18450 and then 18200 and 18050. It will then embark on a wave iv correction.

  44. 44
    zman Says:

    Looks to me like the gas number should be at least 35 if not 40 Bcf injection tomorrow which would be a disappointment vs the Street’s 30 Bcf number. Potential hedges in SWN, KWK, LNG, and UNG.

  45. 45
    zman Says:

    TRADE: just as a hedge taking a little KWK 35 put action in advance of tomorrow’s storage number.

  46. 46
    Stephen Says:

    Pretty wild swings in MDR, it was down 10% and now back up 10%.

  47. 47
    Stephen Says:

    In one week that is.

  48. 48
    zman Says:

    MDR – what’s up with those swings…don’t see any news…is it just the OIH gyrations being exaggerated in their stock?

  49. 49
    Stephen Says:

    I think, they are trading with the wrong group, the hot-money infrastructure group: FWLT, JEC, FLR, and the, I think, ridiculously overvalued SGR.

  50. 50
    rammastr Says:

    ZMAN do you believe VLO is going back to the low to mid 70’s soon or is this a quick trade like KWK?

  51. 51
    Fred Says:

    Z – Guess it’s just sit tight and watch for now. I did add some more UNG below $36 today.

    I have been making money recently of the swings between DUG and DIG but out of both currently.

  52. 52
    rammastr Says:

    NICKY – S&P is encountering alot of resistance at 1460. Are we approaching another downdraft?

  53. 53
    zman Says:

    R – at this point I’m happy to see a trade that works on the long side. I’ll be quick to guard profits here. As far as prices go, I think it should get back into the high $60s to start. Really depends on oil and products. I don’t see oil much lower in near term and that would give gasoline and heat a chance to bounce a bit.

  54. 54
    Sambone Says:

    Here is an interesting slide from the EIA.

  55. 55
    zman Says:

    more on refiners: cheap is outperforming expensive but just barely. Tried to snag some TSO long but missed among the cheap ones.

    FTO is kind of mid priced and could enjoy a pretty big snap back rally.

    WNR and HOC could put in a big run here…I’m not too comfortable in those names but HOC is illiquid and prone to big moves. Spreads are some of the smallest I’ve seen for them in recent memory. Might take a little long.

    Nicky – I second that opinion request re the S&P.

  56. 56
    zman Says:

    As far as TSO goes, they’re second cheapest in the group but you’ve got to figure they have the most room for improvement given the latest stocks data which showed a sharp decline in west coast gasoline stocks but higher production there. I’ll probably just pay up and buy a little here, with the assumption that I’ll be adding more lower if it doesn’t open higher on the open in the morning.

  57. 57
    zman Says:

    Sambone – that’s exactly what the EIA and IEA have been harping about. That chart assumes that OPEC boosts production beginning in October. Although I think they might be a bit overly cautious that kind of thing will help to support oil, I think in the upper $60s.

  58. 58
    Stephen Says:

    Here is my naive narrative:

    We are stuck in a trading range between 1450 and 1470. The drop from 1450 to 1405 was pure panic, with the financials and XLF actually rising and hot stocks being dumped, fueled by the carry trade unwinding, but that was crazy as the BOJ is not going to raise rates anytime soon, adn the fundamentals of the carry trade remain. We can’t go above 1470, because no one knows how big the subprime mess will be.

  59. 59
    Fred Says:

    Z – I picked up some long VLO and TSO.
    Hope we can make some $$s there. Thanks

  60. 60
    zman Says:

    Little service shopping:

    Looking at calls in HAL $32.50s, RIG $105s, DO 100s. I know that last two are up a bit but the fundamentals are strong and the MMS lease sale was very active and highly focused on the deepwater.

  61. 61
    zman Says:

    Fred – GLTY (for Big H that = good luck to you!)

  62. 62
    zman Says:

    OK, who picked off the RIG so cheap?

  63. 63
    rammastr Says:

    The reason why I inquire about the S&P is because certain stocks tied to program selling will get caught i.e. HAL.

  64. 64
    zman Says:

    VLO just issued statement saying no crude supply disruption seen from Dean which at first blush sounds like a “well dub” kind of thing to headline but it means they’re comfortable with no long term disruptions from Pemex facilities (which is where they get quite a bit of their oil from). That may be bearish for crude prices.

  65. 65
    zman Says:

    EOG getting taken to the wood shed – no obvious reason.

  66. 66
    Nicky Says:

    r – yes resistance at 1459 -1460. We could turn down here or run on another 20 points or so and then turn down. Move up certainly looks corrective right now so I am expecting it to roll over.

  67. 67
    zman Says:

    TRADE: RIG $105s for 1.80

  68. 68
    zman Says:

    Dean impact dribbling out: Mexico says 70% of oil city of Ciudad del Carmen flooded.

  69. 69
    scoop006 Says:

    Is there a trade off post #68?

  70. 70
    rammastr Says:

    NICKY – Does “roll over” mean that this will be wave 3 that will take us to new lows?

  71. 71
    Nicky Says:

    R – it may be a b wave lower where we could test 1400 again and then see another bounce or it could be the start of 3 down. Need to see a few more days of trading for it to become clear.

  72. 72
    zman Says:

    Scoop – na, just accumulating dribs of information on possible impacts. Many were quick to brush off the impact but anything termed an “oil city” should not be flooded. Unless its Oil City, La which I toured last weekend, it’s likely to have an impact on getting Maya crude to the US. It may not affect VLO but it could impact some of COP and MUR’s activities. They haven’t put any PRs out that I’ve seen.

    Nicky – say no to #69, lol.

  73. 73
    zman Says:

    TRADE: TSO – start pos, very small, and probably think man was that stupid tomorrow as per #56 above I ended up paying up $1.70 for the Sept 50s.

  74. 74
    zman Says:

    Interesting acitvity. I know the market is fairly strong today but energy, which has been weaker looks to be attempting to close at HOD on XNG XOI and OIH could make a run on 170 as well. Seeing best levels of the day on refiners.

    Did anybody listen to me on MN1 this morning? If not I’m going to can that idea as it’s not a value add.

  75. 75
    zman Says:

    wow pbr / ptr

  76. 76
    zman Says:

    Little HK making a stand just over $15. This is one people liked at $17 only 10 days ago. Story remains the same albeit with lower nat gas. Like the strength and may add back to longs but not today.

  77. 77
    zman Says:

    Ok, now I’m glad I paid up for the TSO.

  78. 78
    rammastr Says:

    Will there be any influence on RIG with the upcoming merger?

  79. 79
    zman Says:

    R – 2Q E&P and major company conference calls were filled with nervous commentary about that. About how the companies hope the new bigger RIG won’t bend them over on day rates negotiations of long term contracts given their greater leverage/ size.

  80. 80
    rammastr Says:

    Thanks ZMAN and NICKY. I hope wave “3” to the downside will be several days from now.

  81. 81
    Nicky Says:

    R – I gave the retracement levels the other day for wave 2. But this can go to 13,800 on the dow….

  82. 82
    Nicky Says:

    First Enercast predicting a build of 25bcf for tomorrow.

  83. 83
    zman Says:

    Thanks Nicky …they’re pretty good but I’m thinking a bit higher than that.

  84. 84
    rammastr Says:

    Nicky – Thanks and I wrote them down this time. It looks like we are only about 100 dow points from the first retracement and this coincides with only 10 additional points to about the 1474 level on the S&P for potentially rolling over.

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