Monday – Oil Traders Say “It’s The Economy Stupid”

Oil opened up last night as European traders watched the weather channel to see just how much snow piled up in New England as the second major winter storm plowed across the U.S. Then they got concerned about the U.S. economy and sold the contract into the red handing it off to U.S. traders in the early morning hours where the losses snowballed.  

In case you missed the wrap, click here.

Commodity Watch

  • Crude Oil was up 3% last week. In early trading crude is off a $1.30 to $1.40 to sink just below $90.
  • Iraqi volumes reached 2.3 mm bopd according to the EIA, highest level since 2003 invasion. This is up from 1.9 mm barrels of oil per day (bopd) at the beginning of this year and above levels produced before the 2003 U.S. led regime change. Lots of speculation now that this will provide a big juicy target for martyr wannabes. Also of note in Iraq, over the weekend Turkish planes bombed Kurdish positions in Northern Iraq.
  • Rebels attack another oil facility in Sudan. This time the quaintly named JEM (for Justice for Equality Movement) rebels attacked and shuttered the 50,000 bopd Defra facility in south Kordovan.  China is Sudan's biggest trade partner taking oil and supplying the government with weapons. This is the third attack in recent weeks and I expect this to be an increasingly hot geopolitical sources of oil price support throughout 2008. Sudan produced a record 490,000 bopd in September having more than doubled volumes since 2000. It exported over 75% of its production volumes.
  • OPEC Watch 1: From Bloomberg ~ OPEC may decide to increase quotas when it meets Feb. 1, Algerian Oil Minister Chakib Khelil said, citing rising winter demand. ``The forecasts now point toward a cold winter, and the economy seems to be improving,'' Khelil said yesterday in an interview in Limassol, Cyprus. ``The chances that we could decide to increase output are greater than reducing output.'' Z comment: Weather to date supports his statement but I have not yet seen a change in the winter forecast to a "cold winter". As to economy improving...not from where I'm sitting. As to raising production quotas he was speaking about the Feb 1 meeting and you have to keep in mind that Algeria just received its first quota restriction and was disappointed at how low it was. Set at 1.9 million bopd Algeria could bump up its quota early next year and had thought to receive a limit of 2.5 million bopd as they ramp production.
  • OPEC Watch 2: OPEC increased the expected call on its crude by 100,000 bopd for 2008 in its monthly report today. Still sees global 2008 oil demand at 87.1 mm bopd in 2008, up 1.3 mm bopd from 2007 levels. The IEA pegs 2008 demand at 87.8mm bopd.
  • EIA ups 2008 oil price forecast. Latest short term outlook report calls for oil to average $84.93 next year up from $80 in last months report. They cite continuing oil market tightness, due to tight spare capacity, increasing consumption, weak non-Opec growth, and the ever present potential for supply disruptions. I personally think next year will see oil trade in a broad range of something like $70 to $110.
  • Analyst Numbers Remain Quite A Bit Lower Than The Current Pricing Environment. Analysts are using an oil price of $73.49 in their models for 2008 (with a range of $60 to $87) and $70.43 for 2009. The 4Q oil price deck is $77.59 which also lower than the 4Q average to date for WTI so we should see some healthy mark-to-market estimate increases in coming days in names like APA, CLR, DNR etc.
  • Natural Gas was off 2% last week barely clinging to $7. Last night, gas breached $7 and in early morning trading is off nearly a dime at $6.94. $7 has been key here and a close below that level probably signals a move down to $6.50.


    • Weather Watch:
      • Gas Weighted Heating Degree Days (HDDs) came in at 192, much higher than the CPC's original estimate of 177. This should ensure another triple digit withdrawal from storage this Thursday potentially flipping storage into year over year deficit. So far, December is running slightly colder than normal.
      • CPC estimate for this week: 190 (also normal). The National Weather Service is calling for less snow but continued cold in the northeast, and cold in the midwest, west and southern regions.


      • Once upon a time Tropical Storm Olga is now a disorganized low pressure system due south of central Cuba. No development is anticipated.


Stocks of Interest Today:

  • Refiners: The White House is expected to sign the most recent version of the bio-energy friendly energy bill into law now that the anti Big Oil tax provisions have been removed. The bill does contain requirements that will force refiners to build out gasoline blending infrastructure or pay a fine for each gallon of non-ethanol blended gas produce. Stories are quoting "billions of dollars in capital required". In my way of thinking this part of the energy bill's burden is not yet widely known and could pressure the stocks however it's by no means the end for them (we're talking billions over many years) and their prices are more likely to be tied to the price of crude first, the market second, and cracks third (that list seems backwards but that's the way they trade).
  • SD: The Street is picking up coverage today. 3 Buys, 2 neutrals.
  • (FTO) fire at its smaller refiner in Wyoming. Expects to run a reduced capacity for 30 days or less while repairs are made to the coking unit at its 52,000 bpd Cheyenne facility.
  • (DRYS) takes 30% in Oslo based Ocean Rig, owner of 2 ultra deepwater capable drilling rigs.


Odds & Ends

Analyst Watch: (TGP) upped to buy at FBR, (TSO) upped to buy at Citi, SD picked up with buy ratings at RBC, B of A, and Lehman and peer perform at Bear Stearns and JP Morgan. Amtech research lifts JASO target from $79 to $105.


50 Responses to “Monday – Oil Traders Say “It’s The Economy Stupid””

  1. 1
    zman Says:

    NOV buys GRP for $7.5 billion. This should fuel another round of who’s next in the service arena to get consolidated.

  2. 2
    scoop006 Says:

    Good Morning Z & All,
    Can anyone recommend a broker’s website for trading. Scottrade is still down this morning and I am looking to open a second account.Many Thanks

  3. 3
    kiaora Says:

    Options Xpress is really good

  4. 4
    zman Says:

    Scoop – I second the OptionsXpress and would add StreetSmartPro from Schwab. Both offer timely executions and tools to evaluate potential option trades and automatic execution of strategies (ie, want to do a calendar spread, its a click away).

  5. 5
    zman Says:

    Crude hanging onto 90 for dear life. A few random E&Ps up and all the refiners. Cracks on the rally since last Wednesday and no change in the direction (up) for cracks this am either. I’ll update the cracks and refiner multiple page with the Tuesday post but they remain cheap. The one thing I’d point out is that despite analysts proven ability to both a quarter’s numbers (3Q being a shining example of this) numbers are still too high in 4Q and are coming down almost daily for the big guys. The little ones, HOC and WNR especially are not seeing this action as numbers just don’t get revised as often in the group. Setting up some nasty EPS downward surprises their. Normally I’d say, that FTO the one stand out there but I never got back and the fire this morning may ding numbers on the through put side.

    NG dipped below and then started to from $7. $7 remains key.

  6. 6
    kyleandy Says:

    i have 3 accts scottrade, bank of amer and fidelity and fidelity by far the best

  7. 7
    irished Says:

    not an expert but fidelity is very good, professional and accurate. plus get some free seminars on options etc throughout the U.S.

  8. 8
    zman Says:

    ZTRADE: Out VLO Jan $67.50 calls for $3.10, up 72% since December 12. See post for reasoning on the quick exit and I made trade in around these for a bit. Also given this market’s schizophrenic behavior I’m going to be a little more hit and run with profits at least into January.

  9. 9
    zman Says:

    Wow RIG / DO just getting macked. Looks like DO coming up on support but everyone is crowing about better numbers at RIG which is probably right. RIG looks to be coming into closer to $130 so I’m in no hurry to get back in. Surprising though that the NOV/GRP is doing nothing for the sector.

  10. 10
    ram Says:

    PBR JAN 115’s are still good if missed on initial blast?

  11. 11
    zman Says:

    RAM – I’m waiting for the Jan crude contract to get off the board tomorrow before/if I add more. Missed out on taking a nice profit in those once, don’t want to compound it by getting aggressive in the face of an obviously weak market. As to the story, well it gets stronger weekly from a production growth standpoint.

  12. 12
    ram Says:

    Thanks and Thanks – VLO’s. It would be nice to see CHK do something. The CEO keeps buying shares lately. Are all officers purchases scheduled? If not, how could you tell if it was unscheduled?

  13. 13
    zman Says:

    Ram – don’t know if all of CHK’s officers buys and sales are registered. On the Form 4 you’ll see “planned sale” if its planned.

    Aubrey buys his stock out of the normal course of operations (32 purchases this year) and if you look at the rest of the team, buying outweighs selling 5 to 1.

  14. 14
    ram Says:

    Sorry, I added more downside to PBR by buying the JAN 110’s.

  15. 15
    zman Says:

    could be that or could be oil at LOD

  16. 16
    scoop006 Says:

    Z Is selloff in DRYD overdone?

  17. 17
    zman Says:

    Scoop – I’d guess so as they made an investment that left a bad taste in everyone’s mouth. Stock is cheap, rates are still high but people don’t like the message investing in a new businessline (deepwater rigs) sends about their current business. I’m not one to catch this falling knife although it might be interesting if it can hold $70.

    Oil still clinging to 90. Group still red almost across the board.

  18. 18
    dmharvey8 Says:

    Re brokerage a/cs. “Think or Swim” out of Chicago is the best by far, I think. Small boutique with an amazing trading platform, great commissions too

  19. 19
    scoop006 Says:

    Thanks to all for broker recommendations.

  20. 20
    Dman Says:

    Hey Z: what’s bugging HAL ??

  21. 21
    zman Says:

    HAL down 3%; SLB down 5%. Search me?! Market getting crocked everything energy down from crude and products to NG to all stocks except some upgrades (TSO) and the takeout GRP. Even solars, normally immune to this are getting crunked with FSLR down $15. Better day to get your taxes/expenses in order for year end than for trading.

  22. 22
    kaman Says:

    Initiated small position DRYS Jan 75c at 6.90 – K-man

  23. 23
    zman Says:

    call it the Wild K-Trade! Good luck with those dice K!

    Wow, oil service down 3% on a day with a $7.5 billion dollar merger. unreal

  24. 24
    zman Says:

    Z Trade:

    Adding to Jan PBR $115 calls for $2.05. Brings my average down to $3.40.

  25. 25
    kaman Says:

    Any intel on Ocean Rig ASA (DRYS stake), are they like a mini-RIG? Whats so bad about that? DRYS is a proven volatile stock, is a January call that kuh-razy? Like you said, failure to hold $70 and I bail.

    Good trade on PBR.

  26. 26
    scoop006 Says:

    Kaman Good luck with the Jan’s.Too conservative for me.I bought the Dec $75 .

  27. 27
    zman Says:

    k – more like a mini-ATW. Only saw that it has two rigs. It looks like this is a balance sheet investment for them. Saw CEO of drys took 4.4% of the company personally.

    Scoop = wildman. Seriously though, good luck to you both…this looks overdone to me… group getting crushed and as we don’t live Baltic quotes on the rates…I can’t tell if its part fundamental or just all crappy market.

  28. 28
    scoop006 Says:

    Hoping for that “SANTA CLAUS”rally

  29. 29
    zman Says:

    Hear ya Claus rally. Check out oil at the close, down $0.42 to close at 90.76 Ho, Ho, Ho (heating oil that is).

  30. 30
    scoop006 Says:

    Z Any last words of wisdom prior to market close.

  31. 31
    kaman Says:

    from the Yahoo board (I know, I know….lie down with dogs…):

    “First, the investment today of $160M DRYS cash is not a “short” against the prospects for dry bulk.

    —George Economou (GE) stated unequivocally that the prospects for drybulk in 2008 are atleast as good as in 2007. He has invested for growth in drybulk as aggressively as any owner, with fleet renewall program, and with newbuilds slated for 2009 and 2010.

    —long term (post-2010) for drybulk will be excellent as indicated by massive global energy & infrastructure growth, and investments in ore and coal mining.

    Second, GE indicated that there are few attractive priced options in the dry bulk sector today…either in vessels or in other players. He affirmed that only accretive use of funds is his goal.

    —CEO indicates that captial crunch is having an effect on vessel availability.
    That is great news for owners, as fleet growth will almost cetainly be tempered and exisiting vessel asset prices to coninue strong.

    —CEO is showing great discrimination is not tossing more money at expensive assets that dont ensure accretion. That shows good judgment. Perhaps the analysts might have cheered him making a bid for QMAR, and paying $170M for another Cape……but CEO saw better use of some funds as a seeding toward other better growth options.

    Third, GE is not a novice in oil transports or oil exploration. Further, he is making a capitial investment (buying stock) in what he beleives will be a capital appreciating equity.

    —Look at the number of oil and product transports owned by Cardiff, and prior ownership in oil, and you see a person with broad portfolio.

    —He foresees a sizable captial appreciations, in excess of 12% annually for 5-7 period. Inother words, he sees a doubling of investment in 5-7 years. No guraentees, but a better prospect that increasing the dividend payout.

    Fourth, the investment today is not some wild-brained scheme doomed to failure….wildcating behavior of CEO.

    —look at the mergers in oil exploration….just today, NOV buy GRP for $7.5B. Look at RIG, the largest deep water submersible play, and their valuation. It appears that GE has made a timely, and savy investment.

    —-The two submerisbles to be recharted in the next 12-18 months by Ocean Rig will generate NET daily combined earnings (profit after cost) of about $1M/day, for the typical 5 year contract period. Currently, all of the DRYS fleet generates about $3M/day profits.

    Fifth, the “analysts” are unhappy and beating up on CEO for this move.

    —-Aside from Jefferies analyst, thec overage in this sector has been anything but prescient. If one had followed the advice of these so-called sages just 12 months back, one would NEVER had taken a position in DRYS…..since those “experts” were dubious about the prospects in drybulk.

  32. 32
    zman Says:

    keep your powder dry;

    take note of the fact that the OIH fell into support at 175 but did not break it and the deepwater plays have all bounced substantially in the last hour as MEND issued yet another threat; still the OIH is down double the market, the XOI and XNG are in line with the move;

    Notable exceptions: APA down 3% is a bit nutty, SLB down 4%+ same but I like and hold HAL here but see no reason to add since reason is not in play;

    DNR is trading post split and getting hit for 3%

    SD down on 3 buy recs and 2 holds.

    in all a very unfortunate start to expiration week… only upside is things like OII and CLB which I’ve been patient and not chasing on their bounces have come off nicely. Ditto BTU

  33. 33
    zman Says:

    K – info is info, thanks. Our friend in the sector Bill offers some sage advice on those boards.

  34. 34
    zman Says:

    Should have added to #32. DNE, interesting story, down 10% for no reason (possibly tax loss selling which could drive it even lower)

  35. 35
    zman Says:

    Fun fact of the day. PBR volatility has increased so much today that the last hour’s move lower has left the calls with higher bids than when I bought them.

  36. 36
    kaman Says:

    Dune Energy? Spice-mining on Arakis for the Guild?

  37. 37
    zman Says:

    not desert planet, gulf coast. underexploited assets, new application of capital and technology …lots of potential. I have mentioned now and again but its a low priced single digit midget and those are likely to be sold into year end despite the fact its got stronger management than most of the minnows out there and the fact that they are making their numbers and generating some serious EBITDA. Its just not on the Street’s radar …yet.

  38. 38
    TTupp Says:

    the proble with pbr z is that there is some economic turmoil in brazil last week with the government not being able to re-pass a bill allowing a tax on financial transactions that accounted for 10% of state revenues.

  39. 39
    kaman Says:

    Will look deeper at DNE, thought prevailing sentiment was GOMEX is dead money.
    cheers mates(all in all not too bloody after today)…K

  40. 40
    zman Says:

    T: agreed, their Bovespa has been all over the place so its a combination of that and the international oils being off. Chinese oils were off big SNP, CEO, PTR all down 4 to 6%.

  41. 41
    zman Says:

    K – DNE gulf COAST, not offshore

  42. 42
    bill Says:

    re # 31

    Good summary.

    the analyst were all up in arms. You can listen to recorded cc by going to dryships.com and clickong presentations.

    1. Some didnt like it because they bought drys for it spot exposure to bulkers.

    The ceo said the 400 m is a relatively small investment

    Some didnt like it or nervous about ceo motives as he privately owns 100 ships thru his ownership of Cardif Marine and cardif made the inital investment in Ocean Rig, cardiff flipped it to drys for a 1 % comission.

    So he traded 4 .0 m in commision and had the market cap of drys go down 420 m of which he owns almost 50 %

    the whole sector sold off with Exm down a similar anount so I think the real cause of the sell off is due to

    1. Worries of Chinese slowdown
    2. Worries of US slowdown
    3. Market sell off
    4. Ye tax selling
    5. Recent gains back to 90 didnt hold
    6. fast money

    All i can say is the fundamentals havent changed and they are making money hands over ist. In fact the money they make in 2 months covered their entire investment in Ocean Rigs cash invest

    I think Z likes Rigs and the prospects in this area


  43. 43
    TTupp Says:

    was Ocean Rig ASA a private company?

  44. 44
    ram Says:

    Until the momentum players come back to DRYS, it will flop around it’s BB not bad though considering that is between 70 and 95. The stock and its ownership has credibility issues. The stock has lost 45% in 6 weeks – that also states that alot of money and confidence has gone somewhere else.

  45. 45

    Hi Z.,

    I’ve been out of DECs and consumed with my regular job the past week or so.

    Wow, this market sucks for bulls.

    CHK 40s… well they’ve been in the tank for some time.

    There has to be some great buying opps.


  46. 46

    … And look at VMC maintaining support above 80.

    Go ahead, Z., enter a ridiculously low limit order bid on a Mar 75 VMC, … it’s a good-un!



  47. 47
    bill Says:

    ocean rig is public and trades on the oslo exchange.

    you can get a quote on yahoo ocr.ol

    it closes at 39.10 kroners


    z–what drillers do you like

    I did a little research..

    Ocean rigs only owns 2 rigs

    Seadrills has over 50

    I think Rigs is in this space

  48. 48
    bill Says:

    ocean rigs web site here


  49. 49
    bill Says:

    UDW Market summary cont’d
    􀂃 Market could see some sublet activity because
    operators have been forced to commit to units several
    years before drilling plans are firm
    􀂃 Operators enter consortiums to secure rig capacity
    􀂃 Strong demand for rigs allocated for exploration work
    􀂃 Back-log months for all deepwater units have reached
    5,434 months (~ 453 rig years)
    􀂃 Back-log for ultra-deepwater units is 3,126 months
    (~ 261 rig years)

  50. 50
    zman Says:

    43 – yes, public and thanks Bill
    44 – that money partially went into the solars (next trendy thing for the fast money crowd)
    45 – Q – the market is generating some bargains but they will likely remain that way (save a Santa rally) through year end. I’ll have a list of likables in time for New Year’s resolutions.
    46 – VMC – I’ll nibble at 78
    47 – RIG in particular. $20 EPS in 2010, less jackup exposure than their peers, seeing some hefty contracts in their ultra-deep capable floaters now $500K+per day
    48 – its a very stable long term market. These projects are low F&D cost but also fairly modest IRR (since they are strung out over several years). This makes the projects fairly insensitive to commodity price fluctuations. As you point out the backlog is large so cancellation is unlikely, sublet possible with extra fees.

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