Thursday – Gas Preview & Oil Review


In Today's Post

  1. Holdings Watch - added an opening position in (QBIK), added to July CHK calls
  2. Commodity Watch - gas #s preview / oil #s review
  3. Stocks We Care About Today - a little Haynesville acreage study
  4. Odds & Ends

Holdings Watch: Wiki tab is updated.

  • (CHK) July $60 calls added for $1.55. This brings my average cost in this position to $1.67. I may leave this July position on board when I am out of pocket at the end of this month. I will be exiting my June call position opportunistically in the near future.

Commodity Watch:

Natural Gas rallied $0.16 despite another down day for oil closing at $12.38 as gas is up $0.90 in the last 4 sessions. I continue to think that gas will remain aloft (north of $11 and probably north of $11.50) in the near term unless we see a sudden ramp in LNG shipments (something that will eventually occur as prices rise since after all there is no cure for high prices like high prices) AND a break in the recent heat wave. If you think about, we really saw no shoulder season this year...we went from heating to cooling with very little Spring-like weather in between. This morning gas is trading up another dime in early trading.

Gas Storage Preview:

  • My Number: 100 Bcf Injection
  • Year ago: 110 Bcf Injection
  • Last Week: 87 Bcf Injection
  • 5 Yr Avg: 99 Bcf Injection
  • Weather: Warming Up
    • HDD - not meaningful as we have transitioned to the cooling season.
    • CDD - starting to crank up at 31 cooling degree days last week, and expected to rise to 54 this week. Electricity generation was up 6% from the prior week and in line with year ago levels.
  • Imports: down 2.9 Bcfgpd from year ago levels (nearly 21 Bcf less per week coming in)
  • Exports: hard to get current data here but:
    • Jan 2008 ran 1.0 Bcfgpd above 2007 levels,
    • Feb 2008 ran 1.5               "             "
    • March 2008 ran 0.6            "             " 
  • Domestic Production: up 4.7 Bcfgpd as of March. So it is likely that supply is a Bcfgpd +/- 0.5 Bcfgpd higher than year ago levels


  • Street Consensus: 100 Bcf Injection.

Crude Oil fell $2.01 to $122.30 yesterday. This morning crude is trading flat after an explosion at chemical facility in Kuwait, which did not impact oil output, but which does spark concerns that it is terrorism. 

  • Fuel Subsidies Being Cut. Indonesia, Malaysia, India, Taiwan all are either cutting or are about cut gasoline subsides that will effectively raise gasoline prices by 10 to 30% in the next few days. ZComment: its about time.

EIA Oil Inventory Review



API Had A Different Read. The American Petroleum Institute which conducts a more accurate survey of the 3 big numbers (crude, gasoline, distillates) has a different view this week showing a build in crude stocks and it is this number and the higher than expected builds in products that traders saw as a reason to sell oil down yesterday. In my book, the failure of gasoline demand to track normal levels is long overdue and more of a negative sign for the current elevated crude market than any other indicator of late. However, I don't expect oil to capitulate due to this or due to efforts by the CFTC and Congress to reign in spending and I would not expect to see crude below $110 any time soon.

CRUDE OIL -  Oddly Large Draw Down.

Utilization Rallies, Crude Inputs To Refineries Cranking Up. Utilization jumped 1.8 points to 89.7% last week, still below levels deemed as normal for this time of year. Given the dip in demand which will likely lead to Statecations this summer and just less driving in general, I don't see U.S. refiners cranking utilization up into the territory of the peak of the red line in the following graph. 



Crude Imports Rallied As Expected.  As expected imports recovered from the last few week's very low levels. These levels were a function of offloading logistics and weather and not a shortage of oil being shipped. I would bet that barring further weather related issues along the Mexican Gulf Coast imports will begin to shadow last year's levels for the next several weeks as imports play catchup. 


Crude Stocks: Odd Pattern.


GASOLINE - Bigger Than Expected Storage Buil ... It's The (Lack of) Demand Stupid. Finally.

Gasoline Production Inches Up ... As it should this time of year.


... Imports Remain Volatile But Within Normal Bounds ...


... But Demand Retreats Noticeably.


... As Price Beats The Consumer Over The Head.


Gasoline Inventories: 4% above year ago and 1% of the 5 year average for this time of year. My sense is that if demand remains soft for the next few weeks, the time when the summer driving season should be kicking into full gear,  then gasoline prices will soften at the wholesale level which in turn will lead to a further easing, albeit slight, in crude prices. I don't see either falling out of bed as refiners will back production off with any significant deterioration in recent crack spread increases.



Stocks We Care About Today

(COG) East Texas Acquisition. Last night highly experienced gas E&P (COG) announced a $603 million producing property acquisition in East Texas with "Haynesville/Bossier" potential, essentially doubling their exposure to this shale play. Here's the deal:

  • Purchase price $602.8 million
  • 25,000 gross acres
  • Associated Reserves: 176 Bcfe (primarily attributed to Lower Cotton Valley but implication is at least some of this is Haynesville potential)
  • Produces 32 MMcfepd at present
  • Associated Infrastructure valued at $26 million. 

So how's this stack up from an acreage and acquired reserves basis? After backing out the value of the infrastructure this transaction has a pricey feel to it but given the potential companies, analysts, and other interested see in the play I think they will be quickly forgiven. They also hedged out a good portion of the expected production at very favorable prices.

  • On an Acreage Basis: $23,000 per acre
  • On an acquired reserves basis: $3.28 per Mcfe

GDP Transaction At Bethany Longstreet Field, LA. This was announced on 5/30/08 but it provides a second recent acquired acreage/reserves set of data points. The deal was $32 million for 3,250 acres with associated proved reserves of 12.3 Bcfe (again, lower cotton valley with little to no reserve potential allocated (yet) for the Haynesville).

  • On an Acreage Basis: $9,800 per acre
  • On an acquired reserves basis: $2.60 per Mcfe

Interesting Takeaways  From The Two Deals As It Pertains To Stocks We Care About: The numbers here get big very fast and would likely not even be realized in a takeout but they represent the upside limits and as you can see when comparing them against the companies' market caps you can see the market could run these names quite a bit further (and this is just one play

  • HK - now "over 150,000" acres in the area. Value as bounded by the two transactions above on an acreage basis would be $1.5 to $3.4 billion.  The potential reserves based valuation is in excess of $15 billion. Current market cap: $6 billion with a TEV close to $7.5 billion.   
  • PQ - about 24,000 acres, acreage basis would yield a value of $240 to $550 million; reserves basis gets you $2.7 to $3.4 billion. Current market cap $1.15 B, TEV $1.33 B. This one is also cheap on a forward CFPS basis trading at 4.2x 09 estimated CFPS.   
  • QBIK - On an acreage basis this is simply overpriced with a range of $63 to $145 million vs a market cap of $230 million. However, looking at them on a $/Mcfe potential basis yields a range of $700 to $900 million. This equates to a share price of $9 to $12. Admittedly those are pretty pie in the sky numbers and they will never get them. Obviously the reserve potential of GDP's recent acquisition (as it was adjacent to part of QBIK's acreage) would be the better metric to use and even that would yield an astronomical per acre acquisition basis so I don't expect the stock to move much above its current range (other than spikes on news which will likely be unsustainable) until the company is able to prove up more of its potential reserves. Again, I'm not swinging for the fence here.

Odds & Ends

Analyst Watch: FBR ups its price target for (NFX) from  $80 to $90.

HK Takeout List. Pick the acquiring company of HK and get a free quarter. Here's the current list.




197 Responses to “Thursday – Gas Preview & Oil Review”

  1. 1
    zman Says:

    Turning the spam blocker back on so if anyone can’t get their message through shoot me an email at zmanalpha@gmail.com.

    Saudi Aramco raising prices. They price their crudes at a discount or premium to WTI. Yesterday they announced the discount to WTI for Arab Extra Light which was $1.45 in June went to a premium of $2.40 per barrel. Discounts for Arab Light, Medium, and Heavy grades were reduced as well. So even as prices come off from recent record highs, they are able to reduce the impact to them.

  2. 2
    zman Says:

    Turkish TV reporting Turkey and Iran have carried out joint strikes against Kurdish rebels in northern Iraq. That’s the first time I’ve heard about Iran coming across the Iraq border with troops (and not just funding insurgents).

  3. 3
    zman Says:

    PVA analyst day presentation starting, their Gulf Coast slides have some interesting Haynesville/Bossier shale slides.

  4. 4
    zman Says:

    PVA – drilling a second Haynesville well now.

    Have drilled one Bakken well and fraccing in next few days, about to drill a second well there.

  5. 5
    Dman Says:

    #2 incredible. I’ve seen some talk about how all the mideast players are now simply ignoring the US and going about their business, making alliances as suits them. But this is amazing. If true, the Iranians have simply handed W the excuse he’s been searching for (unsuccessfully). Of course they have Turkey there as cover: if the US approves Turkey launching strikes, why should they oppose Iran doing so? Hmmm… well that sounds like nuance and W don’t do nuance. At any rate, if this really happened it would confirm the impression that the Iranians are unconcerned about US action (or are even trying to precipitate it?).

  6. 6
    Dman Says:

    Reuters confirming #2

  7. 7
    zman Says:

    Dman – An Israeli paper is saying today that Olmert is going to ask for Bush’s help in a series of tactical strikes in Iran before he leaves office. Maybe true, maybe not. I am sure Iran believes it and they may be trying to get the US to attack them so they can play the martyr position but also to jack oil prices so they can offload some of that heavy/sour crude they have on hand.

  8. 8
    zman Says:

    PVA talking about oil potential in the Woodford Shale. Says 4 wells drilled so far, verticals, that are producing oil. This could be one of the oil shale plays EOG and CHK alluded to a couple of months back.

  9. 9
    zman Says:

    Dman – right, so oil up $1.30 now from down early this am.

  10. 10
    Dman Says:

    I’ve been wondering if those tankers Iran has got sitting there were in some sense playing a hostage role, as in “we may not be able to hit your Navy but we can sure as hell hit these & send crude soaring”

  11. 11
    zman Says:

    I’m probably going to take some NFX on the open as I saw a synopsis of the FBR pt upgrade there and it makes a lot of sense to me, kind of what I’ve been saying about the Street just not getting how big the woodford is going to be and how low it will make NFX’s 2008 F&D costs (they are saying $2.10/Mcfe, down from $2.90 in 2007) which is completely feasible for the whole co.

  12. 12
    zman Says:

    Dman – I think they will be able to put them on the market if a strike onshore happens.

  13. 13
    zman Says:

    PVA – saying 72 rigs now in the Bakken Plan in aggregate, this is up slightly from last I heard.

    They are saying the IPs in the play are growing as the play extends toward their acreage, they will complete their first well in the next couple of days. Could leg this stock higher.

  14. 14
    Dman Says:

    There has been plenty of speculation in the Israeli media and the hardliners there were looking (& sounding) very smug after W’s last visit and didn’t mind leaking to the media that they had been assured the “Iranian problem” would be “taken care of”. Whether it is all theatre is the question. I don’t claim to know but I have a lot of trouble believing that it is entirely hot air.

  15. 15
    Sambone Says:

    Can Weak Gasoline Demand Douse Oil Market Fire?


    NEW YORK — Science shows that the more gasoline on a fire, the more it rages. But in U.S. oil market economics, more gasoline threatens to douse red-hot prices.

    U.S. gasoline inventories rose by 2.9 million barrels, nearly 10 times the expected level, in the week ended May 30, according to Energy Information Administration.

    Stocks built as demand dropped to a five-year low for the last week in May, at 9.129 million barrels a day. EIA data showed that in the week that included the Memorial Day holiday, gasoline deliveries fell 244,000 barrels a day, or 2.6% from a week earlier.

    Early data through May 30 suggested demand dropped 128,000 barrels a day, or 1.4%, for the full month, to 9.301 million barrels a day. That’s the biggest barrel-for-barrel drop in May since 1988 and the biggest percentage drop since 1992.

    “We believe (the demand drop) is a result of the high prices and weak economy,” said Tancred Lidderdale, an EIA analyst who handles the Short-Term Energy Outlook.

    Traders on the New York Mercantile Exchange took the bait and sold futures aggressively. July-delivery gasoline shed 4.7%, or 15.74 cents a gallon — the biggest single-day drop since March 17. Prices settled at $3.1951 a gallon, the lowest since May 15.

    Weak gasoline more than offset bullish crude oil data and forced prices lower across the board. July crude oil futures fell $2.01 a barrel, or 1.6%, to $122.30 a barrel, the lowest level since May 6 and 8.2% below the record price set May 21.

    July heating oil futures shed 9.39 cents, or 2.6%, to $3.5458 a gallon, the lowest since May 8 and 10.3% below its record price, reached May 22.

    Weak Demand Meets Expectations
    Despite the sharp reaction — attributed to weak demand — the data was in line with forecasts made a month ago and tracked typical gasoline market behavior around the Memorial Day holiday.

    The first holiday of the spring-summer season, Memorial Day is celebrated on the last Monday of May, so straight week-to-week data comparisons can be skewed by the floating holiday.

    Ahead of the holiday, gasoline is moved from primary storage facilities, such as refineries, down the supply chain toward the consumer. The movement of oil from primary storage is tracked by EIA for its implied demand figures. In the week which includes Memorial Day, demand usually drops compared with the weak earlier.

    The week-to-week drop was the most since 2003.

    Gasoline demand is still weak, but it’s only as weak as the EIA projected. Demand in May was the most in any month since August.

    Despite dismal demand in the last week of the month, May gasoline demand was essentially in line with EIA’s forecast in its Short-Term Energy Outlook, published May 6. That projected May gasoline demand would average 9.32 million barrels a day, down about 110,000 barrels a day from a year ago.

    Four-week data showed gasoline demand in May rose 91,000 barrels a day, or about 1%, from estimated April levels. That’s half of the size of the gain a year ago and smallest rise in the month since 2004.

    May’s expected weak performance came as retail prices for regular gasoline averaged a record $3.766 a gallon, up 62 cents, or 19.7%, from a year ago, and above EIA’s estimate of $3.671 a gallon.

    With the demand drop, a jump in imports and a slight rise in refinery output, gasoline inventories rose enough to cover 22.9 days of current consumption. That’s slightly above the five-year average of 22.6 days.

    Price Drop Could Spur Demand
    The issue for the market is whether gasoline demand that’s only as sluggish as expected — in the face of record high prices — will be viewed as a bullish sign.

    Based on recent history, demand will be rise by around 200,000 barrels a day in June through August.

    Combined with Tuesday’s drop, gasoline futures prices have shed nearly 20 cents a gallon in two days. Without a dramatic reversal — which can’t be ruled out in the current volatile environment — that may soon bring down record-high pump prices. A slide in retail prices could send more drivers back on the road or answer the question of whether fuel-saving behavior changes are for real.

    The American Transportation Association said the number of trips taken on public transportation rose 3.3% in the first quarter to a 50-year high, while the number of vehicle miles traveled on U.S. roads dropped 2.3%. That impact was well known and documented in first-quarter U.S. data, showing a steep 700,000 barrels a day drop in demand from a year ago, and the impact of declining sales of gasoline-guzzlers may take time to be felt.

    “The summer season will still see a seasonal rise in gasoline demand, but the uptick will be significantly below historical averages,” said Harry Tchilingurian, senior oil market analyst with BNP Paribas Commodity Derivaties in London. “With consumer confidence down and further weakness in the economy ¿ Americans are making discretionary reductions in consumption wherever possible.”

    EIA is scheduled to update its demand and price forecasts Tuesday in the June Short-Term Energy Outlook.

    (David Bird is senior energy correspondent for Dow Jones Newswires).

    –By David Bird, Dow Jones Newswires

  16. 16
    rseidman Says:

    05-Jun-08 09:18 ET

    Petrohawk Energy’s growth and value impact – Coker & Palmer (31.09)

    Coker and Palmer is raising their price tgt on HK to $38 from $24. Firm notes
    the co’s recent acquisition and testing in the East Texas area of the
    Haynesville of 8 MMcfed and say it could have IP rates from 10-15 MMcfed. Firm
    says with wells taking 60 days to drill and with 3 year leases, the co is
    likely going to be very aggressive attacking the play. Although the firm is
    heavily discounting their production and reserve forecasts due to uncertainty,
    HK could still double its production and reserves from the Haynesville alone
    over the next 3 years. Firm believes the “sweet spot” in the play generally
    lies along Interstate 20 from just west of the Greenwood-Waskom field, east to
    the Sligo field, and south into Red River Parish then west into the Carthage

  17. 17
    zman Says:

    Thanks RS. Anybody know who Coker & Palmer is?

  18. 18
    zman Says:

    COG rallying sharply on the East Texas news.

    This will carry GDP, HK, GMXR and other Haynesville names higher.

  19. 19
    ram Says:

    Mucho buying in HK early.

  20. 20
    Dman Says:

    XCO getting juiced (I mean that in a good way).

    I had thought EOG was looking juicy after the pullback but now its up 2.5% Aaargh.

  21. 21
    isleworth Says:

    Coker is small boutique investment firm with good energy analyst, Michael Bodino. They are in Texas, Mississippi and Texas.

  22. 22
    zman Says:

    CHK actually getting a little respect.

    Hear ya EOG, volatile and mostly up with oil. It’s probably due a bounce. However, if oil fails this rally, which looks suspect to me it will give this back quick.

    PVA talking about Selma Chalk. Interesting play. DNR country.

    Thanks Isle, have heard his name.

    Ram – that HK move is the COG news from the post.

  23. 23
    kyleandy Says:

    z is HK’s “sweet spot in proximity to QBIK/CHK’S acreage?

  24. 24
    ram Says:

    Still thinking about NFX?

  25. 25
    Fred Says:

    Z – Could I pick MRO for the HK take out if no one has it yet? Thank you!

  26. 26
    zman Says:

    Refiners having another lackluster day.

    HK – is going to be a little further to the east. It will nice to get some more datapoints as the field will have sweet and not so sweet spots from region to region but vertical wells that have pierced the Haynesville show similar sections between the two regions.

    Ram – yes, just giving the market a little time. I dislike these pop oil on the open on rumors days and even though I agree whole-heartedly with FBR’s assessment of NFX’s better than Street recognized prospects, if oil decides to reverse they will take it, and everything else, lower.

  27. 27
    zman Says:

    Fred – gotcha for MRO.

    Kyle – I should have added that when I say east of CHK I am talking about their held by production underlying the Elm Grove field. That’s about 30,000 acres. They have over 150,000 acres (probably about 200,000 acres now) and I don’t know exactly where the new acres lie, will see if they have updated their map and get back to you on that.

  28. 28
    zman Says:

    hey look, a new all time high in HK.

    PVA should get to their Gulf Coast division speach, including they said earlier, quite a bit of detail on their Haynesville activity.

  29. 29
    guru1 Says:

    Z- If it is not too late, I want to pick CHK as the acquirer for HK.. Thanks.

  30. 30
    zman Says:

    Guru – sorry, Jason had that honor back in March.

  31. 31
    guru1 Says:

    Z- Do you think that CHK stock is being held down because of its agressive hedging of its gas production at below spot ptices?

  32. 32
    Dman Says:

    NG a tad lethargic here. Could be altitude sickness.

  33. 33
    zman Says:

    Guru – I see three factors holding CHK down. Hedges are part of the issue, debt levels are another, aggressive leasing of acreage at record prices.

    The hedges will look better in a retreating gas price environment.

    The debt comes down as production goes up and they get back within free cash flow on spending, probably next year.

    As to the leasing, Aubrey has always paid up for leases and if you look at his wells in the Barnett vs the other players, they are concentrated in the sweetest of sweet spots, with higher IP and EURs on average than his peers.

    Wall Street always is slower to give these guys credit, grudgingly doing so as the stock advances.

  34. 34
    zman Says:

    Dman – could be waiting on numbers in another 20 minutes, why get overly aggressive just before the report with gas up nearly a buck, 8%, in the last five trading sessions.

  35. 35
    zman Says:

    No volume in QBIK today. hmmmm. a day after trading 700K+ which is 3.5x normal. This is a spotty trader and is just one reason why I always dollar cost average into any name but especially these little ones.

  36. 36
    zman Says:

    HK spiking over $33. woo-hoo.

    PVA getting ready to move on to their Gulf Coast discussion, probably about 15 minutes from now. This is the next data point in the Haynesville.

  37. 37
    rseidman Says:

    PQ not doing badly either!

  38. 38
    Dman Says:

    SLB on the move

  39. 39
    ram Says:

    Nice call on getting on the PQ 22.5’s.

  40. 40
    zman Says:

    RS – re PQ, yes, I understand some blogger highlighted the potential of that one re the Haynesville this morning, lol.

    HK on fire.

    SLB – yes, people seem to like energy again.

    Ram on PQ, I still feel better about holding the stock than the options there. Just not a good option trader. The $25s are flat for me and the $22.50s, though a double have not moved as well as I would have thought.

  41. 41
    zman Says:

    105 Bcf, just a touch high to the Street and me at 100 Bcf. I think it is rounding error and it expands the deficit to last year by 5 Bcf. Not a game changer on gas price by any means.

  42. 42
    Hoss Says:

    Morning Z

    WH – Live Webcast Today(replayable)

    June 5, 2008 – 11:00 AM Eastern

    Diversified Investing with Asian Companies


  43. 43
    reefguy Says:

    pva presentation is a great primer on the Hy/Bossier shale play.

  44. 44
    zman Says:

    Thanks Hoss, saw that and will listen to the replay.

    Reef – they are just about to start the Gulf Coast segment.

  45. 45
    irished Says:

    ZMAN do not know if it my system but having trouble loading your site with firefox. Have to stop and retry 1 or 2 times. Not a big deal, just so you know.

  46. 46
    zman Says:

    Reef – are you listening to the PVA call. They are about to get pretty technical.

  47. 47
    Sambone Says:

    10:36 am EST

    Nymex Crude Higher As Euro Gains On Dollar


    NEW YORK — Crude oil futures rallied $2 Thursday after the dollar softened against the euro.

    Light, sweet crude for July delivery was recently up $1.58, or 1.3%, at $123.88 a barrel on the New York Mercantile Exchange, after climbing as high as $124.39. Brent crude on the ICE futures exchange rose $1.51 to $123.61 a barrel.

    The crude market reversed earlier losses after European Central Bank President Jean-Claude Trichet said inflationary pressures in the euro area will last longer than previously expected, with risks to price stability increasing amid strong food and oil prices. His hawkish posture sent the dollar lower against the euro, which was recently $1.5540 from $1.5435 late Wednesday.

    “He opened his mouth and caused a pop in the price of oil and gasoline,” said Phil Flynn, an analyst at brokerage Alaron Trading Corp. in Chicago. “If he’s out of step with U.S. (interest) rate policy, that’s going to pressure the dollar, thereby creating upward pressure for commodity prices.”

    Crude oil fell earlier this week in part because Federal Reserve Chairman Ben Bernanke voiced concern about the dollar and signaled the U.S. central bank will take a harder line against inflation. Investment funds have piled into commodities as a hedge against inflation risks and the dollar’s loss of purchasing power.

    The oil market was choppy. Early in the session prices spiked after an explosion at a petrochemical plant in Kuwait, the fourth-largest oil producer in the Middle East. But Kuwait National Petroleum Corp. said the blast in an area known as the Mina Abdulla hasn’t affected its nearby refinery.

    Traders remained cautious about the up move as demand struggles in the face of triple-digit prices. The national governments of India and Malaysia faced protests Thursday after hiking fuel prices to shed some of the burden of subsidies. In the U.S., which consumes nearly a quarter of the world’s oil, gasoline demand was down 1.4% last month from the same period a year earlier.

    Front-month July reformulated gasoline blendstock, or RBOB, rose 4.69 cents, or 1.5% to $3.2420 a gallon. July heating oil rose 6.42 cents, or 1.8%, to $3.6100 a gallon.

    —By Gregory Meyer, Dow Jones Newswires

  48. 48
    reefguy Says:

    z- your our man on the call, trying to sell my stuff near Cabot and GDP near minden$$$

  49. 49
    zman Says:

    Congrats on that pricing last night Reef!

  50. 50
    reefguy Says:

    PVA slides suggested to me these completions cannot be done by a cubic size outfit on a sustained basis. Manpower Engineering, procurement etc has to to be deepnot two guys and big capital

  51. 51
    guru1 Says:

    Z- Thanks for the response on CHK.

    I am enjoying the ride in HK with Sept $25 calls. Also in NBR calls.

    I am trying to understand CHK before entering either CHK stock or CHK Sept calls. For some reason your WIOWIO tab comes up empty. Hence the question on CHK.

  52. 52
    zman Says:

    Reef – do you think fossil operating can handle the technical aspects? QBIK is drilling verticals that can later be completed horizontal. I think they are trying to show thickness of the lower bossier, gas saturation and then sell or partner up.

  53. 53
    zman Says:

    Guru – wiowio will be updated soon. Last instance was back a couple of weeks. May do one for tomorrow.

  54. 54
    guru1 Says:

    Z- Any thoughts on why RIG has shown so much downside compared to OIH? Thanks.

  55. 55
    zman Says:

    Guru – listening to the PVA call but here’s some reading for you in the meantime:


    There is more background stuff on CHK on the reports tab. WIOWIO is general just the quick bullets.

  56. 56
    zman Says:

    Re RIG, profit taking, not the blow out quarter people were looking for as there was some deferred maintenance which will impact 2Q. It will run again as it is cheap but there are some deepwater issues and although day rates remain high in the deepwater arena there is some softness in Jackups and rates in dw are not accelerating as fast as they were so the impatient money went to find greener pastures.

  57. 57
    scoop006 Says:

    Z My best % trade on the ZMAN site.March 27, bot HKFX @$1.10 sold today for $11.30

  58. 58
    zman Says:

    Nice one Scoop!

    Reef – any thoughts on the MMR move up today? I see no news but I’m still listening to the PVA call.

  59. 59
    john11 Says:

    QBIK doing a presentation at 10:10pst at redchip conf today, webcast avail.

  60. 60
    guru1 Says:

    Thanks Z for the link on CHK and a very quick overview on RIG. Any links on RIG research are highly appreciated. I jumped the gun on RIG.

    Congrats on avoiding the refining group yesterday based on the gasoline demand data. Unfortunately, I jumped in a little early yesterday in VLO. Probably an error I may have to backtrack.

  61. 61
    reefguy Says:

    MMR- waiting on offshore scout report this pm….Logs?

  62. 62
    zman Says:

    PVA saying bottom hole pressure was 9200 psi, flared the whole time they were in section, fracced by 36,000 horsepower WFT unit, said they did a perfect job

  63. 63
    reefguy Says:

    z- give me vertical depth, I will gioe you pressure gradiant

  64. 64
    reefguy Says:

    at 11,200′ the gradiant is .82. This is the highest gradiant for a well frac I know of. Barnett is .65

  65. 65
    zman Says:


  66. 66
    reefguy Says:

    Higher the frac gradiant more horsepower, specialty proppants(Bauxite), more skilled folks, mucho dinero. That is why the little guy cannot do it on a sustained basis.

  67. 67
    zman Says:

    said they saw 100 bwpm when they open the 2nd sleeve during the frac on an 8 stage frac, can’t say enough favorable about WFT.

  68. 68
    reefguy Says:

    Slide 111 shoes the zone at 11,200.

  69. 69
    zman Says:

    Reef- you are correct, I was looking at the TD on the Fogle 5 log.

  70. 70
    zman Says:

    Agree re your comment as it relates to Cubic. They can’t do it, and they aren’t really trying as they are not drilling the laterals, but the better this play gets, the more that one will run, maybe a takeout, maybe just a rally on a $3 stock (leap with no expiry, lol).

  71. 71
    zman Says:

    The operating company they use, Fossil Operating, has drilled some Horizontals here as well so maybe they will take a smaller piece in a future hz well.

  72. 72
    reefguy Says:

    FYI-small potatoes- looks like TMR getting taken out-up 15%

  73. 73
    reefguy Says:

    RRC- bigger move than the crowd…

  74. 74
    zman Says:

    PVA – second Haynesville well at 7,000 feet, expect results in 30 days.

    In early July, new pipeline will unconstrain the first well from the 8mm/d first producing well.

  75. 75
    zman Says:

    OII – moving back up, makes one want to go look at Atlantic weather maps.

  76. 76
    zman Says:

    ZTRADE: June $2.50 Calls for $1.45, risky as it has about two weeks of life left on the option but it looks to be breaking out.

  77. 77
    zman Says:

    Would you TA types take a look at NBR bearing in mind the fundamentals are solid and Goldie Sacks fell in love with it yesterday. I to the 40 contracts that went off on the offer and it moved 10 cents and put me on the bid. Wow.

  78. 78
    VTZ Says:

    what equity is the ztrade for?

  79. 79
    zman Says:

    ZTRADE: NFX September $65 Calls taken on the bid for $5.40 and then it popped 2 minutes after my trade. These are September calls and the purchase is for upcoming Mancos and Bakken well results and I still hold some pretty underwater July $70s as well.

  80. 80
    zman Says:

    V – wow, sorry, NBR.

  81. 81
    zman Says:

    PVA call went very well, very positive meeting. I don’t feel like I know the stock well enough to play but the Haynesville stuff will have people writing notes about CHK, GDP and others tonight.

  82. 82
    zman Says:

    Question for the house:

    How do you guys notice comments? Do you constantly hit the f5 key or otherwise refresh the screen? Do you get comments as an email?

  83. 83
    VTZ Says:

    I refresh using the refresh button beside the stop button every once in a while.

  84. 84
    BossmanG Says:

    no comments as an email, just keep hitting F5 for refresh

  85. 85
    Garyinhou Says:

    Refresh comments with refresh key, receive email blasts on Z Trades….

  86. 86
    zman Says:

    Ok – if anyone has a non-refresh way to get notice of comments please let me know.

  87. 87
    scoop006 Says:

    refresh key. Did you notice the steel stocks you talked about last month up 5% today.

  88. 88
    zman Says:

    Scoop – yeah, wicked rally there and it appears I am riding the slow horse in terms of pipe companies, check out TS rallying even better than the steels.

  89. 89
    guru1 Says:

    Z- Based on the hourly stock charts, NBR just went into a positive trend (10hours above 20 which is above 30 hours mav line). MACD on the hourly chart also turned positive.

    According to Wang’s Happy Trading strategy, this is one of the best indicaters for short term options. Longer term daily charts looks good as well with the stock hugging the upper BB, although MACD is slightly negative which may become positive after today’s action!!!

  90. 90
    zman Says:

    Andy Wang is a very smart technical trader and helluva guy. Thanks much for the response re NBR.

  91. 91
    zman Says:

    Note DO far exceeding the bounce in RIG, I would be the cause is lower exposure (at DO) to the jackup market.

  92. 92
    zman Says:

    wow PQ!

  93. 93
    rseidman Says:

    Please clarify this email:
    ZTRADE: June $2.50 Calls for $1.45, risky as it has about two weeks of life left on the option but it looks to be breaking out.

  94. 94
    Pete Says:

    Z ,

    Do you like the common on RBR on a long term time line?

  95. 95
    zman Says:

    RS: Sorry about that, I was in a hurry and botched that email.

    Should have been NBR June $42.50 calls taken at $1.45 for a quick trade. It is now $1.50 x $1.65 and the stock is trying to break out.

  96. 96
    zman Says:

    PBR? Yes.

  97. 97
    kyleandy Says:

    listened to NG conf with KWK,SD,SWN and 1 more. several ceo’s commented on shortage of steel for drilling all have ambitious drilling programs, and that was the one thing that could slow them down.

  98. 98
    Pete Says:

    my mistake NBR

  99. 99
    irished Says:

    Scoop Thought I did pretty good with selling HKFX with 100% profit in April!! guess not. Great moves by Z and you holding. I am such a wimp!!

  100. 100
    zman Says:

    Pete re NBR , yes, thought about taking their common and that of PDS north of the US/Canada border for same reasons which is the whole rig count 2H08 expected explosion.

  101. 101
    zman Says:

    Irish – never fault yourself for taking profits. That’s a problem to have!

  102. 102
    zman Says:

    Oil up $2, anybody see a reason beyond the bomb,bomb,bomb bomb,bomb, Iran stuff?

  103. 103
    irished Says:

    My two cents. I rolled down my NFX yesterday from 70 to 65. Am green today but have not made up the difference. Hope to on Judgement day.

  104. 104
    scoop006 Says:

    Irish- I was very lucky on that trade Just think if we could average 100% on all our trades.

  105. 105
    VTZ Says:

    With Precision common you get a good (6%) dividend too.

  106. 106
    tater Says:

    Just a quick comment technically on the NBR trade. Just be aware that the current push through 41ish is a breakout of the Jan ’06 high. If you want to construe the last couple days as an adequate pullback to that high and this as a breakout from that pullback, well, that’s what makes TA something of an art. I am extra-long this equity with the common, but I would be a bit careful with calls until it shows that is has really broken out. Other than that, the only red flag is the angle of the current uptrend, very hot.
    As for oil, maybe it’s guys like me who thought today’s chart looked like an adequate pullback and a way to finally get in the game.

  107. 107
    zman Says:

    V – I’m thinking either Precision or Ensign, not sure which, not sure options or just a little common to tuck away as the real acceleration up there is expected to be seen in 2009.

  108. 108
    zman Says:

    Thanks Tater, hey , take a look at NFX while you are at it, tia.

  109. 109
    VTZ Says:

    SVY should also see good growth.

  110. 110
    VTZ Says:

    MDI as well

  111. 111
    zman Says:

    VTZ – names I don’t know at all but I think they play catchup, especially as the Can rig count bounces off those lows. Going to have to make a list of them and a table soon.

    Re NBR – as those are Junes I will be very quick to punt but would like to see a dollar rise from here in the common. You have the full faith and credit of GS pushing it today.

  112. 112
    zman Says:

    About to say enough is enough on CLR as it slices through $67 again, I’ll wait for a red day (or minute of the day as the case may be) and reload with longer dated, further out of the money calls.

  113. 113
    zman Says:

    ZTRADE: Out July CLR calls (CLRGM) for $7.10, up 87%.

  114. 114
    zman Says:

    wow XCO, got out a little early there.

  115. 115
    ram Says:

    We still have the JULY’s?

  116. 116
    zman Says:

    Ram – I just sold the July CLR. I sold XCO Junes the other day. I never had the July’s.

    ZTRADE: Out July HK $30 Calls (HKGF) for $4.80, 300% since entry on 5/19.

  117. 117
    tater Says:

    NFX is a tricky little one, actually been trading it quite a bit over the last couple weeks. Currently I am out as I believe it really isn’t giving great chart clues. You can read all you want to into the 50 EMA tests of the last couple days and todays possible break above the last 10 days downtrend line, but there really seems to be some strong resistance on this one at 65.50ish.
    If somebody wants to call the last 3 months a triangle, then there will be ample opportunity to see it breakout (again above 65 should you want to be long). That’s the best I can do until I see how it reacts around that number.

  118. 118
    zman Says:

    Thanks T – I think they have the catalyst on the near term horizon to pop it into the low $70s on valuation. Timing may be as late as the 2Q call though which is already set for July 25.

  119. 119
    ram Says:

    I meant CLR’s which are now gone as well as the JULY HK’s – thanks!

  120. 120
    zman Says:

    gotta like the action in the HAL and SLB. With regards to HAL I am going to let the $47.50 and $50 calls leave the building shortly. In aggregate I’m down there and the risk is a bit high that they will announce an Expro offer than the market thinks is too high which would savage the Junes. Longer, it will be accretive and position them well unless GS fights them on it.

  121. 121
    zman Says:

    Oil up $2.75, did the US bomb someone. I see the dollar down a tad but come on.

  122. 122
    john11 Says:

    QBIK giving a strong presentation at Red Chip conf..talking about doing some horizontal into H shale later this year.

  123. 123
    scoop006 Says:

    Z re # 120 Would you feel the same way if the June’s were July’s

  124. 124
    zman Says:

    John – are they saying they are drilling verticals with the possibility of add horizontal laterals in the future? That was the game plan as I under stood their 4th Haynesville penetration.

  125. 125
    zman Says:

    Scoop – no, I own the July’s and I plan on holding for a little while longer and if I were not trekking to the jungle late this month I would be holding them longer still. capiche?

  126. 126
    scoop006 Says:

    Thank you. Remember I am a simpleton and need your thoughts spelled out in plain english

  127. 127
    zman Says:

    Service on fire, outpacing the E&P names by a full percent and 3x the move of the DJIA/S&P. I think in the go forward near term we see more of this type of action.

    OII back from the dead. Sam , see anything on the water?

  128. 128
    zman Says:

    Scoop – if you are a simpleton I’m an idiot as your returns beat the crap out of mine…and mine are at another annual high today. You can usually tell when I’m having a good day as 1) your energy screen will be green and 2) I type a lot faster.

  129. 129
    john11 Says:

    I don’t recall him saying that specifically..this is not a sophisticated oil and gas crowd so he has been pretty general. With your expertise you will get more from the nuances than i can when you get a chance to listen to the web replay.

  130. 130
    doc Says:

    I have hk july25calls with a big profit, would you reccomend selling?

  131. 131
    zman Says:

    Doc – I never kick myself over taking profits. Either taking half off the table and playing with house money or taking it all off and waiting for a down day. By September I would expect it to be higher than here or gone (there’s a chance) but it just depends on what you want to do with your time and money in between. The charts of this and the other Haynesville guys look like telephone poles to me which always makes me a bit nervous.

  132. 132
    scoop006 Says:

    Z all out HK just sold 20 HKGF @$5.bot 5/19 @1.20

  133. 133
    Brian Smith Says:

    Anyone on the board know anything about WHX? It’s a trust issued by Whiting this past April. Assuming that the price of crude holds up, it looks like a good income producer.

  134. 134
    zman Says:

    Brian – sorry no, don’t know, will look at.

    Seriously, did the US bomb something, oil up $3.90 now.

  135. 135
    apbd Says:

    Nothing on Drudge.

  136. 136
    Fred Says:

    (AP:NEW YORK) Oil prices rose back to $125 a barrel Thursday after the dollar fell in response to comments by European Central Bank President Jean-Claude Trichet suggesting the bank could raise interest rates. At the pump, meanwhile, gas prices rose to a new record near $3.99, and are likely to hit $4 soon.

  137. 137
    zman Says:

    Thanks Fred, I see the story but the dollar is not get pummeled so I don’t think it is the reason we are now up $5.50! Wow. So many people calling for a top, it was bound not to happen. Just kidding, it may very well be one but they are not going down without a fight.

  138. 138
    Nicky Says:

    Z I presume you saw the news that GS, Morgan and Bear Stears are being accused of manipulating the energy markets – surprise surprise. I guess this is their way of sticking the finger up at the CFTC.

  139. 139
    zman Says:

    Afternoon Nicky.

    I did see that but the story goes on to say they did nothing illegal under current rules.

  140. 140
    Nicky Says:

    No nothing illegal but still accuses them of gaming the market. Which surely is obvious to absolutely everyone. And if that is the case then watch the CFTC take action. They can’t admit that the market is being gamed and then doing nothing about it.

  141. 141
    reefguy Says:

    MMR- at investor presentaion today Jim Bob Moffat came dressed as Jack Sparrow

  142. 142
    Nicky Says:

    This looks like a classic short squeeze anyway. Even CNBC aren’t trying to ramp it today!

  143. 143
    zman Says:

    I want to know what is meant by “gaming the market”. For instance, If I like a stock and I have a lot of money and I buy it every time it falls and people think, hey, that Z chap is pretty smart, and they decide to buy when they see me buy and together we make the stock go up, am I gaming the system or just engaged in price discovery?

  144. 144
    zman Says:

    Reef – no he did not!

  145. 145
    zman Says:

    HK at $34.

    PQ pushing $24.50.

    Thinking about doubling my DUG call position.

    Have to step out for 25 minutes, back well before the close.

  146. 146
    reefguy Says:

    i heard this today am trying to confirm

  147. 147
    kyleandy Says:

    reef for 5 days in a row IOC has opened way weaker then slowly rallied to end up near the high for the day am going to try that trade tonite on a small basis, so look for it to open higher tomorrow and prove me wrong !!

  148. 148
    Nicky Says:

    Surely in the case of GS it is quite obvious – they continually bring out highly publicized upgrades which are a self fullfilling prophecy and they are able to use the media to ramp the price.
    If you were followed in the same way as GS Z I would say you would be able to manipulate the market.
    Personally I think GS are a bunch of crooks and its a greaty pity that they have been legally allowed to do this. The whole world is suffering whilst they profit. The only shame is that they cannot throw the book at them cos as you say its not illegal. But let’s just hope they make it illegal.

  149. 149
    reefguy Says:

    Kyl- i have noticed the same thing. When i sold half 10 days ago i told myself to wait for the gong on the held portion. I hear these daily bells and have a though time sitting tight. When I hear the gong, i will post it.

  150. 150
    crysball Says:

    Z, Regarding QBIK, note there are warrants outstanding on the stock which may act as overhead and hold it down. Apparently the warrants are not publicly traded as can find no record of any symbol for them.

  151. 151
    reefguy Says:

    tmr now up 18%

  152. 152
    ram Says:

    Energy complex seems out of control. Muey enfuego!

  153. 153
    Nicky Says:

    Line in the sand for the bearish count for crude oil is 129.35.

  154. 154
    VTZ Says:

    Nicky if we close high do you see a test of those levels being imminent?

  155. 155
    zman Says:

    Crysball. Thanks, I included the warrants in the fully diluted share count.

    yes muey en fuego.

  156. 156
    italyinvestor Says:

    Zman – got a lull in the shooting here to put in my pick for the HK takeout – PXD. They need to get a foot in the ARKLATEX area.

  157. 157
    Garyinhou Says:

    What are thoughts about todays driving force across energy board for this massive one day rocket fueled take-off?

  158. 158
    kyleandy Says:

    gary his thoughts are : could we make it a two day rocket fueled take-off?

  159. 159
    zman Says:

    Italy – got ya.

    Gary – Dollar off but also traders got too bearish, bound to turn. Then you have Iran news on Kurd attacks and also rumors U.S. going to bomb them. Also, note in today’s post the pattern in US crude stocks I labeled as odd.

  160. 160
    kyleandy Says:

    gary am having such a good day i couldn’t help myself hope u didnt mind!!

  161. 161
    Garyinhou Says:

    I hear ya, I’m just stuck with a bag full of Quan, taken great profits thinking I could buy back.. I guess it’s bye back….

  162. 162
    Nicky Says:

    VTZ – it needs to turn down hard if its going to. That said this is typical wave 2 action – they always go higher than everyone expects and they also make everyone think we are back off to the races!
    If we are heading back to the highs then we are going to need some sort of catalyst and not just short covering imo.

  163. 163
    zman Says:

    It won’t always be this easy.

    What is supporting the broad market up 200 with oil up $5.50 … very strange.

  164. 164
    js1 Says:

    This is nuts. Sold out of my HK. Thanks for a profitable trade!

    Also notice HK up something like 5 days in a row. I think thats only happened once last 3 months.

  165. 165
    zman Says:

    Js – Re HK – Happy to own longer dated calls and the common here but the action is probably not sustainable in the short term.

    June calls going to be punted in things like HAL which is a bit nutty today and like I said before could announce a stock knocking takeout bid for Expro.

  166. 166
    Nicky Says:

    But if you want to be short crude oil you can do so with a stop at 129.35.
    If we do turn down from around these levels we are going much much lower too.

  167. 167
    Nicky Says:

    Nat gas also looks very close to a top – if it is’nt already in at today’s highs its very close….

  168. 168
    VTZ Says:

    Z – I commented on that yesterday as well, so it has to be a catalyst or shift caused by something…

  169. 169
    zman Says:

    ZTRADE: Out HAL June $47.50 calls for $2.30, up 28%, just a little cash management/profit protection.

  170. 170
    Bob Says:

    Z- RE# 145. Still thinking of doubling up on the DUG? Down 8 percent today

  171. 171
    Popeye Says:

    Ok, too far too fast (HK) hurry up and get this day over before it corrects.

  172. 172
    Garyinhou Says:

    Z – Thoughts on a correction, pull back, profit taking or such that allows a person re-entry on all our good names? No pity party here, just seems I’ve missed more boats than a blind harbor master.

  173. 173
    zman Says:

    Bob – will wait to see the open on that. The position is for shock protection and I honestly don’t care if it goes to $0.

  174. 174
    BossmanG Says:

    SD up up

  175. 175
    bill Says:

    what a day

    i added to qbik pq chk

    i just signaled the top, lol

  176. 176
    scoop006 Says:

    Cramer just bought SWN, XTO, & EP for his charitable trust

  177. 177
    zman Says:

    Gary – I would guess we will be back to fear and loathing next week in the energy names.

  178. 178
    Nicky Says:

    I think it very likely we see a pullback in the broader market tomorrow.

  179. 179
    Garyinhou Says:

    Thanks Z, Nicky…

    Note, Z… I got that book you recommened “Non-technical guide to Petroleum Geology, Exploration and Production.. excellent reading.. Thanks for that too.

  180. 180
    Nicky Says:

    I think it highly unlikely too that Bush will attack Iran. If anyone is gonna attack Iran it will be Israel. This country is ‘done’ if they attack Iran at this moment in time.

  181. 181
    zman Says:

    1 minute to close, smoke em if you are nervous about ’em.

  182. 182
    Nicky Says:

    That said if he does of course it is the catalyst for $160 and above oil. But the downside to the broader market would be huge.

  183. 183
    zman Says:

    Nicky – you Brits thought we were done 200+ years ago, lol. I agree with you though, an attack is unlikely.

  184. 184
    zman Says:

    Beer Thirty! The expensive foreign kind of beer today! Have a good night gang, the gas piece will be out around 12 EST.

  185. 185
    apbd Says:

    We don’t need an attack. We need others to think there’s going to be an attack.
    lol. Great day. Thanks Z.

  186. 186
    tater Says:

    Not real excited about the volume on today’s moves in RIG and SLB, let all mine go at the close, feels kind of wrong to move so hard on average to light volume.

  187. 187
    Nicky Says:


    There seems to be a general consensus that the CFTC will doing nothing after their investigations are complete. I would hazard a guess that if the manipulators continue to hold the prices at these levels the CFTC are most certainly going to be forced to do something – maybe that is self fulfilling too!
    Dennis Gartman had alluded to the fact that action was about to be taken very quickly – its hard to see that right now.

  188. 188
    Nicky Says:

    apbd – I don’t believe the thought of an attack is going to take it much higher.
    The thought of an attack is priced in and some!

  189. 189
    Nicky Says:

    tater – light volume may be very telling.

  190. 190
    kaman Says:

    June EOG 125’s….sweeet!

  191. 191
    zman Says:

    WIKI and Performance Tabs are updated.

  192. 192
    scoop006 Says:

    Where are the June closed positions ie, HK

  193. 193
    zman Says:

    I have not created the June closed spreadsheet yet. Will do tonight.

  194. 194
    zman Says:

    Scoop – just added closed June so far to the performance tab.

  195. 195
    Nicky Says:

    Energy is at a very critical level when I look at the charts. It either reverses from near here or we go much higher.
    Its hard to imagine that the ‘speculators’ will now take it much higher when they are under scrutiny.

  196. 196
    Nicky Says:


  197. 197
    Nicky Says:

    By Ian Talley


    WASHINGTON -(Dow Jones)- Major Wall Street banks are feeling increased congressional scrutiny as lawmakers seek a convenient villain for skyrocketing oil prices.

    A top House Democrat, Rep. Bart Stupak, D-Mich., on Thursday complained oil and products markets were being “manipulated” by the biggest trading houses in the futures markets, though he said a probe hasn’t uncovered illegal activity.

    In response to a reporter’s question, Stupak identified Goldman Sachs (GS) and Morgan Stanley (MS) as firms whose oil trading activities warranted closer review. The two firms quickly defended their conduct and Stupak later went on CNBC television to say no specific firms were under investigation.

    The development comes as lawmakers have sought to show voters in an election year they are trying to act to identify and punish whoever is responsible for rising oil prices. Crude oil futures posted the biggest single-day gain in dollar terms in New York on Thursday, erasing a week of losses in one stroke, settling up $5.49 at $127.79 a barrel.

    Though many analysts see considerable fundamental support for high oil prices, regulators and legislators alike are increasingly placing the blame for crude’s scorching run above $100 a barrel on what they perceive may be excessive financial speculation – a charge that’s hard to prove.

    Stupak said initial results of his committee’s investigation into oil and product prices had found loopholes in current laws were allowing the biggest traders in the futures market to artificially inflate oil prices. He said the committee would hold a hearing to announce full results of the investigation on June 23.

    “As our investigation goes further, we are really starting to unravel quite a web of – I am trying to say collusion, but I wouldn’t quite go that far – but you can certainly see manipulation of the price in places we’ve never seen before,” he said.

    Stupak said the biggest traders were the “financial houses.” The congressman said large traders had “learned to game the system and maximize the profits.”

    “I find it amazing that even Goldman Sachs said (oil prices) would be $200 a barrel,” said Stupak. “No one’s looking at them, they can drive it up to $200 a barrel.”

    In a statement, Morgan Stanley said: “We fundamentally disagree with Congressman Stupak’s allegations that Morgan Stanley is manipulating the oil and products market. We are happy to meet with members of the House Energy and Commerce Committee regarding Morgan Stanley’s commodities business.”

    Goldman Sachs spokesman Ed Canaday said the bank conducts its commodities sales and trading businesses “to the highest standards including all applicable regulations and exchange rules. We have rigorous policies and procedures including regular training designed to ensure that our activities comply with the rules that prohibit market manipulation.”

    Stupak said he and other congressmen plan to file legislation next week that will target speculation through swap – or privately negotiated – deals, foreign exchanges and over-the-counter trades.

    Eye On Swaps

    Under scrutiny from lawmakers now are two rules that allow institutional investors to funnel billions of dollars into the crude futures market, far beyond the speculation limits imposed on trading on the New York Mercantile Exchange, owned by Nymex Holdings Inc. (NMX).

    Maria Cantwell, D-Wa., Byron Dorgan, D-N.D., and Joseph Lieberman, I-Conn., are authoring legislation very similar to Stupak’s Prevent Unfair Manipulation of Prices, or PUMP, Act. Among the proposals, one would subject Nymex’s main competitor ICE Futures Europe, a unit of IntercontinentalExchange (ICE), to the same oversight as its New York counterpart. ICE offers contracts to trade crude in the U.S. but has been granted exemptions from the same rules governing the Nymex because it’s considered a foreign operator.

    The U.S. Commodity Futures Trading Commission, which last week unveiled plans to beef up its own oversight of the markets and disclosed a broad crude-oil investigation, already plans to require more information from dealers of swaps, and obtain details on investment funds using them to track the returns of commodity indexes.

    Because swap transactions are lightly regulated, little is known about the size of the market. On the Nymex, traders face position limits on futures contracts equal to three million barrels of crude oil in the last three days before the contract expires. But the Nymex rulebook allows traders who need to hedge their commodity swap exposure to apply for exemptions.

    Some say this, coupled with the ICE exemption, creates an opening for investment funds to skirt position limits by placing swaps bets though Wall Street banks that have exemptions.

    Stupak said current laws allowed excessive speculation that created artificial prices in energy futures markets.

    “It’s not that they are doing anything criminally illegal…they are taking advantage where no one has ever looked before and when someone does take a look, there may be something illegal,” said Stupak.

    Unlike stock markets, where trading on information unavailable to the broader market is illegal, commodities markets often turn on proprietary information known to a limited number people. An oil company can take advantage of inside information about its own production outlook when it makes trades. However, if traders intentionally create an artificial price and use it to make money, market manipulation charges may arise.

    Goldman Sachs and Morgan Stanley are major players in the world of commodities, which range from trading to hedging and even owning electricity plants and oil barges. In the first quarter, Morgan Stanley calculated that it took more risks in commodities on a daily basis than in stocks.

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