Wednesday – EIA Oil Preview Plus Some OIH Thoughts

Posted on by zman

Durable goods came in at up 4.9%, expecting up 4% with a last reading of down 2.2%. This is the best increase in two years but this is an erratic series with big swings and this looks like it was driven by aircraft orders and as such the market may shrug. We get data on new home sales at 10 am EST; expecting 395K versus a last reading of 384K. After Dman's  wise comments on the distressed nature of the homes/mortgages being including in the existing home sales number yesterday you have to think it's put up or shut up time for the housing bulls with the release of this number.

 

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Oil Inventory Preview
  4. Stuff We Care About Today - Oil Service thoughts
  5. Odds & Ends

Holdings Watch:

  • $10KP II:

    • $6,800
    • 34% Cash
  • Yesterday's Trades: None.


Commodity Watch:

Crude oil dropped $2.32 to close at $72.05 yesterday.  After the close, the API released a mixed looking set of data, with a big, imports induced build in inventories and better than expect product draws. The MasterCard SpendingPulse also confirmed gasoline demand rose week to week with an estimated 9.4 mm bpd of demand for the week ended August 21.  This morning crude has been tradng between flat and down $1.00 on a slightly stronger dollar but everything before the EIA numbers will likely be meaningless action.

  • OPEC Watch: Venezuela says global inventories still too; expect no action at the September gathering. Pretty much in line with my thinking ... the meeting will be one of the quickest in Cartel history, a veritable touch and go with a few members chastised for excessive quota violations (Angola, Iran). 

Natural gas retreated 4 cents to close the day at $2.88 yesterday. Not bad considering the move in crude and the gains from the prior day, especially with no tropical activity threatening at present. This morning gas is trading off 5 cents with oil.

  • Early Read On Natural Gas Storage: 53 Bcf.

Industrial Demand Starting To Slowly Show Signs of Life. Took a look at Chemical shipments via railcar yesterday and it is apparent that activity is recovering. Chemical demand represents about a third of Industrial gas demand which in any given year is about 25% of total demand. Earlier this year, industrial demand hit decade low levels and much has been written about industrial demand being squashed by the economy. In a more normal economic environment, Industrial demand would increase as gas prices fall. But this past year, the global swoon has prevented that. But in the last couple of months, we have seen higher than expected apparent demand in the weekly gas storage numbers, demand that was not explained by cooling load. 

 

 

Oil Inventory Preview


API Watch:

  • Crude: UP 4.347 million barrels

    • Imports - as expected, snapping back up. Rose nearly 500,000 bopd week to week.
    • Refining - down 170,000 bopd.
  • Gasoline: DOWN 1.798 million barrels

    • Production was actually up on the week implying a bigger demand number. This would seem to be backed by the aforementioned MasterCard SpendingPulse data.
  • Distillates: DOWN 0.146 million barrels

    • Normally this time of year you see big builds in distillate stocks in preparation for winter. Since demand has been so low and margins so poor due to already bloated stocks, refiners have worked to reduce product make here. This has resulted in some recent reductions in the year ago and five year inventory levels.

ZComment: Things to watch for in today's numbers will be stronger gasoline and distillate demand. I could care less about the imports related snap back in the headline crude number. We are seeing signs of movement in the tranportation sector and we need to see this come through in the weekly diesel demand figures to be supportive of crude this Fall.

Stuff We Care About Today

Oil Service Multiple Update

Key Thoughts:

  • Estimates - Estimates are no longer in free fall and in some cases, analysts are starting to bring numbers up following the second quarter reporting period. Change since before the second quarter:

  • Anecdotal data

    1. Land drilling and other well services. Sideways business environment, no longer in free fall, not really improving much either. Glimmer of hope/increased activity in areas like W. Texas and the Bakken. Oil stronger than natural gas activity as you would guess. Pricing following suit. Gas rig pricing continues to modestly soften. Obviously still lots of idle capacity and few are thinking price increases anytime soon.
    2. Last time we saw a steep decline in the rig count,m ti took 2 years for prices torecover...that fall was not as steep as this one.
    3. rig equipment makers showing no signs of life, still layoffs, salary cuts and noo new orders
    4. I would add that this is a good time for those with cash to pick off cheap assets, either at the rig companies or for those E&Ps that maintain their own drilling fleets (CHK, SD) or that could benefit from doing so (any of the bigger resource players) ... hearing some rigs have been going for cents on dollar.
  • Odds on what the group does - best guesstimate is 5% more than the S&P (in either direction) between now and the next set of quarterly results in mid October.  Since just before the earnings reporting period, the average OIH name is up 17% while the S&P500 is up 14.5%.

  • At the close I was asked about my thoughts on a SLB put postion? I'm not ready to go there yet. But what the stock does will largely be tied to the market and less to improvement or lack thereof in the fundamentals over the short term. If you think the broad market is going into the can during the Fall as many do, than the highest multiple names in the table above, especially the ones that have had the biggest bounce, will be the most vulnerable. SLB really hasn't hasn't bounced in comparison to the group or the market, and it has seen its earnings estimates tick up a bit.
  • I prefer liquidity in the options and for that if I were going to do it, and again, I'm not yet ready to do it (short the OIH that is) I prefer to play with HAL. The options there trade like water and therefore the spreads are slimmer than in almost any energy name options outside of a Major. Other reasons I am considering playing HAL on the put side are the continued reductions in earnings estimates, its higher exposure to the U.S. natural gas market where I think a perceived bounceback in rigs will be slower than many expect and the fact that the stock is up 26% since just before the 2Q reporting period.

ATPG Will Host Analyst Day tomorrow.

BEXP and USEG Sign Bakken Acceleration Deal.

  • BEXP needs cash, here is one way.
  • USEG will received a 65% interest in exchange for covering 65% of the costs on 6 wells in Williams and McKensie counties. The deal also gives USEG additional options on further drilling down the road.
  • Financial terms not disclosed beyond the carry.
  • USEG likely to see some play on this today.

Odds & Ends

Analyst Watch:

  • Zip, nada, nothing.

Interesting Reading Watch:

123 thoughts on “Wednesday – EIA Oil Preview Plus Some OIH Thoughts”

  1. Russia to spend $1.9 Trillion (with a T) between now and 2030 to prop up flagging production. Normally that kind of talk is bullish for the oih, especially HLA, SLB, maybe BHI, WFT. But its such a big number it has to more of a statement about what it takes to keep oil production up … they would not expect to invest that kind of sum to keep a 10 mm bopd level with oil only at $70. That would work out to only $5.1 T over the same period. Not great once you back out lifting costs and the big capex number.

  2. TechTrader weighs in with a lengthy comment, but very low odds (and he doesn’t trade on low-odds days) — For Today: Same game plan. And just like in 1987, working down from here into September and October in general. That does not mean we will not have some up days and good opportunities on the long side. Bull markets always die hard. But think short and selling the rallies most of the time. Like today. Go Short on the morning rally, usually early, and any rally at 10:45 and 11:20 for a sell off through lunch and into the afternoon and last hour late. Look for a few points with below average odds of 55/45.

    HeadTrader thinks the mrkt may parse the durable goods orders (and the positive prior revisions) and be biased higher today.

    So, tension between eco-numbers, sentiment, history, seasonality, and low volume. I continue to track my favs, set a price, and buy if it hits my target. [Waiting in the weeds, picking my points, pouncing on slow-moving fat antelope…]

  4. Almost talked myself into going back into HAL puts. If the natural gas market does recover however, in terms of a price adjustment back into the $3s which I see as likely soon then it is likely to lift service, even if activity rolls back over because $3 level pricing is less than inspirational in 90+% of the U.S. onshore. So kind of damned if you do …

  5. Looks like USEG got themselves a good deal. That’s the thing about the Bakken players… there are a lot of littler guys who have gotten in over their head. A company with cash in hand can still make reasonable land deals there. If KOG does do an equity deal any time soon, part of that will be used to make accretive land deals. KOG was the first to least acres on the FBIR, they know all the players there and have the trust of the Nation. So, not a bad place to be, if you have a little extra pocket money.

    Just musing….

  8. Wondering about put candidates…. if the mrkt is going to be volatile, may as well play from both sides…

    Any ideas?

  9. Of course, “buy on down days, sell on up”… so may not be the day to think short or puts… but, if Sept/Oct is going to be volatile, may as well try to make some $$ off that volatility.

    It would be just too easy to buy a call on the VIX, wouldn’t it.

  10. BOP – re puts, just what I was musing about in the post on the OIH. Lot of those names are big up following earnings, despite flat to slightly down EPS. No longer a cliff dive on forward estimates but no reason to run as hard as they have either. Rig count stabilization has given investors there a bit too much courage I think. Am considering HAL puts.

  11. I don’t think it’s inconsistant to hold a portfolio of both puts and calls, if your forward view is more volatility ahead for the mrkt. Then, just play the range of what you know.

    Again, musing… and yes, i did read your thoughts on the OIH. Just thinking along the same lines.

  12. I’m wondering which co.s passed on BEXP deal? If the terms were as good as they look, why wouldn’t NOG, XTO, pvt equity take that deal?
    One logical answer is BEXP’s reputation for doing high cost science projects. Other thoughts?

  13. RMD – I thought the USEG was an interesting if odd partner. Were’nt they into uranium at one time? I would imagine the established Bakken players would not sign such nice terms with full payout prior to a back in to 35%. NOG I think has a full plate on acreage but I only know what I read there and am not close to that one. CLR, XTO, NFX, WLL, MRO, HES, ECA, etc have lots of acres to deal with already, KOG is a bit tight on funds so it makes sense to bring in the outsider.

  18. FSLR still trying to move up off the recent plunge to $125. Maybe it will after all of the analysts throw in the towel on the sector. I suspect it will be quite a bit higher by 3Q earnings. If they disappoint due to the rebate it would be counter to their history. They said it just wasn’t going to have that big of an impact but the stock has lost 1/3 of its value since the last call.

  19. have been reading about USEG , Interesting in that prior to the deal they had $42mm in cash and no debt. $2.02 in cash for a 2.15 stock. it appears that they have options to participate in more BEXP wells if all goes well. the first 2 wells in their deal are currently drilling and one is only 1/2 mile from a BEXP well that ip’d at 1434boe. unless their other holdings are worthless, this looks pretty strong o me, would like to hear what z,bop, west, rmd, and anyone else think.

  20. Kyle – All good points. I don’t have anything to add on them. Since the drilling is up to BEXP and they’ve had a bit of a hot hand lately the shares could move well. I need to check and see where the wells are but I thought that area was rather untested. Will circle back later.

    Crude holding down a buck with about 10 minutes until the numbers hit. Best guess is negative surprise and we see $60s, positive and we track the equity market.

    Market higher now on new home sales. Dman – any thoughts on the nature of those sales, appreciated the comments on the existing home sales yesterday.

    Dollar has been rallying since before home sales and has rallied further since.

    A few spots of green in energy land now, including APC, SLB, HAL in big name land, WRES and BRY in oily and smaller. Note the Majors are all up with the Dow.

    Still all moot until we have the numbers.

  21. kyleandy — good poop on USEG… with that much cash/share, it doesn’t really matter if the rest of their stuff is worth squat. Need to look at the cash burn rate… but, good investigative reporting. thanks! Will go look….

  22. Energy has not participated with the market last 3 days. I think to go higher, if it is going to go higher, the market needs energy on board.

  24. EIA Inventory Report: crude at 70.85 at time of report

    Crude UP 0.2 mm barrels
    Gasoline DOWN 1.7 mm barrels
    Distillate up 0.9 mm barrels

    Imports at 9 mm bopd, up 1.1 mm bopd from last week
    Gasoline demand: 9.1 mm bpd, ok, not great
    Distillate demand: 3.4 mm bpd ditto.

  25. [grumble, grumble….] someone keeps jumping in front of me, grabbing my antelope.

    KOG… not tumbling to my “add-more target-price.”

  26. I would tell u to buy KOG instead of BEXP at least until next Tuesday for well announcement. Last time there was a very large multilayered sell block above price and mm don’t real support moves into that. One thing need to remember is that there are alot of people that bought this stock a lot lower and are taking profits on these moves…..Working on the NDIC data last nite it is amazing how the production disappears at the magic line. KOG has done a lot of work on this line and if you look at the new presentation u will see that they have refined the line somewhat from what it use to look like. Also this magic line shows that Stetson’s current well is on the east side of the line , not good. Needless to say I bought some more this morning.

  27. Crude initially up on the numbers. The crude big build fear from last night’s API is out of the way.

    Gasoline is marginally positive as it was better than expectations but it should be coming off quite a bit more this time of year and we are not seeing a pre holiday ramp in demand, or much of one, just yet. Probably see that in next weeks numbers.

    Avgas (kerosene-jet fuel) had a noticeable uptick. Best demand level in recent memory. Vacation travel.

  28. Summary of BEXP/USEC deal

    Brigham, US Energy Drilling Agreement (BEXP,USEG)
    2009-08-26 14:36:12.189 GMT

    Aug 26, 2009 (SmarTrend(R) News Watch via COMTEX) —
    8/26/2009 – Brigham Exploration Co. (NASDAQ:BEXP) announced Wednesday it reached an agreement with U.S. Energy Corp. (NASDAQ:USEG) to accelerate 2009 drilling activity in North Dakota. The terms of the agreement call for the drilling of up to 15 initial Bakken wells, but could reach 90, in 15 separate 1,280-acre spacing units. Brigham will retain 35% working interest in the initial well in each unit and U.S. Energy will acquire the other 65%. U.S.
    Energy committed to drilling six initial wells and will have the option to participate in nine additional acre spacing units that will be selected by Brigham. Brigham may retain up to 50% of its original working interest in the nine additional units and after achieving payout on the initial six wells, Brigham will back in for 35% of U.S. Energy’s working interest in the first four optional wells and 27.7% in the last five. Brigham will serve as the operator and will drill the first six wells during the remainder of 2009.

  29. More on EIA:

    Cushing retreated sharply from 33.3 to 31.8 mm barrels. That is very good news for oil pricing as it was getting back into no man’s land on inventory levels. It usually moves up or down in much smaller increments so a bit odd there.

    Continued string of no adds to the SPR.

    U.S. production seems to have flattened after a Spring of rising production due to the Bakken and the more probably the deepwater.

    People tracking total product supply saw the highest level of product delivered (gas, jet fuel, distillate, resid fuel oil, propane) in recent memory.

    These are fairly positive data points and will be graphically displayed in tomorrows post.

    Oil down 60 cents now at $71.45.

  30. The US National Hurricane Center said an area of disturbed weather centered about 470 miles east of Nassau in the Bahamas could become the season’s latest tropical depression, or more likely, tropical storm, later Wednesday.

  32. Given today’s numbers my sense is that crude stabilizes here (around $71) and moves with the market for the rest of the week. And my sense on the market is that we rally a bit although in tentative fashion. First green day for crude and I’d bet it runs again to the upside pretty hard.

  33. kyleandy — it looks like USEC is kind of a holding company for a couple of people… real estate, mining, E&P. So, comes down to the ability of mngmt to do acretive deals with their $2.00/share (and no debt). But, at the current price, seems like a decent call option, as there is no multiple placed on cash, anything they do will be “accretive.”

  35. Crude just eying the broad market now which is shrugging off the positive data points of the day. Stocks almost all red but not cliff diving today. My guess is the market shrugs off the sellers after lunch or tomorrow, still dip buyers coming in from what I can tell.

    BOP – way to pick your price and wait for it.

  36. I took more KOG also…interesting company…loved the conf. call very deftly handled I thought

  37. KOG — Got my hand out for some more at $1.22… will be happy if that fills too. Given that it’s micro-mini-cap and the last issue was done at 75c, wouldn’t be surprised to see KOG trade lower, prior to announcement of 5/6 well results. That’s OK. Just have to be able to stand the volatiilty.

  38. jiveyjr — good for you! I will be very surprised if well pairs 7/8 aren’t nice producers. The “risky” well is 9, right on the edge of the Pink Line of Death. Hearing that the horizontal orientation of that well has changed to more east-west. Makes sense. But, if that well is productive, then pretty much close to 100% of their acres should be good to go for the Bakken. Then, it’s on to the 3FS… and a tie in to infrastructure (to turn that nat gas and NGLs into cash and more reserves).

    Just musing some more…

  40. west — your relentless updates with hard fact info on production in and around KOG has been invaluable. PLEASE keep it up…. I am going to be out on vacation starting tomorrow, thru Labor Day. Will only be checking in occassionally (that’s why they call it “vacation”)… so, need to keep the info-ball rolling there.

    Thanks again.

  43. (all the rah-rah aside, i do have some puts on a certain services company, so i don’t think it’s straight up from here…. just trying to shave off a few points from a volatile, thin mrkt…)

  44. I’m bidding 1.16 and 1.20…heading on vacation myself starting Thurs. ’til after Labor Day

  46. They should be thru fracing the 6th well and waiting on flow back. I think we get something Friday or Monday. Stock went down and hit 50 fib as shown on Tater’s charthttp://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2933882

  47. KOG-does not seem to be a lot offered between 1.26 and 1.33 according to Level II-I guess that could change.

  48. bill — useg seems like a reasonable “bet.” Assuming the Larsen Brothers aren’t totally incompetent. Mngmt doesn’t pay themselves huge amounts and they have a nice pile of cash to put to work. Insiders own about 15% (if i recall correctly), so they have a nice incentive to get the stock higher. It just comes down to how good of “deal makers” the Brothers Larsen are. But, tough to see the stock languish around cash value… so, think you have a solid floor around $2.00.

  49. bexp deal with useg covers 5500 acres

    is there any way to quantify the value of the deal to cost per acre and can we use that for the rest of bexp acreage

  50. Choices – on amex/nyse stocks you are not going to see what’s really there unless they want you to. Agreed, I don’t see big pieces for sale but I’d bet those 2,000 and 3,000 share offers higher up are placeholders, and can easily grow on you.

  52. 49

    is it 30 % times 24 m= 7.2 m divided by 5,500 acres to give a cost per acre of 1,300 per acre?

  53. Morning all.

    Indices – we look to have started v up. Its possible the top was in yesterday and the move up this morning is ii but not expected as the move off this mornings low looks impulsive. If this is indeed v up then expected target is around 1041 – 45 for the SPX.

    Heads up – the USD may have actually put in its low and is working on ii down which may retest the lows whilst the equity markets work on their highs.

    Oil – likely to only make a secondary high if the top in equities is close.

  54. Jerome — so, if KOG had hit 1.49, that means it would have headed higher? (all else equal, of course) or, does failing to get thru the 1.49 ceiling meant it was doomed to fall back? if so, how low could it go, P and F-wise?

  55. I meant to add that when equities top I am expecting a very fast move to the downside. First target area is 965 for the SPX.

  56. Hi…I won’t buy on the initial buy print ($1.50) when the signal occurs below the major resistance line which in the case of KOG is at $2.00 right now. So if Kog prints 1.50, and pulls back, I will buy on the pullback to 200 MA support at around 1.00.

  58. Jerome — thank you for your analysis. I don’t know why, but that technical stuff works (which is why TechTrader drives a very very fancy car).

  59. Jerome – you should chat with RMD, I used to see him updated those P-F charts by hand in his office. That’s voo-doo plus territory to me but it worked for him.

  60. Z – # 20 haven’t seen anyone raining on the new home sales parade. They are counted when a contract is signed or when a deposit is paid to a builder. Hard to see why anyone in financial distress would be doing either of those things. Let ya know if I see any theories why up 10% is bad šŸ™‚

  62. re # 60 – try this:

    July New home sales was the 3rd lowest sales for July since the Census Bureau started tracking sales in 1963

  64. Nicky – Hear ya. More concerned with how the market is looking at them going forward though. String of easy comps or will it wash out. I know a couple of people taking the $8K credit. They are young to be sure but they also were not going to buy a house in the next decade, good or bad economy either.

    Market going green again, crude improving. I just don’t think the bulls are done yet. Maybe it turns on Tuesday following the holiday …

  66. Nicky — did you see the post from HT on Doug Kass yesterday? Aparently, Doug’s Gnome is the one who picks tops…

  67. Nicky – I hear ya. Everyone is trying to make the big top call. He said that three weeks back too. Calling tops and bottoms is hard, not faulting the guy. I do have a problem with all these guys using nothing really new but trying to pick the point so they get guru status on CNBC.

  68. It’s intersting that KOG tried to break 1.49 on 5/12/09, after pushing above its 200 day moving average for the first time in a year, this actually put KOG on its first Point and figure buy signal since about June of 2008, the price objective for this initial buy signal is $3.25, but this buy is a bit stale, tested 1.49 again on 8/24/09. Someone is watching this level big time. The break to 1.50 would be a third test up, with enough push I could see it go right to the $2.00 wall of resistance

  69. I actually have a count which says we could see a hard and fast pullback and still go on to make new highs into late September.

  70. Not to discourage you from telling me what Kass is up to though, smart guy, just think calling the tops and bottoms is a lot of luck and less skill. People seem to remember when you get it right but all the times you miss it are quickly forgotten.

  71. FWIW, i think Doug Kass is mis-interpreting the recent moves in the credit market. And he (or his Gnome) is using that to point to a lower stock market.

    The stock market could go down, but not b/c the credit market is dragging it there. Au contaire, mon frere!

  72. #65 Here it is for your viewing pleasure:

    The Market Has Likely Peaked for the Year
    8/26/2009 8:11 AM EDT

    Markets top during times of enthusiasm.

    Shrevie: Ok, now ask me what’s on the flip side.
    Beth: Why?
    Shrevie: Just, just ask me what’s on the flip side, OK?
    Beth: What is on the flip side?
    — Diner

    Back in early March, there were signs of a second derivative U.S. economic recovery, the PMI in China had recorded two consecutive months of advances, domestic retail sales had stabilized, housing affordability was hitting multi-decade highs (with the cost of home ownership vs. renting returning back to 2000 levels), valuations were stretched to the downside and sentiment was negative to the extreme. These factors were ignored, however, and the S&P 500 sank to below 700.
    To most investors, back in early March, the fear of being out was eclipsed by the fear of being in. Despite the developing less worse factors listed above, bulls were scarce to nonexistent in the face of persistent erosion in equity and credit prices.

    It was at this point in time, on The Edge, in an appearance on CNBC’s “Fast Money,” on “Mad Money” and in multiple appearances on “The Kudlow Report,” I confidently forecast the likelihood that a generational low had been reached.

    I went on to audaciously predict that the S&P would rise to 1,050, a gain of nearly 400 points from the S&P low of 666 during the first week of March, by late summer/early fall. I even sketched a precision-like SPDRs (SPY) expectation chart that would reach approximately the 105 level (a 1,050 S&P equivalent) within about six months.

    Yesterday the SPDRs peaked at 104.20, within spitting range of my intrepid March forecast of 105, and the S&P nearly touched 1040 in Tuesday’s early morning trading.

    Arguably, today investors face the polar opposite of conditions that existed only a few months ago, with economic optimism, improving valuations and positive sentiment.

    To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices.

    As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons.

    Stated simply, in the current bull market in complacency, optimism and a boisterous enthusiasm reigns.

    As I have written on these pages, the investment debate has morphed in a dramatic fashion from concerns as to whether U.S. economy was entering The Great Depression II to whether the current domestic recovery will be self-sustaining.

    The primary question to be asked is, Will the earnings cycle dominate the investment landscape and cause investors to overlook the chronic and secular challenges facing the world’s economies, particularly as the public sector stimulus is eventually withdrawn and paid for and the economic consequences of the massive public sector intervention manifest themselves in the form of higher interest rates and marginal tax rates?

    Most now have accepted the notion that due to the replenishment of historically low inventories, extraordinary fiscal/monetary stimulation and the productivity gains from draconian corporate cost-cutting, the earnings cycle is so strong that it will trump the consequences of policy. More accurately, most believe that they can get out of the market before the full effects of policy are felt.

    I am less confident as a decade of hocus-pocus borrowing and lending and 35-to-1 leverage at almost every level in both private and public sectors cannot likely be relieved in the great debt unwind over the course of only12 months.

    It is important to emphasize that when I made my variant March call, I expected many of the conditions that now exist — namely, a resurgence of economic and investment optimism during the summer to be followed by a multiyear period of weak investment returns. Specifically, I expected a mini production boom and an asset allocation away from bonds and into stocks to be embraced and heralded by investors, who would only be disappointed again in the fall as it becomes clear that a self-sustaining economic recovery is unlikely to develop.

    My view remains that it is different this time. Again (now for emphasis), the typical self-sustaining economic recovery of the past will not be repeated in the immediate future for 10 important reasons that will weigh on the economy and markets like the governor that controlled the speed of the Good Humor truck I drove when I was in my teens during the summer:

    Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

    Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

    The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

    The credit aftershock will continue to haunt the economy.

    The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

    While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

    Commercial real estate has only begun to enter a cyclical downturn.

    While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

    Municipalities have historically provided economic stability — no more.

    Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
    Just as I looked over the valley in March 2009 toward the positive effects of massive monetary/fiscal stimulation within the framework of a downside overshoot in valuations and remarkably negative sentiment, I now suggest another contrarian view is appropriate as I look over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed.
    Yesterday, the OMB/CBO provided an exclamation point to the secular challenges that the domestic economy faces in forecasting an accumulated deficit of $9 trillion over the next decade (up $2 trillion from the previous forecast just two months ago), and public debt as a percentage of GDP is projected at an alarming 68% by 2019 (as compared to 54% today and only 33% in 2001). Thus far, the drop in the U.S. dollar (influenced, in part, by the mushrooming deficit) has been viewed favorably by the markets, but we must now be alert to a downside probe that becomes a threatening market factor. In other words, what has been viewed positively could shortly become negatively viewed.

    A double-dip outcome in 2010 represents my baseline expectation. When the stimulus provided by the public sector is finally abandoned, it seems unlikely to be replaced by meaningful strength or participation by any specific component of the private sector, and the burgeoning deficit (described above) will ultimately require a reversal of policy, leading to higher interest rates, rising marginal tax rates and a lower U.S. dollar. My forecast assumes that the market’s focus will shortly shift from the productivity gains that have been yielding better-than-expected bottom-line results toward these chronic and secular worries.

    Even more important, my forecast of a 2010 market peak reflects that the aforementioned nontraditional influences (and the untoward policy ramifications) will, at the very least, yield a broad set of uncertain economic outcomes that (in consequence and in probability) tilt away from a self-sustaining economic scenario sometime in the following 12 months.

    Stocks bottom during times of fear. With the benefit of hindsight, the March 2009 lows represented a dramatic overshoot to the downside.

    Markets top during times of enthusiasm. I believe that the markets are now overshooting to the upside and that the U.S. stock market has likely peaked for the year.

    Investors Intelligence?
    8/26/2009 7:25 AM EDT

    In today’s Investors Intelligence poll, the bulls rose to 51.6% from 48.3%, and the bears fell to under 20% from 23.1%.

    One of the core concerns I express in my opening missive, which is coming up, is the huge move in sentiment from noisy despair to boisterous enthusiasm.

    This is reflected in today’s Investors Intelligence release in which the bulls rose to 51.6% from 48.3%, and the bears fell to under 20% from 23.1%.

  73. i think the useg story is very interesting

    the company is also buying back shares

    by investing in wells in the bahken with bexp and PQ and Houston Energy they get to piggy back on releases from their partners

    Took some..

  74. BOP – yes I saw it. Kass is often early.

    Z – totally agree and whilst they continue to make the calls the top will remains elusive. That said I am wave counting and we are close – the question for me is how important a top it will be. We are in a big C wave up and this top could be all of it or just i in which case we go much higher after the pullback. I am leaning towards the latter as cycles are pointing that way too.

  76. Jerome — i’m in the camp that thinks KOG breaks through that $1.50 brick wall and just keeps on going.

    Then, we would get a 2ndary… but, for not more than 10% dilution, I think. But that would fully-fund their capex program through 2010 and we would be good to go higher.

  79. Hi BOP…if KOG breaks 1.50 and never looks back I will try to buy pullbacks off major P&F resistance at $2. Stock will probably hug the reistance line, then buy more on a break above resistance looking for 3.25 price objective

  80. USEG: a friend was all over stock and mgt finally wore him out. From what I remember they appear to be doing the right things but it never accrued to the shareholders. He is fishing today so I will get his recollections tomorrow (unless fish not biting an he calls, but I am joining him in an hour).
    Quick read on KOG is 1.50 is a beakout o the .10 cent chart, often followed by a 3 box pullback (1.20). Downtrend line at 1.80 should pause stock if it breaks out. Humbly, fwiw.

  81. Hi RMD…in my view this price range is tricky with the box size changes at low prices, I tend to still use a .25 box size because that is what the majority of folks look at on commercial charts

    Hi elija, can you clarify what you mean by 11 data?

  84. Someone on CNBC pointed out not to get too excited about the housing data today when the margin of error for those numbers is 13%!

  85. Nicky #62 – in other words, it was up 10% from a whole lotta not much. Fair enough, but all I was saying is that it seems like it might be a real 10%, i.e. actual people instead of statistical fakery.

    It’s not a high bar I’m setting – but most of the “good” news doesn’t make it over even that bar. I’m *very* wary of the macro picture overall. I just want to make sure that I don’t get used to reflexively dissing every bit of fake optimism that I lose the ability to spot something that is actually changing. Even if it is only a small thing. I say a small thing because I find it hard to believe that whatever recovery occurs will be housing-led (!)

  87. 86 = wow. The EIA may have its issues but the ranges aren’t so big you could drive a 26% point sized truck through them, lol.

  88. From the dept of “Nicky made me do it”:

    I downloaded the new home sales press release & sure enough, it is up 9.6% +/- 13.4%. Helpfully, a footnote at the bottom says: “90% confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero.”

    They also say that it takes 4 months to establish a new trend in these numbers.

  89. How to tick off your customers 101.

    SLB CEO on the tape saying gas prices will remain low due to oversupply. BUT oilfield services costs are going to rise soon. He called that last part “the bad news” but who is he kidding?

    He said prices have bottomed and he expects them to start rising as early as next month.

  90. Another green shoot goes into the stir-fry. That’s one thing no-one talks about: all these green shoots have nutritional value.

    I guess it’s a bit of a quiet day in market-ville.

  92. It was at a CERA meeting. I’ll I saw was a few quotes. He mentioned the prices on lots of things had fallen because of lower steel prices but that that had stopped. Sounds like the answer is “because I can”. My response is that that remains to be seen. I think if gas prices don’t rebound pretty quickly you are going to see the gas rig count quickly retest the lows from a month ago and maybe go lower. Not a lot of plays economic (like about none) at $2.80 gas so its hedges and when the hedges run out it …

  93. . #81 – Investors Intelligence Bulls vs. Bears Survey. Bulls 51.6% Bears 19.8%.
    Itā€™s a survey of some 140 financial newsletter writers and these #s were last seen in Oct ’07. So, no P&F, no Elliot Wave, no Fib stuff, but a pretty simplistic read on intellectual comfort and compliancy in the investment community. Since Markets turn when the great majority least expect and generally on good news it is an easy reference point for simple contrarians such as I. Interestingly it is dovetailing with Elliot & Fib work.

  94. Wyoming and TexW or anyone else in the field feel free to add your two cents on SLB’s ability to push price increases on the gas focused E&Ps.

  96. Right now and for most of the summer UNG has correlated (% wise) well with Nat gas (.98). They have gotten terrible press recently with the NAV issue and CFTC position limits pending. If you look at a spread study, its true, you would have done much better buying the front month future vs. UNG, but this is with strong Contango, to me with UNG at all timne lows and lower?,when backwardation occurs, UNG will be in huge position to benefit, and it has enormous insitutional support (Re: volumes)which is not talked about much. I’m a buyer here. Just for fun, the bearish price objective on a P&F chart was 26, you can’t get any more oversold…you can actually….

  97. Yep, $2.80 sure is the twilight zone. When the curtailment crunch happens (i.e, soon), which E&Ps would you expect to take the biggest hits?

    The Alberta spot price is about C$2.33 today, i.e. US$2.12. Any Canadian gas economic at that rate?

  98. D – Assuming that takes gas to some new low and isn’t the signal for the short covering to begin I would assume they talk them all down, with gassier names, regardless of hedges, being hit worse. So SWN, RRC, UPL, BBG (rockies will get hurt worse), CHK etc … anybody without a big oil or liquids cut to their production profile. Again, that’s if they take gas down hard for the curtailments.

    more in a second …

  99. And to your second question… no, not that I’m aware of. The rig count up there is not recovering by the way.

  100. No fill on my KOG, back to even on the day.

    Back to the gas question. There has been some new storage added over the last few years. I think we get fuller in the Rockies than the other two regions, at least fuller first. Gulf Coast and Eastern region have seen small storage built, don’t have size off top of head.

    But going back to last Thursday’s charts recall that high storage early in the season often leads to lower injections later in the season. So you have some self curtailing going on as the high storage seasons progress. I think that happens again this year. We are at 3,204 Bcf in storage now with some people calling for a 4 Tcf exit. So 800 Bcf to inject over the next 10 weeks to get us to the end of October plus or minus a week or two depending on the weather. In the years where storage was already high at this point, the average is closer to 550 Bcf. My point is the push back on prices leads to curtailments, public, like NFX, or more quietly, as announced on the 3Q press releases. “we could have made our numbers but we opted to shut in production to wait out higher prices” will be an oft repeated phrase.

  102. Ooh.. curtailments on the sly. When does it become material to the extent they gotta announce it?

    Gap fillage in SPWRA. Only took a month.

  103. … and the stocks are starting to green up a bit. Or at least de-redden.

    Dman – did that answer your question?

  104. #103 – yep. Looks like E&P’s are playing chicken with NG, hoping to avoid curtailments until the price rises. But it won’t rise until curtailments happen (announced or otherwise) or the hurricane wild-card removes the element of choice.

  105. If you have guidance out it becomes material when the curtailment will push you out of the guidance range but it is still a judgement call whether or not you say anything.

    The real trick is to make people think you are curtailing and then not curtail. Aubrey did this last quarter. One thing that should have put more fear into me at the time was his ability mimic Eric Cartman basically saying “screw you guys, I’m producing gas!” That should have been a pretty good indicator that Aubrey was in full out generate cash flow at the expense of prices and maybe hurt my unhedged peers in the process mode.

  108. …on the flipside it means Suncor and the rest of us oil sands producers are getting a break on energy costs which represent >50% of our upgrading costs.

  109. V – true enough. Have not really seen much of a move out of SU. With oil where it is I would have thought it would have been higher.

  110. Re OIH, marching orders are to maintain price capture or reduce further. We will not hesitate to use other vendors if pricing is out of hand or shut down projects.

    Heading of out of town for a meeting and wanted to get that in.

  112. VLO says Aruba refinery shut indefinitely. There had been some question about would they or would they not bring it back up soon, after having tried to sell it. That’s gasoline price supportive as it removes a little import capacity.

  113. kog went down and hit previous resistance and bounced up. bop have a good vacation. if u get some #’s from kog let us know

  114. Beerthirty at tad early. Paint drying action as the market tries to close unchanged on the day. Several names well off low…pretty much write of that day. Here’s to some news on the near term horizon.

  115. West — thank you for your kind words!

    z — you missed your antelope today…. tee hee hee (but, in this mrkt, who knows… may get a second swat at the herd tomorrow)

    west, kyleandy, occam, john11, jiveyjr, z, bill, and all the rest of us in the KOG Camp… here’s to hearing some decent numbers on wells 5 and 6. Could hear as early as this Friday, I would guess. And as soon as KOG can get those wells producing, that will be a 33% jump in monthly revenues (approx).

    Anyway, i’m gonna make like TechTrader and take the rest of the summer off. Will check in every once in a while, but meanwhile, Happy Trading Everyone. — BOP

  116. BOP – I already a little chunk so no worries. Have fun on vacation. Do like I did and don’t watch the market at all. You will be missed.

  117. [i know you have some… that is why you got included in the next paragraph… the Friends of KOG Club. And thanks for the advice. cheers!]

  118. Have a great vacation BOP. I got hit on a KOG add at $1.25 this morning. We’ll see what happens.
    FoKOG club…lol

  120. useg up about 40 %

    Nice one day gain

    Im glad i jumped on at 2.47

    Im not sure if its worth more than 3.00

  122. Thanks,

    What kind of IRR do you think USEG modeled for the wells? or maybe what could one expect with 70 dollar oil and all wells being averaged.

    i think if i was providing the cash Id want 20 %

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