Wrap – Week Ended 3/26/10

It's Good To Be Back! Thanks to all who kept the site rolling and me informed over the past week. It was a lot uglier week than the energy indexes would have you believe and I'll have more comments on that in the Monday post.

Since I was out for the EIA inventory reports last week, here are the summary tables and a couple of graphs:

As you can see we are not going to make it to my 1,500 Bcf end of season target due to warmer than normal weather. This puts the burden of a gas price recovery on the end of month supply reports and the trajectory of injections as we enter the cooling season. I expect gas to trade in a fairly erratic manner in a band of $3.75 to $4.50 between now and May 1.

Oil Inventories: The big build in crude was almost entirely due to a big jump in imports which is unlikely to be sustainable and will in fact probably reverse partially back out in this coming week's reports. Good to see the demand pick up for gasoline and the bigger than expected drawdowns of inventories of gasoline and distillates. I expect crude to hold the $75 to $85 level for the next several weeks but it could see further upside if gasoline demand accelerates in front of the driving season and/or refiners continue their discipline of sharp throughput curtailment. Note below that inventories are in fairly good order now except for distillates but that should see some return to normalcy in the second and third quarters this year.



6 Responses to “Wrap – Week Ended 3/26/10”

  1. 1
    BirdsofpreyRcool Says:

    [end of day Friday, from an energy-only trading desk]

    Thoughts f/ our Desk: Ngas and sentiment (look to names w/ catalysts EOG, BEXP, PXD)

    After marketing on both the west and east coasts the last couple weeks, talking with people after a competitors conference this week, sentiment (regarding ngas in particular) is as bad as we have seen/heard in ~6 months. While all of you know this, what I want to point out is that while those that can take a very short term view “want” to be contrarian and put on a “gassy E&P trade”, very few to none are actually doing it. And many are actually asking if they even get involved before 2011. Usually when the ship is leaning one way, its advisable to go to the other side, but it “ain’t” easy. And honestly, sometimes the right thing to do is simply “nothing”. However, I can give you the following reasons why ngas should be finding a floor (Coal/Ngas switching, Pacific NW Hydro issues, E&P’s floating trial balloons at competitors conference of dropping rigs, slowing growth, etc) but I can’t assure you ngas can’t/won’t go to $3.50/mcf or lower before it goes to $4.50/mcf or higher. So since I have talked myself out of making an aggressive ngas call, I will highlight names that based on 3/24 closing prices are currently trading near or have upside to our 3P NAVs using $4.50/mcf and $81.70/bbl (APA -1%, NBL 17%, OXY 10%, CIE 19%, CLR 5%, CXO 0%, PXP -1%, WLL 8%, ARD 9%, BEXP 23%, BRY 44%, ME 6%)…. See the theme…? Mostly “oily”.

    One of my biggest concerns is that current activity is not necessarily being driven by economics today which then further complicates what to do with the stocks. Hedging, JV “Carries”, HBP issues, etc., are driving activity as much as anything else. I would argue that some operators are even thinking “everyone knows ngas is a disaster and to hell with my typical ~20% IRR hurdles, even if I am making just $.01/mcf on my production…at least I am proving up reserves (in addition to HBP’ing) and therefore accreting my NAV so that my equity is worth more when ngas eventually recovers. And I’m not going to give someone “open season” to short/underweight me if I do the “right thing” for the industry near term by dropping rigs/slowing production growth”.

    So while it isn’t as fun to be non-contrarian, put $ in names that have potential upcoming catalysts – including EOG and PXD, BEXP and don’t shoot me but even HK…all of which could benefit from EOG comments at their upcoming Analyst Day.

  2. 2
    1520sbroad Says:

    Z – welcome back. I was just rolling thru my email and saw a pr from SWN this evening about a new program based on some bids they won for acreage in New Brunswick. Release is at swn.com. I’ll be curious to learn more about this one from anybody that knows that area. All my canadian knowldege is a lot further west. I guess that’s where the ‘New Ventures’ budget is headed. I hope it’s oily…

  3. 3
    nifkin Says:

    looks like golmand upgrading some energy names .. SWN to conviction buy

  4. 4
    nifkin Says:

    thats Goldman, sorry

  5. 5
    BirdsofpreyRcool Says:

    BedTime Market Strategist

    Renminbi Rage or Yuan Yawn.

    It is that time of year. Spring has arrived. It’s all around us with the snow melting, flowers blooming, and the latest uproar among politicians complaining about China’s currency peg to the Dollar. The reason this debate heats up the same time every year is that along with being Tax Day, April 15th is the date that Treasury publishes its “Report to Congress on International Economic and Exchange Rate Policies.” The rhetoric has increased among U.S. politicians threatening legislation to label China as a currency manipulator. One aspect of the argument that is interesting is that China’s RMB peg has caused the loss of American jobs. The United States has endured an historic recession with record job losses, the majority of which was this nation’s own doing. Financiers made money available and borrowers took loans they could not pay back. The manufacturing jobs that have been lost to China over the past decade pale in comparison. Over the past year, we have argued numerous times that we believe the status of the U.S. Dollar as a reserve currency enabled the bad financial behavior that ran rampant in this country. Consumers bear some of the blame as well. Just because credit card companies send low interest rate teasers in the mail, it does not mean that every recipient should accept every offer. It’s plausible that China’s purchases of U.S. Treasuries likely created a fair share of jobs by pushing U.S. interest rates lower over the past decade. The most ironic and arrogant aspect of these anti-China allegations is that the U.S. has expanded it Monetary Base by 150% since September 2008. It is true that most of this money has not turned into money supply as of yet, but the U.S. has created an environment where more of it certainly can and is likely to. Depending upon the Fed’s execution exit strategy, the U.S. is potentially in the process of committing the same offense for which it regularly criticizes Beijing.

    The question for investors in all corners of the world is whether the U.S. will finally follow through and formally label China as the currency manipulator it is undisputedly, unofficially recognized to be. The reason the concern is elevated is because if the President was still in Congress, he would be among those supporting such legislation. During Treasury Secretary Geithner’s confirmation process in January of last year, he responded to a question from Senator Schumer about this issue with the following, “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.” The President often speaks of accountability so the concern obviously arises that the President will officially call China what he believes it to be. Later in the response, however, Geithner left himself some wiggle room saying, “The question is how and when to broach the subject in order to do more good than harm.“ When Treasury published its report in April, it steered clear of labeling China a manipulator. The reports provided,

    China’s continued large current account surplus and accumulation of foreign exchange reserves suggest the renminbi remains undervalued. To limit the pace of renminbi appreciation, the PBOC buys foreign currency in the foreign exchange market, adding to China’s stock of foreign reserves. Chinese authorities have stated that they recognize the need to address the imbalance in their domestic economy and have made “rebalancing” growth a key feature of China’s 11th Five-Year Plan. Limited progress has been made and household consumption growth remains weak.

    April 15, 2009

    Most U.S. investors do not even give the possibility of labeling China as a manipulator a second thought primarily because they believe Treasury recognizes that the potential unintended consequences could be catastrophic. In a world looking for stability as we try to exit the worst economic environment in 1-2 generations, opening the nation up to a tail risk event hardly seems like good policy. In that sense, Geithner’s disclaimer about timing still applies. Investors view the world in terms of risk and reward. For taking the risk of labeling China a manipulator, what is the reward? There will be no new manufacturing jobs, at least not anytime soon. Will China react “well” and alter its currency peg? The answer ranges somewhere between a very highly doubtful to a categorical no. Could the maneuver lead to a trade war? Yes, it could. Will China stop buying Treasuries and send interest rates higher? Maybe, but China has the leverage in such a debate. Those very purchases of Treasuries are what support the peg, so for China to retreat from the U.S. Treasury market, the move would likely lead to RMB strengthening, but also higher interest rates here in the U.S. Politicians here in the U.S. need to be careful about what they wish for.

    There is an option the Administration has if it is intent upon pursuing the intellectual honesty of the situation. Just as the U.S. and the Federal Reserve responded to the crisis when it began to reach its most desperate levels in the Fall of 2008, China also responded. China chose to halt the gradual strengthening of the RMB which it had been permitting since 2005. Just as the U.S. chose to expand its monetary base during the desperation phase, China chose to peg its currency to a nearly static level (see chart). Not only preventing additionally strengthening, but they also did not make attempts to weaken which would have further upset the global balance. Arising from the from the crisis a year after the U.S. equity bottom is opportunity for the U.S. to label China as currency manipulator, but Treasury can do it in a laudatory nature noting China’s response to the crisis environment was one of stability provider. Such nuanced response does serve the purpose necessary while also permitting the avoidance of retaliatory tariffs that could trigger a trade war. China has stated it has plans to resume the strengthening of the RMB, therefore drawing the line here in such a nature provides China with a mulligan on the issue of manipulating without losing face, but would also create a benchmark from which future Treasury reports will be kept honest.

    In this risk versus reward business, traders and investors know that once they let a position get beyond their control, it usually only gets worse until it is light’s out. In labeling China a manipulator, there is a high risk of opening the prospects of higher interest rates or a trade war, the rewards are low (let us know if you come across any tangible ones), and many aspect of the situation are beyond U.S. control. Secretary Geithner recognizes this. The following comments he made on CNN last week indicate that Treasury will continue to pursue an affable approach,

    Well, China is a sovereign country. China is going to have to decide its exchange rate. We can’t force them to make that change. But it is very important that they let it start to appreciate again. And I think many of them understand that – I think they’ll come to decide it is in their interest that they move. And I think it is quite likely that they move over time. I think China will be better, they are more stronger as an independent country if they are not running an exchange rate policy that essentially has the Federal Reserve of the United States setting monetary policy in China.

    We have also laid out the framework through which the Administration can attempt to chart a new course, but they would quickly need to sell the theme we laid out to both China and the Markets. Based upon the Treasury Secretary’s comments last week, that does not appear likely. To conclude, the fear of unintended consequences is a very legitimate concern which is likely the reason that Treasury will not brand China as a manipulator.

  6. 6
    apbd Says:

    Glad you’re back safe and sound with the other Z’s
    Bless you,

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