Oil Stock Trader: Thursday Outlook

by: Steve Zachritz

What a whipsaw! All determined by the broad markets, with neither the downdraft nor the updraft determined by oil, which actually closed at $58.16 after a brief dip below the $57.50 level (my initial target for a pullback from last week). In fact oil trailed around in lockstep after the Dow Jones Index most of the day which seems normal for an important sector in a choppy until you look at that same chart for the last year. Some credit also has to go to natural gas, which retook the $7 level, and inspired a small rally in the gassier E&Ps.

I said this in comments yesterday:

It [natural gas] did so after the heating oil [HO] number came out which was bigger than expected. The expectation is that a big HO draw today means a big gas draw tomorrow. Not always true. The HO relationship with temps is not as linear as is the relationship between gas and temps. I think this rally in nat gas gets reversed tomorrow.

I stick by that.

Natural Gas Inventory Day

  • My expectations -- 90 Bcf. Degree days were roughly identical to the prior week (in aggregate) when we got a 102 Bcf withdrawal. Of that number 12 Bcf was a database adjustment. Note: the EIA’s file does not yet reflect year-ago figures from the weekly natural gas report. I have emailed them to update the database. When they do I’ll update the gas storage page.
  • Street -- range of 80 to 140 Bcf, consensus was unknown at the time of this post.

I’d bet the over/under is 100 Bcf. Below that and you slip towards $7 immediately. Above it and gas may get a small reprieve -- say a day or two at most before it again heads toward $6.50. The reason is simple: degree days are expected to fall by nearly half this week. I won’t surprised to see another burst of cold make for choppy trading, but I still expect to see lower prices in the second half of March and early April, setting up a good buying opportunity in the quality E&P names prior to summer’s heat and hurricanes.

If we get a 100 Bcf number today and average withdrawals for the remainder of March, we’re likely to bottom out with more than 1,400 Bcf in storage. Well above the five year average of 1,232, Bcf but well below last year’s 1,692 Bcf number.

OPEC Watch: The ministers begin the first of a two day meeting today in Vienna. I’ll update in the comments section.

We received little help from yesterday’s inventory report in hobbling the 3 legged stool upon which high gasoline prices rest. Utilization continued to slide, although according to the companies that’s about to reverse, imports ticked up but only just, and demand ebbed but also only just.

Hey, if demand and imports move in the same direction next week (down and up respectively), the stool should start to wobble a bit under the weight of $0.40 of gain in RBOB prices since mid January.

Extended maintenance and snafus are keeping utilization low.

Low Utilization 15 03 2007

Imports may be trending lower, but this is after running high to historic norms:

Gas Imports 15 03 2007

From EIA’s comments yesterday:

Gasoline imports have also dropped, falling below 1 million barrels per day the last six weeks after averaging 1.15 million barrels per day in 2006. After receiving a lot of gasoline imports earlier in the season, gasoline stocks are relatively low in Europe and refinery maintenance has begun there as well, just as other parts of the world see an increasing need for gasoline. As a result, the arbitrage for shipping marginal gasoline supplies from Europe to the United States diminished considerably, further limiting imports.

Demand actually fell slightly from a week ago, but remains elevated for this time of year:

Gas Demand 15 03 2007

Two charts straight from the EIA’s weekly are very telling of just how much of a rise we’ve seen in gasoline prices this season:

Gas Driving Season 15 03 2007

Recent Gas Price Hikes 15 03 2007

Wow -- with price action like that inventories must be very low! No, they’re still above average. So what do you think happens if we’ve gotten the pre-driving season rally already out of the way, and refineries start coming back into service?

Gas stocks and days of supply 15 03 2007

Holdings Watch: I took a little Tesoro Corp. (NYSE:TSO) put position yesterday - May 90s puts between $3.40 and $3.60 (average is close to the top unfortunately).

STEO Watch: If you don’t read the EIA’s short-term energy outlook, you should. The price estimates move around as oil and gas prices do, and I’ve found them to be utterly worthless beyond the next few weeks in predicting price. No offense meant, but they stick pretty close to current prices with an eye towards what’s happened in terms of direction over the past month. However, the data they keep up with is phenomenal.

Briefly, they expect the OPEC surplus to increase in 2007 and 2008 to 2.0 mm bopd from 2006 levels of 1.3 mm bopd, yet they expect oil prices to be up relative to last year on higher demand in 2007 and again in 2008. This is in spite of the fact that early year demand came in lower than expected, and that non-OPEC supply is growing faster than expected (Caspian Sea, Russia, Africa, Brazil, and even the United States). That’s a head-scratcher. Growth in demand is expected to slow as well. Hmmm.

And here are their thoughts on gasoline inventories:

Total motor gasoline stocks are projected to be at the upper end of the normal range throughout the forecast period. Nevertheless, continued demand growth pushes inventories (measured in terms of days-of-supply) steadily lower, setting the stage for an increase in gasoline margins and retail prices.

Who do these guys work for? I mean -- steadily lower? That’s the red line in the last graph. Does that look steadily lower, especially given the season? These are smart guys, but sometimes you’ve got to stop contradicting yourself or trying to make the data fit the scenario and just say things don’t make sense, are irrational, overblown etc.

Endeavor International Corp. (NYSE:END) Watch: Back down to $2.11 after 2 days of very little volume. To me this one is fire-and-forget (or at least check infrequently). Either way, I hate to be that guy at the poker table who only points to his recent gambles when they’ve immediately paid off.