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XOI [Amex Oil Index] and XNG [Amex Natural Gas Index] continue to be led around by the broader market, despite continued weakness in their underlying commodity. While some of this weakness can be attributed to approaching contract expiry, the near term trend is showing lack of support from shoulder season weather, a somewhat cooled geopolitical climate, and the disappearance of OPEC from daily headlines.

The Oil Service HOLDRs ETF (OIH) raced higher yesterday on the TODCO (THE) takeover, but I’m not playing as I don’t think the rally has staying power beyond a week or two. I could be wrong, but I don’t lose money if I miss out -- only if I make the wrong play. I’m spending a majority of my time working up long ideas for when both oil and natural gas hit their low for the year (later this spring).

Oil: below $57. Crude had another down day yesterday, with the April contract finishing $0.52 lower at $56.59. The oily stocks followed the market higher, with the XOI actually jumping 1.7% and further widening the outperformance of the stocks versus that which they sell. Despite the continued decline in the front month contract, the 12 month strip edged up $0.24 to $62.85, the first increase since March 8th, as trader’s attention shifted from China’s rate hike and it’s impact upon global oil demand back to expected strong demand in the driving season.

Gasoline, on the other hand, had a banner day closing up a nickel to reach a six-month high of $1.96. El Diablo posted a list of potential reasons on the snafu page. Take your pick. The fundamentals remain strong, and gasoline is now up $0.42 (27% since mid January).

I’ve got puts on Tesoro Corp. (TSO), still a relatively small position (and getting smaller by the day), but I’m being patient with my May 90s. That doesn’t mean I’m adding here. THEY want this one to get to $100, and it either bounces off that like a rubber coated ceiling ,or slices through it with renewed vigor on the logic that because it’s up, it should go up more. Either way I wait.

Good follow up article on the state of affairs with regard to oil production in Mexico from Upstream. In a nutshell, not good. Pemex’s head says they won’t see 100% reserve replacement until 2012, and that without foreign investment in costly deepwater Gulf of Mexico projects they have no hope of growing production. Someone please forward this to the Mexican Congress.

Early read on the crude inventory report from Reuters:

  • Crude -- build of 1.2 million barrels.
  • Gasoline -- expecting a draw of 1.8 million barrels. To arrest further price gains we need to see an increase in refinery capacity utilization as well as another increase in imports from Europe. Inventories remain high relative to five year averages for this time of year (March 9 inventories relative to March 9 spot wholesale gasoline prices):

inventories vs spot 20 03 2007

  • Distillate -- seen declining by 1.2 million barrels. Not very important, unless it’s way off the mark, as it is completely overshadowed by what’s going on with gasoline.

Natural gas continues to drift lower. Natural gas slid $0.077 to $6.85, its lowest closing level since mid-January. There is no weather to speak of to support current prices, and despite recent large drawdowns, gas storage remains comfortably above historic averages for this time of year. I imagine there will be a broad range of estimates for the gas storage withdrawal this week, so I’ll be keeping a sharp eye on estimates. With only three weeks left in the traditional heating season, I expect trough storage to fall to just under 1,400 Bcf.

This is not a good weather pattern for gas as we rather quickly exit the heating season:

Weather patterns 20 03 2007

OPEC Watchers Watch: Everyone from analysts to the oil ministers themselves are saying that oil prices are likely to drift higher over the summer as the oil production quotas remain in place. Of course I think they’ll cheat, and it’ll start showing up in the tanker rates (already rising) and tanker loadings (we should see some data in two or three weeks).

Putin Watch: More Gas OPEC Talk. Dignitaries from Russia, Iran, Venezuela, Algiers, and Qatar will meet in Doha to discuss forming a “gas OPEC.” I’d say it’s logistically impossible given the localized nature of gas, and is more of a power trip for all involved.

Oil Sands Watch: Tax breaks are to fade away more slowly than originally thought, but tree huggers still have reason to rejoice. Not great news for the likes of EnCana Corp. (ECA), Suncor Energy Inc. (SU), Nexen Inc. (NXY), and Petro-Canada (PCZ), but investors and analysts have known this was coming for months now, and the phase-in period should help ease the pain until long term higher oil prices can alleviate the need for the tax breaks. At least that’s the theory.

Analyst Watch: Cabot Oil & Gas Corp. (COG) from strong buy to buy at Matrix. OMI Corp. (OMM) downgraded to neutral at JP Morgan.

Source: Oil Stock Trader: Tuesday Outlook