Energy Stock Trader: Thursday Outlook

Includes: CRZO, MUR, TLM
by: Steve Zachritz

Oil: Crude edged over $60 in overnight trading after a quiet first-day session for the May contract yesterday. This move above $60 will I’m sure be heralded with great fanfare on CNBC.

The EIA makes a few good points in its weekly petro piece about why it thinks April NYMEX crude was trading so far below Brent and the outer months in recent weeks.

  1. First, lack of demand for WTI. Demand slumped as one Gulf Coast refinery after another went through extended maintenance outages. This is about to change, which will pressure gasoline prices but lift crude prices. Not the best of all worlds for the refiners.
  2. The EIA also sighted high crude inventory levels (which if I’m not mistaken got even higher yesterday but I digress).
  3. Finally, the EIA says that a “wave of sellers trying to balance their accounts, putting downward price pressure on WTI” may have been brought forth. Ahh, hedge funds.

Let’s take those inventory numbers apart, because according to the EIA’s report inventories did some zany things last week. And that’s not a word I use often nor lightly.

Crude -- up 4 million barrels vs. a Street expectation of a build of just under a million. Imports rose to 10.418 million bopd, their highest level since the second week of January (blame it on a lack of fog in Houston). The following chart shows the min. and max. import range since 2000. The last two years are highlighted to show that import levels are by no means running low this year, either to average levels or to even to last year when OPEC claims to have had over one million more barrels on the market:

Import range 22 03 2007

Let’s take a closer look at this first three months of each year, just for kicks:

Import range first 3m 22 03 2007

That just doesn’t look so dire. For the first 11 weeks of the year, the U.S. has had imports of 9,802 million bopd. In 2006, the same period saw imports of 9,813 million bopd. Let’s see -- that yields a drop in imports of 11,090 bopd. Given that this is the 11th week of the year, and that there are generally 7 days in a week, that comes to a stunning 854,000 fewer barrels imported to the U.S. this year.

Not per day, not per week, but total. In other words no change. So much for OPEC’s cuts showing up on our shores. Bahhh.

Gasoline -- down 3.4 million barrels vs. a Street expectation of a draw of 1.8 million.

  • Refinery utilization rose 0.7% to 86.3%. As this comes up, gasoline prices are likely to fall.
  • Additional gasoline produced: 434,000 barrels for the week. That seems a little light given the increase in utilization, but it’s only a survey.
  • Blending components accounted for over half of the drawdown in gasoline, a signal that refineries are taking on stocks to begin ramping up gasoline production.
  • For what it’s worth (and I think quite a lot), the American Petroleum Institute [API] showed a much more plausible INCREASE of 0.75 million barrels of gasoline.
  • Gasoline imports fell back again. Europe wants our gas and they’ve been willing to pay more for it.

Gasoline in storage remains healthy:

Gas in storage 22 03 2007

Year over year (YoY) gasoline demand growth has slowed dramatically since the end of the last driving season:

yy Gas Demand growth 22 03 2007

Yesterday’s comments were littered with some ALL CAPS TYPING regarding the overbought nature of a group of refiners which I reserve for times when I see prices advance (in that case the stocks and gasoline) in the face of data which early on was being misinterpreted. They all sold off from 52-week highs shortly thereafter, but recovered slightly into the close on the market’s bullish reaction to the Fed announcement.

Distillate -- down 1.7 million barrels; pretty much in line.

Natural Gas Inventory Day

  • My expectations have been off of late, and with the waning cold things can get squishy pretty fast. I’m going with a range of 40 to 60 Bcf. I had not seen a Street consensus estimate at the time of this posting.
  • Gas weighted degree days fell 40% to 108 last week. The last time it was this warm (in aggregate) was the week of November 18, when only 1 Bcf was withdrawn from storage.
  • Last year it was about 20% colder than this year
  • If we average 40 Bcf withdrawals for this rest of March, natural gas will trough around 1,400 Bcf, comfortably above the five-year average of around 1,200 Bcf (I’m including 2006 here which saw light demand and supply in the aftermath of Katrina). Average trough storage for the period 2001-2005 was 1,025 Bcf.

I still think natural gas needs to test $6 and hold before I get more bullish on the group, although I’m sure CNBC is going to have a swirling gas price ticker to celebrate the advent of hurricane season.

The Fundamental’s Don’t Matter Watch: An analyst at perma bull Fimat said that “while lacking supportive fundamentals now, there can’t be many who think the probability is high that another hurricane season will pass as passively as the last.” That last bit even sort of rhymes if you say it fast enough. I know what he means, and we all know that natural gas will spike when the first tropical wave rolls half way across the Atlantic, but I’m not sure these guys ever care about the fundamentals. El Nino not working for you? Hype La Nina. Cold ending too early for you? Hype hurricanes. When do you ever see a quote about the fundamentals from these perennial media favorites?

Canadian Spring Forecast: From Accuweather, sounds like a mild spring, eh.

Random Company Thoughts:

Talisman Energy Inc. (NYSE:TLM) is doing good things in Vietnam. Another E&P I like with great management and a somewhat downtrodden stock price.

Doing a bit of work on Carrizo Oil & Gas Inc. (NASDAQ:CRZO). Like what I see so far. It will likely make the list of longs once natural gas has fallen into the low $6s. They done well as a late entry into the Barnett, and have amassed a good sized acreage position in several other promising but early stage shales. Could have results from a Floyd Shale test by April/May, which could give them a new core area to develop. Not buying just yet but watching more closely than ever. Modeling slowed by a lack of guidance, which is good in a sense as they’re not out there over-promising and under-delivering like some of their peers.

Murphy Oil Corp. (NYSE:MUR) is back in the press talking about tripling the company’s size by 2010 primarily through asset or company acquisitions. They’ve announced a predilection for an acquisition that gets them into new plays.