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It really wasn't much of a blue Monday for the refining group -- despite a couple of downgrades for group leaders Valero Energy Corp. (NYSE:VLO) (in terms of capacity) and Tesoro Corp. (NYSE:TSO) (in terms of recent stock performance). Gasoline and crack spreads had a much worse day. For once I agree with the talking heads... this is just profit taking. We need data and the passage of a little more time before a reversal can take place. A brokerage firm or two downgrading the sector simply won't get you there.

Speaking of brokers, the refinery ratings count now stands at:

Refiner Rating 17 04 2007

The Street is still pretty bullish.

Refinery stock frenzy has outpaced margin expansion. Take TSO for example:

TSO vs RBOB 17 04 2007

Natural Gas Sentiment Watch: Increasingly less bearish on natural gas/more bullish on a select group of natural gas players: Carrizo Oil & Gas Inc. (NASDAQ:CRZO), Newfield Exploration Co. (NYSE:NFX), Southwestern Energy Company (NYSE:SWN), Quicksilver Resources Inc. (NYSE:KWK), Chesapeake Energy Corp. (NYSE:CHK), Devon Energy Corp. (NYSE:DVN) and Anadarko Petroleum Corp. (NYSE:APC). Doing homework and waiting for small retrenchment (5% range) in the group before going long -- except for Newfield which I hold for near-term catalysts as well as long-term reasons:

  • While I expect a little late spring seasonal weakness in gas prices as the weather warms up over the next month, I think the downside is limited to say $6.50 or $6 at worst. Much below that and the curtailment press releases come out.
  • Also, there's that giant and probably increasingly nervous NYMEX natural gas short position out there that will cover on profit taking or any cloud formation that even looks like it might start rotating over the Atlantic.
  • We have the second most natural gas in storage for this time of year, and that should help to mute gains in gas later this summer barring hurricanes in the Gulf.
  • However, supply growth is hard to come by outside of Texas and Wyoming. Oklahoma holds promise, but it's early there. The Gulf still looks like a trainwreck despite a post Katrina/Rita recovery, as several large gas projects get repeatedly delayed.
  • Imports are likely to be lower with gains in LNG offset by reduced shipments from Canada and increased exports to Mexico.
  • The 12 and 24 month strips have provided the E&Ps with plenty of opportunity to hedge, and this, combined with strong production growth and decelerating operating cost growth, means they should be minting money all year long.

Oil: Off a whopping 2 cents yesterday. Despite...

  • OPEC cut demand forecast. First the EIA, then the IEA, now OPEC. Down 40,000 bopd to 85.44 mm bopd for 2007. As always, the swell folks at OPEC say they stand at the ready to increase supply if need be.
  • 1/2 Restart at McKee, which started a profit taking $0.064 slide in gasoline. True, we'll consume more oil, but we're at the upper end of the range on crude storage.
  • Exxon reopens Torrence, CA. refinery.
  • Shell Nigeria plans to "resume producing oil from its 380,000 bpd Forcados field in Nigeria, which has been shut since militants bombed its tanker loading platform in February 2006. Shell told us that Forcados would be back up and running by the end of May or the beginning of June," a West Africa crude trader said. ~Reuters. It may take a little while, but this outweights everything else and should weigh on crude prices longer term. For now, the news is lost in the maelstrom.

Crude is advancing modestly this morning. May crude is up $0.55 to $64.16 on a leak in an Enbridge pipeline that carries crude from Alberta to the Midwest. No word on how long this will take to fix, but already those available for late night quotes to Bloomberg and Reuters are calling for oil to increase to as high as $67.50 in the near term.

Early Read On Crude Inventories (from the Bloomberg survey):

Crude: up 850,000 barrels.
Gasoline: down 1.4 million barrels. After two in a row at the 5 million plus mark, and with rising refinery capacity, I think a smaller draw, on the order of the survey, is in order. Some are calling for a bigger pull (another 5 million), but I just don't think so. Utilization probably grew to 88.8%, according to Bloomberg. Yesterday I said it would creep up to ~89%, then 90%ish next week.

Fimat Watch: Even Fimat, Bull of Bulls: "You need to see new headlines to extend gains at this level," Michael Fitzpatrick, vice president for energy risk management at Fimat USA in New York, said yesterday. "Gasoline had been leading us higher because it seemed there were refinery glitches every day. Now, it looks like we will be seeing more refineries coming on line and increasing gasoline output."

Analyst Watch: Callon Petroleum Company (NYSE:CPE) to Buy at AG Edwards and China Petroleum & Chemical Corp. (NYSE:SNP) from Buy to Sell at Citi. CIBC raised price targets for Canadian Natural Resource Ltd. (NYSE:CNQ) and Talisman Energy Inc. (NYSE:TLM), which has been the subject of takeout rumors for quite some time now.

Earnings Watch: McMoRan Exploration Company (NYSE:MMR) -- Strong drilling results combined with flat to down 2Q production guidance make this worth watching, but I'm not playing for now.

Next Big Thing Watch: Carbon Capture and Storage [CSS]. Shell will build a 900 megawatt near zero emission coal fired plant. Using integrated coal gasification technology, the facility will capture the CO2 normally emitted by a coal fired plant and then inject it into a fallow North Sea oil field. If it works this could prove to be a boon for the coal industry and potential a bad thing for companies like Headwaters Inc. (NYSE:HW) and Evergreen Energy (EEE).

Source: Energy Stock Trader: Tuesday Outlook