Energy Stock Trader: Thursday Outlook

by: Steve Zachritz

Yesterday was my kind of day! Refiners down, tankers up...big! See the portfolio changes below. All right, enough of that.

From the people who brought you United States Oil Fund ETF (NYSEARCA:USO), Victoria Bay Asset Management, comes United States Natural Gas ETF (NYSEARCA:UNG) -- the somewhat unfortunately named natural gas ETF. It's designed to mirror movements in Henry Hub prices. Note to readers: If you want to trade oil and/or natural gas, do yourself a favor and get a futures account. At least if you plan to be long. Why buy an asset backed ETF that charges a management fee? I really don't get that.

For example, let's take a look at the how the USO ETF, which began trading April 12, 2006, has borne up against its stated benchmark, West Texas Intermediate crude.

According to the USO's profile on Yahoo:

The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate [WTI] light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is non diversified.

Now, at one week past the USO's one year anniversary let's see how it bears up against WTI.

WTI vs USO 19 04 2007

I don't know if it's the expenses or the "investing in other types of crude, yada, yada, or other oil interests" that has caused the divergence, but man did they fail to match WTI!!! As for UNG, I may use it from time to time as a short term vehicle, but for a long term hold -- not a chance.

Yesterday oil sank then rallied. May crude, which expires Friday, was off $0.50 before and after the inventory report, but caught a nearly one dollar bounce towards the close of NYMEX trading to settle off $0.08 at $64.38. The bounce is most likely attributable to Mahmoud and his atomic sabre telling anyone who will listen "we will cut off the hand of any invader". Wrong -- 15 Brits came home with 30 hands just a week ago yet you called them invaders. You have to be consistent, or you become the boy who cried wolf.

Let's take a look at those oil inventory numbers:

  • Crude: A 1 million barrel draw instead of a small expected build. More refineries demanding crude was the driver. Crude imports actually rose by another 100,000 bopd. Iran and Venezuela said last night that OPEC quota compliance is flagging -- thanks for the confirmation boys!
  • Gasoline stocks saw a draw of 2.7 million barrels, about double Street expectations.

Imports tick back over 1 million bgpd. No comment, other than that this needs to continue.

Utilization increases to 90.4%, crude inputs to refineries increase commensurably. My back of the envelope reckoning of refiner restarts had utilization breaching 90% next week, but there are 144 refineries in the U.S. and not every one makes a headline out of starting and stopping production. Utilization should top 91% next week.

Crude Inputs 19 04 2007

demand growth actually fell off it's recent torrid pace. Demand response to high prices? Maybe. But two weeks does not a trend make. We need to see another couple of reports before getting comfortable with the idea that the consumer is once again caring about near $3 gasoline. Next week should see a lower number based on the impact of snow in the west and midwest and the rain in the east.

Demand 19 04 2007

Natural Gas: Draw certain but it doesn't really matter.

  • HDDs rose to 144 last week as a (last) bought of cold weather traversed the country.
  • Last year we saw a build of 57 Bcf, but the transitional weather seen in this should season month has yielded a broad range of expectations (-47 to +69 going back to 1994).
  • Storage stands at 1,592 Bcf, the second highest level for this time of year on record and nothing short of a 86 Bcf withdrawal is going to knock this week's storage tally out of second place.
  • My expectation: a withdrawal of 45 Bcf. Caveat: I don't hang my hat on expectations during the shoulder season, as demand is often relatively soft and storage operators have a different set of priorities this time of year which can lead to some odd looking numbers.
  • Tomorrow or this weekend we'll take a look some more forward looking gas demand data.
  • Natural gas near-term forecast: I continue to this gas makes a run on $7 and perhaps falls as low as $6.50 within the next two to three weeks. After that everyone, including this site, will start closely watching dust and water vapor whipping off the west coast of Africa for signs of the next bad blow.

Holdings Watch: Next week will probably be the last one in which I touch May options. Moving on to June and beyond with this week's expiry.

Sold half the Tesoro Corp. (NYSE:TSO) 110 May puts for $6.60. Trust me this is nothing to cheer about given my refiner put performance for the last 3 weeks, but it's a start. The performance tab is updated as well so you can see for yourself the pain and suffering of my other Tesoro puts. That Western Refining Inc. (NYSE:WNR) put position looks pretty good though, and their deal with Giant is definitely on the rocks.

Newfield Exploration Co. (NYSE:NFX) -- added an initial position in the $45 May calls and I really don't care what the stock does between now and earnings (April 26) as the Woodford update on the call should be pretty illuminating.
Teekay Shipping Corp. (NYSE:TK) -- sold two-thirds of my $55 May call position for $5.30, acquired beginning late April for $1.70. Investors cheered TeeKay's 1/2 acquisition of OMI Corp. (OMM) this morning by driving (TK) up a whopping 7% on the day! Hey, I was in for the whole "OPEC 's cheating hypothesis," but if people want to bid up the acquirer in a merger, who am I to argue. Buy something else guys!

Analyst Watch: Tsakos Energy Navigation Ltd (NYSE:TNP) and Teekay Shipping Corp. (TK) go from hold to sell at Citigroup which has managed to downgrade a different sub sector of the energy complex every day this week. Carrizo Oil & Gas Inc. (NASDAQ:CRZO) downgraded to neutral at Wachovia which may provide the buying opportunity I've been looking for.

China Watch: Crikey! 11.1% GDP Growth. Look for the spin here to be bullish for oil. More on this later.

Alaron Watch: Day 2. That inventory report didn't help. Maybe Mahmoud can.