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Holdings Watch: Refiners: Long -- Valero Energy Corp. (NYSE:VLO). Short -- Tesoro Corp. (NYSE:TSO), Holly Corp. (HOC), and Western Refining Inc. (NYSE:WNR).

Holdings 02 05 2007

Things that stand out from the table above (sorted by forward multiple of 2007 consensus earnings):

  • HOC's forward multiple has been and continues to be very high compared to the group.
  • TSO has enjoyed more multiple expansion since the end of last year than its peers. Tesoro will have a great quarter when it reports tomorrow. Will it be enough to sustain the stock's 83% run year to date?
  • VLO, the biggest of the independent refiners, remains the bargain of the group.
  • Wall Street doesn't see the fat current cracks lasting into next year as evidenced by the expected decline in 2008 earnings.

A recent look at regional crack spreads: West Coast appears to be leveling off while all other regions are playing catch up. Again, bullish for VLO.

Cracks 02 05 2007

Gasoline demand is starting to slip with high gasoline prices: You know it's funny. This is the one chart that no one on CNBC or anywhere I can see a trader quoted is talking about. Demand has fallen for three weeks now. Don't believe me? I don't blame you. MSM and traders alike are pounding you with news to the contrary, and failing to mention they're quoting either data that's a few weeks old or the trailing 4-week average. See for yourself. Are here's what gasoline demand looks like in 2007 year to date when compared to similar periods for 2005 and 2006.

Cumulative Gas Demand 02 05 2007

More on gasoline below.

More Holdings Watch:

  • EOG Resources Inc. (NYSE:EOG) -- took a position in May $75 calls yesterday morning for $1.40 and sold half for $2.40 in the afternoon. Cost control, production growth, making you're numbers when others aren't, and oh yes, cost control.
  • Chesapeake Energy Corp. (NYSE:CHK) -- took a position in the June $35 calls for $0.85 on the premise that cost control is more favored by analysts at present than earnings beats and/or boosted production guidance (Southwestern Energy (NYSE:SWN) had both, but operating expenses rose swiftly as well leaving analysts and investors rather nonplussed).
  • Southwestern Energy Company (SWN) -- I added a little to my June $45 call position on yesterday's dip.
  • Petrohawk Energy Corp. (NYSE:HK) -- this has pulled back slightly and I like it more than ever. No change in positions just yet. In late April they boosted production guidance above the top end of the range but their numbers have not yet come up.

Oil Inventory Report: (expectations from the Bloomberg survey)

  • Crude -- up 1.5 million barrels. This would push crude stocks to 5 month highs. From what I can glean from the press, traders are still bullish, with many saying they expect the 12th consecutive draw in gasoline stocks to support or boost crude prices. I think crude needs to close above $65 and soon or we trade back to the $62.50 level. Of course, a string of gibberish from Mahmoud could accomplish the breakout in a heartbeat, as talks between the U.S. and Iran appear to be increasingly on shaky ground.
  • Gasoline -- down 1.3 million barrels. This actually seems light, since more refiners appear to have been offline than in the prior week. But the data on who's up and who's down is proving to be especially spongy this season. Maybe if imports pick up significantly or demand dips more heavily. We are approaching the $3 mark, which made many motorists choke last summer. Also, gas stations, which had bumped up their purchases from lower levels in the winter, may be getting a bit antsy about purchases at these levels.

MMS Watch -- Gulf of Mexico, arrested sliding production. According the Minerals Management Service both oil and gas production are slated to rise this year. More details on this later, but taken together with inclining production in several key states (TX, WY etc.) it has to take some the wind out of the bull camp.

Alaron Watch -- last day. The silly things people say on TV. Ten or so days ago, the claim was made that crude would rise $5 to $10 from then current May contract levels of $63.

  • Crude Target: $68, Actual $64.50. Moreover, they got a $1.50 bump as the May contract expired.
  • Gasoline Retail Target: $4 somewhere in the U.S. Survey Says?! Nope. National average at $2.97 with a high in the $3.40s in San Francisco.

Latest favorite quotes from Alaron:

April 30th -- "The market is breathing a sigh of relief," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "Traders are locking in profits as the weekend didn't produce any more terror threats and [amid] hopes that talks with Iran might bear fruit." Comment: In the past, I've been heckled from the peanut gallery that is the internet for trying to find a reason or explain the daily moves in crude, natural gas etc. Still, people say, "Crude jumped $2!!! What happened?" They deserve some kind of explanation.

...But from relief, the next day we go to:

May 1 -- "We're in big trouble," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. He noted that [gasoline] inventories stand at 194.2 million barrels _ or slightly above the levels reported in the days after Hurricane Katrina struck the Gulf Coast in 2005, and he predicted that the average prices this summer will surpass the 2005 record of $3.06 a gallon. Comment: That's a long way from the $4 gas comment made two weeks ago. Phil went on to say that gasoline inventories would need to rise to 210 million barrels by Memorial Day... you know that's not going to happen.

But are we going to run out? Take a look at the chart below. Sure we'll probably reach a new low and some areas will likely have shortages, but I hear a lot of talk of running out these days. You be the judge.

Gas Stocks 02 05 2007

Have a great day everybody and try not to drive too much! Unless of course you fill up at a Valero!

Source: Energy Stock Trader: Wednesday Outlook