Here's what I think right now (this is my parting shot for the next 10 days or so):
1. Yesterday's report on gasoline was a bump in the road and not the beginning of a mega-rally in gasoline prices and the refining sector. It all boiled down to a hiccup in gasoline imports. Without that hiccup, inventories would have grown easily over estimates.
2. I see RBOB falling back to the $2.10 level next week if no storms or major geopolitics drive it over $2.20 first. A word of caution: Nicki says that if it put in a bottom at $2.10 and that yesterday was the first leg up, it "should explode from here" -- and I'm not one to argue with her on the futures. Which dovetails nicely with point 3.
3. What do I do if I'm in refiner puts? A) When in doubt sell half. My put position there is very small after the rending I took on the way up in May; I was very cautious scaling back in. B) Exercise extreme caution and wait for next week's number before doubling-down, if that's your inclination.
4. Natural gas is likely to rally once injections fall back into double-digit territory. Does that happen today? Maybe. Imports have dropped sharply for two weeks with no response in inventories last week. I'm thinking 95 Bcf, but more on that below.
5. Oil Service HOLDRs ETF (NYSEARCA:OIH) is likely to head higher. It needs bullish natural gas and oil over $65 to do so, but they are just printing money right now -- without out all the angst associated with the knowledge that the good times are freakishly peakish and cannot last (like in the refining sector). Take a look at the 2008 numbers for the refiners, and then the '08 numbers for the major service guys to see what I mean! Sure the refiners are cheaper, but they're supposed to be! Here's a sample.
Want more reasons for the OIH to do well?
Here's one torn from the headlines: Chevron Corp. (NYSE:CVX) postpones drilling at its deepwater Gulf of Mexico Jack Prospect due to rig shortage. It's estimated to hold a half billion barrels of oil, but they can't get to it now because rigs are more urgently needed elsewhere. The rig was actually pulled off this prospect temporarily for development drilling on another project, and while they thought drilling would resume in August, it has now been postponed to late '07/early '08. A company doesn't postpone a half billion barrel test, let alone interrupt one, without good reason.
6. Oil will likely stay up while I'm gone. I'd bet on a range of $62.50 to $67.50 (again barring a major storm). Plenty of reasons for the elevated price:
- World oil prices which remain elevated over OEDC inventory concerns.
- Rebels in Nigeria (they have a teed off militant group, the Joint Revolutionary Council [JRC], that claims to have bombed a pipeline on the 10th, but nobody noticed until last night.
- Smack-talking OPEC ministers (and yesterday their president who said the world is well supplied), etc, etc, ad nauseum, ad nauseum.
Another Strange Oil Report
Crude: Stocks expected down 200-500K barrels. Actual Up 100,000 barrels. OK, that's not so strange given the low refinery utilization number. Crude imports ran just under last week's levels, and the stocks now look like this:
Gasoline: Expected 1.5 to 1.7 million barrel increase. Actual: FLAT. Why? Because Utilization actually ticked down again? No. Production was up and demand was off slightly. The answer lies with the volatile imports number.
Utilization looks odd in light of production and the EIA's own crib sheet. The EIA's utilization number appears disconnected from reality since the production was actually up reaching the 9.3 million barrel I was looking for (1.3% over year ago levels). In fact, PADD I (East Coast) SET A WEEKLY PRODUCTION RECORD OF 2.014 MM BPD. If that's not bad enough, utilization, by a count of what was announced and reported by the EIA, should have been up. They're either missing some major announcements, which is hard to believe given the production levels, or something else is amiss.
Demand Slowing? Still climbing on y/y basis (although it was down a hair from last week from 9.495 to 9.487 mm bpd) as we approach the peak of the driving season, but the rate of climb is manageable at 1.4% -- not the 2+% levels seen in the later part of spring.
Ah, here's the answer: imports backed off big time. Gasoline imports fell from 1.51 to 1.16 mm bpd this week. Is it the start of the seasonal pattern where Europe competes more directly for gasoline or just a blip? My money is on a blip, and that high prices here will result in another 3 or 4 weeks of big imports before they start to fall off for the rest of summer. By then, utilization needs to be cranking.
Recall that imports fell sharply four weeks ago due to a veritable traffic jam in the Gulf Coast before rebounding to the third highest level on record.
Natural Gas Report Preview
My Number: 95 to 100 Bcf.
Consensus: I'm told the range is wide enough to steer a tanker though: 88 to 113 Bcf. While it would take a number far below that range to keep from again shrinking the y/y deficit, I think the over/under for gas prices hinges at 100 Bcf this week.
I laid out my argument for a Week to Week decline in Tuesday's piece. In a nutshell, continued lower imports and weather that week to week was pretty similar should yield a slightly smaller injection.
Chesapeake Energy Corp. (NYSE:CHK) Took half my position off the table at $1.00 for an 18% gain. Then watched Chesapeake Energy Corp. (CHK) run the rest of the day. The other half of my botched trade here remains a little less under-water today. I'd roll this AFTER inventories today if I were going to be around to watch it next week.
Tesoro Corp. (NYSE:TSO) June 60s sold for a buck. 68% loss on a 2x position. I still hold the July $57.50s, which I'll leave in play while I'm out.
New Oil Sands Player Watch: Teck Cominco Ltd (NYSE:TCK) plans to produce 140,000 bopd (from 0 at present in 10 years). That's ~40% of Suncor Energy Inc.'s (NYSE:SU) current production. Could be one to watch people flock to. Press release on it reads like a kid on Christmas day who woke up early and stole all the other kid's toys.