Newsflash: Citigroup slashes ratings on the refiners.
Let's get to the inventories:
Oil Inventory Expectations: (from the Dow Jones and Bloomberg Surveys)
- Crude: expected UP 1.0 to 1.05 million barrels. Often we see large inventory numbers in one week reversed by lower numbers in the next. Last week's giant 6.9 mm barrel crude build was likely the result of the timing of offloadings along the gulf coast which came in "at the last minute." As such, barrels that normally would have been included in this week's number were counted in the prior week, so I wouldn't be at all surprised to see a lower crude number.
- Gasoline: stocks expected UP 1.1 million barrels with refinery utilization recovering 0.8% to 88.4%.
- Perma Bull Watch: Not to be left out of the mix, perma bull Alaron analyst Phil Flynn said "0.8 and 1.1 are both dismal numbers. [Refiners] have a long way to go to make up for all the supplies they lost earlier in the year." And Flynn's not alone, "Refineries are still operating anemically," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "Prices won't fall too much until we see refinery activity pick up." Comment: what about the facts that:
- 1. Production keeps going up despite the lower utilization numbers? Kevin Saville, managing editor for the Americas energy desk at Platts, the energy research arm of McGraw-Hill, notes that refiners are getting more gasoline out of each barrel of oil they process. I've been pointing this out for weeks.
- 2. That aggregate production is just short of an all time high despite the "dismal" utilization number.
- Distillates: expected UP 200,000 barrels.
Crack spread showed slight firming last week. This week's action so far should more than offset, but as much as I hate to admit it, real weakness in RBOB will only occur with higher utilization, even if multiple regions score production records.
Bought EOG Resources Inc. (NYSE:EOG) June $75 calls for $1.45. High correlation to oil. The stock's taken a bit of beating of late. Watching natural gas for a bottom, and eying entries in Chesapeake Energy Corp. (NYSE:CHK), Quicksilver Resources Inc. (NYSE:KWK), and Southwestern Energy Company (NYSE:SWN) among gassy names, and for Halliburton Co. (NYSE:HAL) in the service arena. I'm unlikely to act before Thursday's gas report on these.
No Action Yesterday: Continue to hold small Frontier Oil Corp. (NYSE:FTO) and Tesoro Corp. (TSO) put positions. Watching utilization / production for a signal to add more, and TSO which is again below its split price, and threatens to shave the massive recent gains of those investors who only know that 'they have something to do with gasoline.' Now that I'm back, and true to the adage about "money and mouth," I'll be looking for an entry in VLO calls for the pair trade.
No action yesterday. Continue to like the action in Continental Resources Inc. (NYSE:CLR) and Westside Energy Corp. (WHT), both up 13% in little over a month, and minnow Storm Cat Energy (NYSE:SCU) -- up 30% since I began acquiring this spring. Endeavor International Corp. (NYSE:END) continues to languish, down 24%, but it's a long term hold trading at under 2.0x NTM CFPS -- so I'll wait them out. Considering taking a long in Petrohawk Energy Corp. (NYSE:HK) and writing calls against it.
Energy Sector TA Watch:
XOI - appears to have pretty strong support between 1,360 and 1,370, less than 2% below current levels
XNG -- punched below its 50 day SMA yesterday, but managed a close over 500. Good support is also within 2% of current levels between 490 and 495, and since my sense is that natural gas is closer to a bottom than a top, I'm looking for entry points on further weakness
OIH -- looks like it needs to test 170 before moving higher. The deepwater drillers are likely to outperform once the group begins moving higher again, which I think will correspond to a recovery (or at least stabilization of natural gas prices).
Hugo's Not Our Boss Watch: From Bloomberg. Conoco Phillips will quit Venezuela after investing $2.5 billion in oil and natural gas projects as talks about ownership failed, said a person on the government's side of the negotiations. ExxonMobil will also leave, the Wall Street Journal and Reuters reported, citing unnamed people familiar with the government and company positions in the negotiations. Comment: Venezuela claims production won't be negatively impacted by the removal of COP and XOM, as the remaining partners and the government pick up the two company's shares. I'd say it certainly won't help to have the two most technologically advanced players and the largest producer COP exit along with their large check books.