Energy Stock Trader: Monday Outlook

by: Steve Zachritz

WEEKLY WRAP

Weekly wrap 02 07 2007

What happens every Wednesday at 9:25 CT? The oil report with Phil Davis and Zman on MN1.com! Don’t forget to tune as we give the blow-by-blow on the oil numbers and our best ideas for quick trades based on the reaction to the numbers. (These week listen on Thursday due to the holiday.)

Holdings Watch: Not a bad week as far as trading goes. Lucrative but quite a bit quicker than my usual.

CALLS

  • Bought EOG Resources Inc. (NYSE:EOG) $75s for $1.45 on 6/26. Still holding. Last bid $1.25
  • Bought more EOG $75s for $1.15 on 6/27, sold at $1.50 (30% gain) later that day.
  • Bought Halliburton Co. (NYSE:HAL) July $35s for $0.55 on 6/27, sold at $0.90 (64% gain) on 6/28.
  • Continue to hold a 2x position in Petroquest Energy Inc. (NYSE:PQ) July $12.50s bought 5/14 for $1.70. Last bid $2.05.

PUTS

  • Bought Frontier Oil Corp. (NYSE:FTO) August $40s for $1.45 on 6/27, still holding. Last bid $0.70. I also have a 1x position in the July $35s.
  • Bought a 2x position in Southwestern Energy Company (NYSE:SWN) on the gas number (6/28) for $1.10. Sold on a further early morning gap down on 6/29 for $2.05 (86% gain).
  • Bought Tesoro Corp. (NYSE:TSO) July $60s for $3.20 on 6/28. Still holding. Last bid $3.80.

CFTC Watch: As you can see from the table above, the Commitments of Traders report shows that the net short position remains very close to a record. In recent weeks I’ve said that the large short position would lend support to natural gas prices. La Nina went on vacation, and the fundamental fact that there’s a lot more gas in storage than is usual for this time of year and a lack of early summer heat contributed to a steep drop in gas prices.

What I've said before about the CFTC position being a contrarian indicator remains true (in my brain at least), but let me be clear(er) on the point. The natural gas market, perhaps more than most, is subject to the “pendulum always swings way too far maxim.” It is at the very extremes of price, highs and lows, when the seemingly overlarge CFTC position in opposition to price comes into play.

Waiting for support. $6.50? $6? $5.50? The pendulum is swinging slower now, but $6 may be in the cards (or even lower) for a very short time frame which will set up an excellent buying opportunity. The Rockies continue to suffer with prices ranging from $1.58 to $1.78 which, unlike natural gas prices in most regions which remain higher than year-ago levels, are down roughly one-third versus the comparable week in 2006. I’ve got my eyes on Bill Barrett Corp. (NYSE:BBG) for less-than-stellar results in 2Q as estimates have come down significantly in recent weeks -- in contrast to the chart which hovers near all time highs. Pinnacle Gas Resources (PINN), San Juan Basin Royalty Trust (NYSE:SJT) and a few others may show adverse affects as well. Just food for thought.

August contract looks pretty iffy for a fall to $6. I think you’ll get a number of PRs announcing curtailments, especially from Rockies producers but also in Arizona and New Mexico. When you see these it’ll be time to get long… then you have hurricanes. I’m never one to tout hurricanes as a reason to buy, but it’s a fact they can quickly jack gas prices -- and this year more than ever with the giant short on. A few curtailments and news that Atlantic windshear is falling off a month ahead of schedule could quickly put a V shaped bottom in gas prices.

THE WEEK AHEAD

  • Thursday: Oil Report
  • Friday: Gas Report

Oil -- treading water over $70. After rallying 2% last week to reach $70+ and a high for 2007 on news that inventories of crude had reached a nine-year high but that demand for crude from refiners is about to pick up, oil is little changed this morning. Nothing further on the geo-political front and a day's delay in the week's inventory data are probably behind the malaise.

Nigeria Watch: The price of machetes fell 50% as demand from politician-backed thugs wanes. Unlike presidential approval ratings and gasoline prices in the U.S., Nigerian machete prices and global oil prices have a more direct relationship.

Iran: SSDD: U.S. accuses Iran of militant support in Iraq; asks Putin for help blocking Iran's nuclear aspirations. Iran tells U.S. to get stuffed.

Natural Gas: Giving back Friday gains in early trading. I think we're setting up for a pretty good buying opportunity, but I'm feeling pretty patient at present as the technicals are in charge and look like they need a $6 test. That'll turn on a dime with real heat and/or a storm of course.

Analyst Watch: Archer Daniels Midland Co. (NYSE:ADM) raised to Buy at BofA.

Have a great week!