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Good Morning!

Oil gave back a little ground on profit taking yesterday, while the closure of the 250,000 bpd crude unit at BP plc's (NYSE:BP) Whiting facility drove gasoline above $2.30. The unit will be off line three to five days for unplanned maintenance. Whiting already had a 75,000 bpd unit shut down. While the perma-bulls will point to this as yet another reason for gasoline market tightness, I point out that this reduces demand for crude and increases the chances that we hit 14-year highs on crude stocks in the next two weeks. Early consensus estimates call for a small build in crude this week.

Weather Watch: Atlantic and Caribbean look clear.

Turkish Invasion Watch: Obviously oil didn't buy it yesterday. Or at least that it was something that would drive crude up though what could be better for oil in the Middle East than multi state warfare? Oh right, there already is one.

Still, Turkey's government is not above playing politics with their military any more than anyone else in the neighborhood, and their elections are just around the corner (July 22). Of course Turkey wants to go beat up on the Kurds, one of the U.S.'s allies, and the U.S. has warned them not to interfere -- but it's summer and temperatures and tempers are running high. If we needed one more little bit of geopolitical flavor to add to the current stew that is Iran, Iraq, Nigeria, yada and distract us from the fact that we're at nine-year inventory highs and near record production, well, there you go.

Bullish Sentiment On The Rise Now... That Oil Has Been On The Rise

  • Barclays Capital forecast a period of consolidation for Brent crude above $72 ahead of a run at $78.65 -- the record touched in August 2006.
  • Mark Mathias of hedge fund Dawnay Day Qauntum said he was looking for oil to test $80 this year. "We are firmly in the bull camp -- don't be short oil!"

Missing The Point Watch: From Flynn of Alaron, "Still the bottom line is that despite the improvements in refinery runs, we are still running at a dismal 90% of capacity. And what's worse is that this week refinery runs should move down due to the problems with Valero (NYSE:VLO) and Coffeyville." I like how he talks about utilization being low at 90%, but fails to talk about how gasoline production has been rising for weeks now.

In the same week two years ago, utilization was running at 98% of what was then capacity. Would that be a good number? That was pre-Katrina.

  • That week saw utilization of 98% and we produced 9.2 million barrels of gasoline per day.
  • Last week, at only 90% utilization, we produced 9.4 million barrels of gasoline per day (a 2% INCREASE). I ask you, what matters more, gasoline produced, or the number by which we measure how busy refineries are?

Nembe Creek Back Online -- Shell's 77,000 bopd Nembe creek facility in Nigeria has been returned to service. The loss of Nembe back in May was big news, but I suspect its return won't be.

Interoil Corp. (NYSE:IOC) Watch: Nada. I'll keep you posted, as this one's going to move hard in one direction or the other with the Elk2 news.

Natural Gas Treads Water -- Natural gas rallied on the early-week Northeastern heat wave before settling back to close off $0.04, right on top of support at $6.38. The heat is now forecast to stick around through Wednesday followed by more normal temps. The rest of the country, especially the West, will continue to swelter -- but most traders all live in the East...

CFTC: Net Short Position Continues To Grow -- third record level this summer. The non-commercial net longs pared back their interest by 1,000 contracts, while the shorts expanded their's by 7,600. As Phil has pointed out to me several times now over the past few months, "sometimes when everyone thinks something is going to happen, it's because it's going to happen". While gas has already gotten weaker than I expected, the combination of...

1. increasing seasonal demand,
2. marginal economics for some plays at current gas prices,
3. increased competition for LNG at current prices,
4. storm angst, and
5. a historically giant short position

... could yield a sudden and significant reversal in prices this summer.

Net Non-Commercial Short Position

Net Oil Short 10 07 2007

CALLS

EOG Resources Inc. (NYSE:EOG) -- sold for $1.55 as it started to run out of steam with oil. Essentially a wash trade on this second half of my position.
Baker Hughes Inc. (NYSE:BHI) -- bought a 2x position in the July 90s for $1.05.

Analyst Watch: Dawson Geophysical Co. (NASDAQ:DWSN) gets upped to buy at Matrix. First Solar Inc. (NASDAQ:FSLR) cut to hold at Lazard.

END Watch: Endeavor International Corp. (NYSE:END) announced yesterday it will become operator of the Agat discovery in the Norwegian Sea. This is a smallish gas discovery which is "in a good neighborhood." I'm waiting for second quarter numbers (and possibly updated guidance) before getting too excited. Another exploratory test (Emu) is also in the offing and should be at TD sometime in August as it was a 45-day well spud in mid-June.

COP Buyback: ConocoPhillips (NYSE:COP) plans to spend $15 billion over the course of 2007 and 2008 buying itself. The news sent the entire energy complex higher yesterday. Exxon (NYSE:XOM) may have a few extra dollars to devote to its buyback as well, after pulling out of Venezuela.

Source: Energy Stock Trader: Tuesday Outlook