Energy Stock Trader: Wednesday Outlook

Looking for another build, but the real question is will traders care, or is utilization the only number that matters? Last week the numbers were bearish and the commodities soared. Can RBOB continue to run if we get more of the same?

EIA Inventory Report (Bloomberg and Reuters Survey for estimates)

• Crude Stocks: Expected UP 100,000 barrels. This could easily be higher given the midwest refining snafus attributable to flooding and unplanned maintenance. Imports, which have been running high, are the swing factor here. If they maintain last week's level of 10.8 million bopd, look for a much bigger stocks number.
• Gasoline Stocks: Expected Up 600,000 to 900,000 Barrels. Last week we handily beat the number (a seemingly bearish event) and RBOB started marching higher and never looked back. Nicky pointed out that yesterday's gain made nine straight days of nothing but up for RBOB (data be damned!).

Why the counter intuitive reaction to last week's report? Traders didn't like the "low" utilization number (90% when they say it should be 94% or 95%) and the high imports number (which they say is not sustainable as Europe and points abroad will soon demand that gasoline).

My reaction -- bahhhh! Production has been climbing and is likely to continue to climb today. Six weeks ago, when those tankers (gasoline and crude for that matter) set sail, crack spreads were still extremely high, and they don't just pivot mid Atlantic, especially since the fall in cracks has not been that drastic yet.

How Do We Play It? Depends on the numbers. Here are the levels we'll be looking for: (gasoline stocks and utilization continue to dominate sentiment)

1) Bullish Report: Crude or gasoline draw obviously; gasoline lower than the 600,000 build with a crude build; utilization south of 90%.

• How we'll play: Calls on Valero Energy Corp. (VLO), Tesoro Corp. (TSO), and Marathon Oil Corp. (MRO) among the refiners/mini-majors. Which will depend on what they do pre-report. I like EOG Resources Inc. (EOG) and or Apache Corp. (APA) long in the event of a crude draw, but ExxonMobil Corp. (XOM) will work as well for a quick trade.

2) Bearish Report: Bigger than expected build in gasoline. Since this is likely only with the help of a big imports number, the perma-bulls will highly discount its importance. It's like the difference between inflation and core-inflation. Somehow it doesn't count to the crowd that is on the Reuters and Bloomberg speed dials for a zippy comment.

• How we'll play it: Much of yesterday's early gains were wiped out by a deteriorating broader market in the afternoon. TSO will definitely be on the list of candidates, but the number really needs to be definitively bearish (i.e. not a big build coupled with a <90% utilization) or I'll take my chips back. If oil stocks rise another 1 mm bls (which would put us at 14 year highs in the U.S.), Suncor Energy Inc. (SU) makes the short list as its giant rally since March has far outpaced the benefits of a rally in oil, higher wages, and a drop in natural gas costs (with natural gas apparently finding its summer legs now).

Obviously, there's often a "split decision" -- if that's the case, we'll sort it out and wait through the headfake as always. We're very light on refining related puts at this point, and I've said I like cheap, well run industry leader VLO long here as a counterbalance to my small and getting smaller (TSO) and Frontier Oil Corp. (FTO) put positions.

Holdings Watch

CALLS

Chesapeake Energy Corp. (CHK) -- bought January 2008 $37.50s for $2.30.

Halliburton Co. (HAL) -- bought July $35.00s for $0.80.

Analyst Watch: RBC cut several of the big oil service companies from buy to hold, and early indications are showing the Oil Service HOLDRs ETF (OIH) down about 1% with nearly across the board selling.

Chevron Corp. (CVX) 2Q Update: In a nutshell, strong. Upstream enjoying sequentially higher crude realizations, and seq. and y/y higher natural gas prices. In the U.S. volumes look strong. Also as expected, refining margins look strong both sequentially and y/y. What may have not been so apparent is a marked increase in marketing margins in all regions save Europe, where apparently cars run on rainbows now. Of note, U.S. refinery output is up year-over-year for 2Q, which may shock some of the perma-bulls mentioned earlier.

EIA Sees Falling Inventories In The Cards

The EIA revised it's number for:

• 4Q07 worldwide demand up by 200,000 barrels, but kept its 3Q 2007 numbers flat and full year 2007 flat with prior estimates at 85.9 mm bopd. Talk about back-end loading the number to get there. 2008 numbers were shaved 100,000 bopd to 87.4 mm bopd representing 1.7% growth.
• Revised U.S. demand down by 40,000 bopd to 21.06 million bopd and 4Q down by 100,000 bopd to 20.94 million bopd. 2008 U.S. demand is seen up about 1%.
• The EIA, as is standard practice now, finished by stating: OPEC's second-quarter output points to falling commercial oil inventories, with stocks possibly hitting historically low levels by the end of the year. A clear message to OPEC which will fall on deaf ears.

Oceaneering International Inc. (OII) snaps up specialty ROV maker. Adds a tiny amount to revenues and will be accretive to earnings this year.

Continental Resources (CLR) Watch: Announced last night hedges on 42% of planned oil production at $72.90 from August 2007 through April 2008. That equates to about one-third of expected total company production on a BOE basis at very favorable prices. Strong move to more than insure this year's capital program and get a good headstart on next year's program. This takes a pretty big piece of risk off the table since they had NO hedges before this. Also, I don't think anybody can cast a stone at a guy whose first hedge as a public company is over $70 per barrel! See my quick note on it from the day after their IPO.

Iran Watch: As in the U.S. is seriously watching Iran having added a third aircraft carrier to the Fifth Fleet.

Mexico Rebel Watch!? Four explosions last Thursday rocked natural gas and crude supply lines in Mexico. No exports were interrupted, but a leftist rebel group, the EPR or People's Revolutionary Army, claimed credit for the attacks. The group, active for the last decade in the poorer southern states of Mexico, vowed to wage a campaign against "this oligarchy and the interest of this illigitimate government." That happened last Thursday and we only heard about it last night? We get more timely reports (sometimes before they happen) out of Nigeria -- and it's a lot further away.

Comments

[Josh Stern]

Last few days it seems that NatGas stocks are going down while the commodity futures have finally reversed and are going up? Is that an opportunity or something else going on?

[zmannalpha]

Josh. I'm not convinced the rebound in gas is real. Some tropical waves and the fact that it's been beat down so much of late. Maybe a little short covering but nothing serious. Come on over to the site and we'll chat about it.