Energy Stock Trader: Tuesday Outlook

Oil. Lofty, Lofty Oil. First it was terror that made you rise. Then, when we were no longer as fearful, gasoline took the lead and drove you higher. But gasoline production rose via crafty means and gasoline prices started to come back to reality. And still you remain there suspended like a clay pigeon at the top of the arc. But your 12 month strip looks, well, sort of like disbelief is setting in. And even Brent, your other source of support is looking like it needs a breather.

What a difference a month makes. Heck, what a difference three days makes! One month ago, the 12-month strip exhibited a nice contango. Buy it, store it, sell it a little for more. But for some reason beyond the grasp of mortal media weather girls and unbiased analytical talent, that easy money trade went the way of the dodo and wa-la, backwardation.

While August and September rose $0.22 and a dime respectively yesterday, October and beyond fell, in some cases as much as a buck. Granted those moves were not on significant volume, but the opposing direction to the front month and the size of the moves smell like trader nervousness.

And Finally: Perma Bull? Watch: This Can’t Be! From Alaron’s All Star:

• With regard to crude: “Looks like the sentiment is turning a little bit sour,”
• and with regard to gasoline: “It’s possible that we have peaked out for the season,”

Comment: Well at least Goldman Sachs still believes in oil, and is now touting, and I do mean touting, a $95 number. Nicki pulled a quote yesterday that sums this up to a tee:

"...the last time they came out with such a high profile target (the $105 WTI ’super-spike’) was March 2005 when WTI was around $58; this marked a near term high point in crude (with GS desperate to talk WTI up to unwind an arb that had gone hugely negative -- sound familiar?) and within two months crude was close 20% lower." -- anonymous but clever oil trader

RBOB vs. WTI: I posted this chart on the weekend to show the divergence between August RBO and Crude. Today’s action: last verse same as the first. RBOB got popped as ExxonMobil Corp. (XOM) announced it restarted its massive Baytown refiner hydrocracker which had been offline since June 23. BP plc (BP) and Valero Energy Corp. (VLO) also joined the restart party announcing a facility apiece restarted over the weekend.

This trend will put a crimp in the habit refining analysts have developed lately of marking estimates to cracks on a weekly basis. Or at least it may cause them to mark them down as fast as they marked them up.

Fun With Crack Spreads: The following graph depicts mid-month standard 3-2-1 crack spreads from spring until present for 2006 and 2007. Just to give you an idea of what a crack spread built out of NYMEX priced crude, RBOB, and heating oil would look like for purely educational purposes. Specifically notice the impact the recent run in crude and slide in gasoline has done to the spread (that’s not a typo).

Natural gas got whacked yesterday. It’ll be bumpy, but I think we test $6 soon. August gas fell $0.28 to $6.37 (right back to support). Heat in the West but not the East and a dearth of tropical activity are to blame (along with the swollen inventories).

• LNG imports continue to run strong -- last week saw sendout volumes of 2.8 Bcfgpd, down slightly from the prior week but still up nearly a B from year ago levels. Below $6 and I think other markets start to look much more attractive to many tankers headed this way.

• Canadian imports continue to dwindle -- down 0.4 Bcfgpd from the prior week and a whopping 1.3 Bcfgpd from year-ago levels. Still many authorities on imports had predicted a more dire swoon from Canada as the second chart below demonstrates. (High prices still mean something to sellers north of the border.)

• Combined gross imports are off 0.4 Bcfgpd vs. year-ago levels -- in the big scheme of things this isn’t a big variance, and just last week we were importing 0.4 Bcfgpd more than in the prior year (on a gross basis).

Energy Intel says natural gas in storage may hit record this summer. Their report says that barring any weather related snags, we should hit record levels.

Of course they also said this yesterday morning:

After a couple of weeks of NYMEX August gas futures prices oscillating in the $6 range, it appears the fundamentals are beginning to shift more toward the bullish side of the spectrum. Summer heat is finally making its debut, and with the resulting cooling demand load increases, prices appear slated to go back toward the $7 area. (Monday, July 16, 2007).

Comment: Hmmm. I think they’re early. Kind of interesting to write one report saying we’ll hit all-time highs in gas, and another that says, “Hey buy some gas, things are bullish!”

Stocks Of Interest Watch

• Petrohawk Energy Corp. (HK) keeps getting hit with gas. Frankly I think it’s a bit overdone here, but as I think natural gas could take another leg down to $6 soon (or even $5.75 if we don’t get sustained summer like heat), I don’t see the need to add to positions now. This is a medium-term play and I want to make sure I’m in for earnings.

• Halliburton Co. (HAL) continues to hold up in the face of negative group action rebounding at every modest turn. I may trade some off the dips, as its pretty evident the company is behind the rallies.

• Tesoro Corp. (TSO) -- that delicious double top, a Tupp trademark, is looking more and more solid each day. Support is $57.50 (current level), and this morning’s early trading is threatening to violate another round-number milestone at $57. We continue to hold $60 and $57.50 strike puts here, and today I’ll very likely roll the July-dated ones to August or even September.

• Western Refining Inc. (WNR) -- coverage resumed with a sell rating at Deutsche Securities and a $48 price target, a 25% drop from current levels of $64. That’s just unfriendly. Guess who won’t be getting a Christmas card this year. On the other there's a sell side guy with guts who I agree whole heartedly with as the 151% rally year-to-date seems pretty hard to justify. Even that $48 target puts the stock at a seven-month double, which is a head scratcher.

PUTS

• Frontier Oil Corp. (FTO) - bought August $45s for $1.20. I can’t remember the last time this one closed lower, let alone down over a buck. At 14x consensus ‘08 EPS (vs. VLO at 10x), and having made a 64% run year to date assumedly on buyout rumors, that’s one I feel has run too far too fast. When you look at earnings that are expected to rise only 14% in 2007 to $3.97 over 2006’s $3.47, and then to fall back by 17% in 2008 to $3.28, the move seems very exaggerated. Unless the acquiring CEO uses cash, and why would he with his own bloated share price to use as currency, it’s pretty tough to do an accretive deal on 2008 numbers, despite the fact that everyone’s numbers are going to take a hit in 2008 (as they stand now). Last bid $1.30.
• Southwestern Energy Company (SWN) -- sold half of my position taken with seconds of the gas storage report last Thursday. Gas may be in for further damage but I hate shorting good companies for anything more than a trade. Sold at $2.00 for a 3 day 74% gain.

UK gas prices jumping -- prices increased as gas from CATS was restricted. Good news for little Endeavor International Corp. (END) and other North Sea gas producers (unless of course you’re one of those who can’t get to market).

Analyst Watch: Peabody Energy Corp. (BTU) cut to neutral at HSBC, Carrizo Oil & Gas Inc. (CRZO) cut to hold at Jefferies in what is most likely a valuation call pre earnings.

BP Doubling Solar Division Capacity: Watch out for margin compression in the recently high-flying solar arena.

Comments

[Georealist]

So...let me get this straight..gasoline drove the price of crude higher? Brilliant...refinery output was hampered..crude built up at storage facilities (Cushing) and WTI fell below Brent by $4+...and that's how crude was dragged upward! Do you write this stuff when you're awake???