Energy Stock Trader: Wednesday Outlook

Oil Rallied $1.20 to breach $75, then read yesterday’s post entitled Rebound? Nahhhh, thought better of rallying on a lack of “fresh” “bullish” “news” (as opposed to the fluffy, albeit disturbing, stories that have been masquerading as bullish news, like kidnapping kids in Nigeria) and sold off to close slightly lower on the day at $73.85. Is this the awaited intermediate top? Hardly conclusive, but it’s the right pattern:

• strong opening,
• sharp reversal,
• lower close.

It’s just not enough follow through for me to call an intermediate top... yet. This morning traders are again bidding up crude and gasoline timidly before the report. See below for some interesting weather maps which could be moving markets pre report.

Backwardation Steepening: The out months, which have more to do with expected demand than the machinations transpiring this close to August expiration, felt differently -- taking a drubbing for a second day. While August only closed down $0.13, February and beyond were down in excess of $0.40, while the back half of the 24-month strip fell over $1 per barrel.

Clearly inventories take center stage today.

From the Dow Jones and Reuters Survey:

• Crude: Expected Down 200,000 - 760,000 barrels. Crude stocks are expected to fall due to a rise in refinery utilization. Last week crude stocks fell because imports sagged heavily falling from 10.8 to 10.0 million barrels per day. I don’t know about you, but if I had a tanker sitting in the GOM to play the contango game and then suddenly there were: 1) more refineries on line to consume said oil and 2) no more contango, I’d probably exceed the no-wake, 5 MPH limit sign as I yelled “all engines ahead full” and made for the LOOP.

• Gasoline: Expected Up 0.9 to 1.2 Million Barrels. That seems like a reasonable number if imports hold and production rebounds to levels seen just two weeks ago.

By the way, all of the sudden, many “oil market players” are talking about peak driving demand in the past tense. Like we’re past it. What, did everyone take their vacation on July 4 and rush back to work? When I was a kid these things were a little more spread out. Let me check...

Nope it’s still that way. So if demand dips now, it’s not a normal seasonal slowdown. Don’t let them sell you that crock. No, if demand slows now it’s consumer elasticity to price.

• Utilization: Up 0.5% to 90.7%. Look for a bigger number in next week’s report as significant capacity came back into service last weekend. Either way this is a useless number, except that reactions key off of it. But I’m tired of harping on the whole demand vs. production debate as I’m sure you are as well.

Over/Under Watch:

• Bullish Report: Crude draw of over 1 million barrels, and a draw in gasoline and utilization below 90.5%.

• Bearish Report: Build in crude (kind of obvious I know) and/or a gasoline build over 1.5 million barrels or a drop in gasoline demand.

Listen Live At 10:25 ET on MN1.com for the oil report play by play and our picks. Last week on air I said at 10:30:30.

“This is a bad report for gasoline and a good report for oil…in a nutshell this is bad for the refiners.”

Phil at Philstockworld.com and I offered up a plethora of put plays in the moments after the report among the independent refiners, which as you’ll see below turned out pretty well.

Since last Wednesday’s report this happened… For those of you who just want to have that spelled out that’s a 2% gain for crude and an 11% drubbing for gasoline!

…And the refiners aren’t digging it. But most of them, especially the smaller ones, are still expensive by historical measures.

Well Duh Watch: “If hurricanes come into play in the Gulf [of Mexico] and disrupt operations in Houston but do little to curb demand, we could see oil prices surge above $90+ a barrel rather quickly indeed,” said Kevin Kerr. Comment: Indeed we could!

Holdings Watch: I’ll probably do very little before the report unless I get the chance to take out some risky July puts, but after it comes out we expect to be pretty busy.

CALLS

• No action yesterday. I was tempted to get in (late) on one of my newsletter picks, Newfield Exploration Co. (NFX), but alas I was reluctant to add new longs in front of this week’s oil and gas reports which could prove pivotal. More on Newfield below.

PUTS

• Frontier Oil Corp. (FTO) -- sold my little position in Aug $45s for $1.70, a 42% gain. Still hold the August $50s (up 69% so far) as well as some dead July $35s.
• Tesoro Corp. (TSO) -- no trades yesterday but the July $60s, up 53%, and the July $57.50s, up 47% should be gone early today. In fact most July stuff should have been out off the list and rolled already.

Stocks of Interest

• Interoil Corp. (IOC) got mauled for 19%. Still no drilling report, but apparently they were downgraded by an impatient analyst. The unpredictability of situations like this are what make me say, “if you don’t know, don’t gamble -- wait for the news and react”. We made 120% in three days on this name last time after the news hit. What we sold for $4.70 two weeks ago when the company’s relief rally petered out closed bid $0.55 yesterday.

• NFX can sell Gulf of Mexico shelf assets to McMoRan Exploration Company (MMR): One less headache to worry about as the company increasingly focuses on longer reserve life/repeatable success while still having the big swing for the fence potential of its deepwater program. Now if they can sell off their North Sea division and dispose of their Bohai Bay production things will really start to click for them. This story just keeps shouting: “Company For Sale!” to me. Maybe that’s not the plan, but it seems to me that they’re making it more digestible, and they were in cheap to the Woodford -- which could be big for them. Some of those wells have come in monster for a shale, and they’ve got plenty of locations and budget there. I still haven’t followed my own writing from the newsletter, but plan to when things settle down with oil.

• China Petroleum & Chemical Corp. (SNP) just shy of refined volumes guidance: Sinopec meets oil production target with volumes rising 2.1% in 1H07 relative to the year ago half. However refining volumes came in just shy of guidance at 6.4% vs a 7% expectation. Last week PetroChina Company (PTR) announced it had fallen just short of its own production targets. No play -- just reporting. But I’m starting to watch PetroChina Company (PTR), China Petroleum & Chemical Corp. (SNP) and CNOOC (CEO) a bit more closely these days.

Analyst Watch: Whiting Petroleum Corp. (WLL) raised to buy at Keybanc. Superior Well Services Inc. (SWSI) raised from Buy to Strong Buy at Matrix. Total S.A. (TOT) cut neutral at JP Morgan. Citigroup cut coal companies Peabody Energy Corp. (BTU), Foundation Coal Holdings Inc. (FCL) and Arch Coal Inc. (ACI) from Buy to Hold. Peabody Energy Corp. (BTU) got the same treatment from HSBC yesterday. It has been a pretty mild summer so far. Credit Suisse picked up several tanker and shipping stocks with mostly neutral ratings. CIBC picked up Chinese solar panel maker LDK Solar Co. Ltd. (LDK) with a sector outperform rating and $44 PT. I plan on getting my head around the impact of BP plc (BP) getting 2x as serious about solar on the smaller players, but judging by yesterday’s action I’d have to guess it’s not positive. Finally, FreightCar America Inc. (RAIL) was initiated with a Buy rating and $60 PT at Keybanc.

Nigeria (or Don’t Try This At Home) Watch: Local youths have drilled holes and set fires in six locations along the Trans-Niger pipeline feeding the Bonny Export terminal. Shell said there is no impact on production and that it has known about the fires since they were set in early June but they have been unable to get to the sites to extinguish them.

Weather Watch: Definitely a tropical wave with rotation over a large area (I’m obviously no meteorologist) off the coast of Africa. Another wave over Haiti appears denser and bears close watching. If these get organized the panic in the natural gas futures market will be classic “yell fire in a crowded theater” variety.

As far as natural gas is concerned, these could lend support…

But this will not.

Have a great day and don’t forget to tune in for the Energy Report!