Lots of people were asking if it was time to bottom fish this sub prime beleaguered energy market late last week. At the time I said I wasn’t planning to wade back in just yet (both the schizophrenic market and the fact that I knew it would be next to impossible for me to give the market an iota of attention Friday through Monday) although I did take a position in the Oceaneering International Inc. (OII) September $60 calls on Thursday which is performing decently so far (all due to Fed Friday action) … it could have been just about any energy name for that matter but it is an exceedingly strong fundamental play and it had gotten a pretty decent haircut at the time.
Holdings Watch: Right now I’ve got September calls in Chesapeake Energy Corp. (CHK), Newfield Exploration Co. (NFX), Southwestern Energy Company (SWN), Oceaneering International Inc. (OII), Halliburton Co. (HAL) and Jan 2008 calls in CHK. For the first time in recent memory I’m not short the refineries although those plays paid nicely last month and could again I’ll be taking a fresh look this week. Patience is king right now and the market is still not to be trusted. Plus, we’ve got some near term pressuring factors on both natural gas and gasoline which could yield opportunities on both sides of the fence in coming days.
Natural Gas Overreaction? Way back in P.D. (pre Dean) I wrote that natural gas would maintain a level of $5.75 to $6.25. Yesterday’s $0.97 drop to $6.04 left us right back in P.D. support land. As I wrote in yesterday’s post, the somewhat cooler than expected temps for this week were likely to exacerbate the pressure on natural gas as Dean snubbed the northern GOMEX. On top of that pressure comes news that natural gas imports hit a year high of 13.8 Bcfgpd as LNG imports forcefully reasserted their importance by more than doubling year ago volumes.
Gas Imports Hit 2007 Record. Gas imports rose 1.7 Bcfgpd from the prior week to hit a 2007 record of 13.8 Bcfgpd. LNG tied the all time record at 3.8 Bcfgpd. That record was set just four weeks ago but suffice it to say, $6 to $7 gas is enough to bring gas to U.S. shores.
Other factors affecting gas. Last week saw another strong week for generation and their were numerous reports of coal-fired generation outages and to my knowledge, the first incident of nuke being shutdown by the TVA because the water feeding the cooling system was simply too hot. That’s all strong news for gas.
Oil Dipped But Didn’t Take The Slapping Natural Gas Did. While the northern Gulf may be out of harms way for the early alphabet storms, the fact that Dean was targeting the third largest oil field in the world with it’s move towards the southern gulf of Mexico, a PEMEX’s backyard.
GOMEX Watch: Pemex literally runs for the hills. According to Upstream, Pemex has evacuated 407 platforms (>14,000 men in a day!) in the Campeche Sound area (southern Gulf) including the entire Cantarell field (the world’s third largest oil field). In aggregate, production is down a staggering 2.65 million bpd or roughly 80% of total Pemex.
Of note, the U.S. imports approximately 1.46 million bopd from Mexico (making it the U.S.’s third largest source behind Canada and Saudi Arabia). That breaks out to roughly 15% of total U.S. imports so the storm has the potential of quickly boosting WTI. While natural gas was obviously affected as well Mexico remains a net importer of gas from the U.S.
At last glance Dean was centered over the Yucatan with winds of 125 mph and headed squarely for the Campeche Sound area where it is expected to arrive as a Cat 2 storm.
Early Read On Oil Inventories (expected from the Bloomberg survey):
Grain of Salt Watch: Estimates have missed actuals by a mile especially on crude for the last several weeks. Part of this miss has been caused by the high degree of variability in imports. Part is I think attributable simply to error in the estimation process and will eventually be revised upwards when the monthly numbers are released a few months down the road, much like May’s numbers were. We shall see but of course by then few will notice and fewer still will care.
Odds & Ends
India Watch. 45,000 workers went on strike this morning and went back to work later in the day when their demands for higher wages were met.
OPEC Watch: Tanker tracker company Oil Movements expects OPEC volumes to increase by another 260,000 barrels by September. Comment: With that kind of quota discipline in place I would bother even holding a meeting in September.
China Coal Watch: According to the FreeMarket News, China is expected to suffer coal shortages by 2010. If anybody’s got “a slow boat to China filled with coal” play please pass it along.