Oil on the Rise, Natural Gas Retreating

Commodity Watch

• Crude Oil: Monday, the January crude contract closed up $0.80 to $94.64 in what many news stories called quiet trading. That sounds like it was a boring day of nothing but drifting higher trader but volatility once again abounded with day's range covering $2 ($93.16 to $95.15). $2 swings have become the norm, not the exception and my sense is that we are building a base in the low to mid $90s for another run on $100 prior to year end. Crude is trading up another $1.00 in pre market action.

• Oil Sands Ablaze: Fire Monday night at the Scotford facility (Shell (RDS.A), Marathon Oil (MRO), Chevron (CVX)) in NE ALberta. 155,000 bopd capacity site, damage estimate not yet in.

• Sudan Watch: Rebels free five oil workers.

• Natural Gas traded off $0.21 to $7.79. With minor exceptions gas has remained mired in a fairly tight range of $7.50 to $8 since mid August. Examining the following chart and the expected round top in storage I expect one more quick dip into the low $7s which should either be seen as a buying opportunity (if winter weather then decides to show up some place other than the northeast) or the beginning of a test of $7 itself if the predicted warmer than normal winter is evidenced in early December temps. I think the move to lower levels, below $7.50 could occur this week as we appear set to essentially tread water storage over the next couple of storage reports. In other words, you won't see me loading up on more of the gassy names just yet but I'll keep the cheap ones, like CHK as their hedges are more than adequate to coast through minor squalls in gas prices. Gas was trading off another $0.21 at the time of writing.

• NG Imports. LNG inched up 0.1 Bcfgpd to 0.8 from the prior weak but were still off 0.5 bcfgpd versus last year. Meanwhile, imports from Canada fell to 8.1 Bcfgpd (their lowest level since early June and in line with year ago levels) resulting in gross imports to the U.S. falling another half Bcfgpd from the prior week.

Cracks Spreads and Refineries. Key Takeaways

1. Refiners are trending with the market.
2. Valuations are at or below the mid point of the historic trading range on the forward P/E multiple.
3. Products had mounted a recovery relative to crude prices in the last three weeks.
4. 4Q Average Cracks are improved over 3Q and for the most part closing on or ahead of 4Q06 levels.
5. If asphalt is a big part of your business you are suffering right now.
6. Favorite names right now Frontier Oil (FTO), Valero (VLO), Tesoro (TSO) (which I think recommends the Tracinda offer) and Sunoco (SUN). Note I only own a little Valero right now because we just went through option expiration and I don't trust the subprime slimers (see 1 above) not to drop several more shoes.

E&P Sensitivity to Oil Price Moves: The process of marking to market the fourth quarter and rising estimates to 2008 and beyond should hit full stride in the next weeks. As the early changes to estimates come out is appears 2008 price decks are advancing by as much as $10 and $20. As can be seen from the following graphs, Apache (APA) is most levered to changes in oil prices. And remains near the bottom of the group on its forward multiple of cash flow. What's interesting about that you say? How about that the Street is currently estimating oil will average $70 per barrel next year. Now this is a stale estimate and the more recent numbers have ranged from $80 to $90 per barrel. But say the Street Consensus price for oil rallies another $10 to $80 (sounds plausible and it will happen by January if crude prices remain in the $90 vicinity much longer) that translates into roughly another $2 of 2008 CFPS for APA, which would know half multiple off the stock and bump it one to the left in that second chart below were the stock to remain at $100.

Holdings Watch

CALLS

• APA December $100s added for $4.60. Last bid $4.10.

PUTS: No action

Odds & Ends

Analyst Watch: (XOM), (HES), and (STO) from Neutral to Buy at UBS, (SNP) from Sell to Neutral, (SU) to Outperform at CIBC, (ESLR) to buy at Janco