Steve Zachritz's  Instablog

7  Months Down …

1. Thanks D.C. For So Much Fun In The Markets This Past Week. While it was a trying week in the broader markets due to the ongoing political soap opera we noted several times in the last few weeks that the energy sector continues to behave as if an underlying bid is in place.  After three months of under-performance that shouldn’t be too surprising as fundamentals in almost all names in the growth oriented ZLT continue to improve (production is growing, prices are fairly stable and cost creep seems to have slowed). Note that this bid was in place prior to the  BHP for HK deal with buyers stepping in to rapidly reverse market inspired selling and some unfortunate shorts left standing when their music stopped (NOG, KOG). Note that the E&P and Oil Service sectors, our two primary areas of focus, outperformed on a relative basis vs the “Big Oil” of the XOI and the broad markets, a pattern that you’ll notice from the table below has been in place all year. The XOI has difficulty growing organically and refining cracks will come off their historically high levels and the Majors and independent refiners are already discounting this contraction.
2. No Help From The Latest Supply Figures. See Monday’s post which will contain the monthly supply slide show for details.  Not surprisingly the non-commercials (speculators) remain quite short.
3. Inventories Remain Price Supportive But Not Overly So:
   1. Natural Gas:  Inventories remain below year ago and five year average due to cold weather last year. More important for prices at present will be the aforementioned but elusive rollover in supply. We should get evidence of some slippage in key areas later this year as the impact of a liquids rich shift in the rig count takes firmer hold.
   2. U.S. crude and products: Down from last years levels due to:
      1. lower imports of crude partially offset by lower refinery throughput. Cushing remains elevated due to increased supply into OK with bottlenecks between the tanks and would be buyers, helping to depress WTI prices.
      2. lower production of light products but partially offset by lower demand, especially on the distillate side.
4. How Are We Doing? July was an improvement over the second quarter but that’s not much of a hurdle to leap over.
   • YTD Results from the stock only portfolios
     • S&P500: + 2.8%
     • XLE :  +11.9%
     • ZLT A (taxable portfolio)   +43%, (+109% since inception 7/1/2008)
     • ZLT B (tax deferred portfolio)   +34%, (+705% since inception 9/1/2008)
     • ZLT C (the ESA accounts)   +19%