Thursday's Energy Trader: Oil Says 'See Ya Later'

by: Steve Zachritz
  • Crude Oil: Fell $0.83 to close at $87.49. Somewhat confusing since OPEC ministers barely got out of their limos long enough to say Cartel output is sufficient and U.S. saw their biggest drop in recent memory. This morning oil is seeing a little technical selling with the January contract off about a buck to $86.50 at press time. $86 should provide some support. OPEC has reiterated over night that it will stand firm on output until its next meeting in February and also noted that its members currently have 52 days of supply in inventory at present.
  • Natural Gas: Natural gas was led around by the nose all day by oil but finally managed to close up $0.03 at 7.185. While I don't think we will get a disappointing number today on the storage withdrawal it could happen and would likely be greeted by a test of $7. This morning gas is trading up $0.10 to $7.36.

Energy Bill Watch: U.S. House to vote today, Senate likely to see it next week. Includes increased efficiency standards for cars, increased taxes on big oil, a required 7 fold hike in ethanol production, and incentives for solar, wind, cellulosic ethanol etc. I smell a veto.

The EIA Inventory Report Review


Note: American Petroleum Institute numbers were essentially in line (for once) with the EIA's.

Z Comments: A strange report in many ways

  1. Crude stocks tumbled by nearly 10 times the expected amount due to a not so surprising slump in inventories.
  2. Stocks at Cushing, OK rose…which sent traders into a tizzy and scrambling for the exits.
  3. Gasoline inventories jumped despite only slightly higher production, higher imports and continued strong demand.
  4. In the end, not bearish for crude, especially when taken hand in hand with the OPEC news and not bullish for products.

Crude Inventories Fell To 89.6% of Year Ago Levels and Are Now In Line With The Five Year Average


Cushing, OK …third week in a row to rally…oh no (that's sarcasm in case you couldn't tell).


Of course Cushing is coming off extremely low levels and to base the price of crude on the amount of inventories in one area that represents a whopping 5% of total U.S. stocks while completely discounting the previous chart tells you something about the herd dynamic in the trading commodity. I got these charts within hours of the inventory report from one of Alaron's finest who was obviously hard at work delving through the numbers. I kid because I love these guys.

alaron-1-120507.jpgclick to expand "Sky is Falling"; alaron-2-120507.jpgclick to expand "Conspiracy

Imports Fell As Anticipated. Probably due to a combination of the supply disruption from the Enbridge pipeline explosion and from fog at the HSC. Like I commonly say, due to logistical constraints peakish import levels rarely come in twos. This week saw imports fall near 1 mm bopd to 9.374 mm bopd.


Long Term Graph Show U.S. Imports Are Near The Upper End Of All Time Record Volumes.


Crude Demand: Remained flat with the prior week at 15.45 mm bopd which is also in line with year ago levels.

Gasoline: Somewhat strange looking number here with the giant build in inventories of 4 million barrels.

  • Production ticked up slightly despite a 0.1% dip in refinery utilization. The week to week increase amounted to 72,000 extra barrels per day or about half a million barrels more than in the prior week. This level is slightly below year ago product make.


  • Imports of finished gasoline have been very volatile of late and jumped 330,000 bopd or 2.3 million barrels on the week. Taken together with the week to week change in production that comes to a change of plus 2.8 million barrels. Hmmm, maybe demand fell off a cliff and that how we get to the 4 million number.
  • Demand fell 90,000 bpd or 0.6 million barrels on the week. That gets you to about 3.4 and solves much but not all of the mystery. EIA guestimates could easily account for the remainder.


Distillate Inventory Build Slightly Bigger Than Anticipated. The build in distillates was bigger than expected and although oil-weighted degree days showed last week to be the coldest of the season to date, the relationship between heating oil and weather is not as linear as the one the between natural gas and cold weather.

  • Total distillate stocks are in line with year ago levels. Heating oil stocks fell by 1.1 mm barrels from the prior week.

Natural Gas Preview

  • My Number: 40 Bcf…In the comparable week one year ago we pulled 14 Bcf from storage. At present we are 3% above year ago levels and until we get some real winter weather this storage overhang will weigh on gas prices.
  • Weather: 172 gas weighted degree days versus 144 last week when we got that paltry 12 Bcf draw. Last year saw only 122 HDDs.
  • Imports: Piped and LNG imports flat with the prior week at a combined 8.1 Bcfgpd; near 2007 lows and 0.7 Bcfgpd below year ago levels.
  • Street Consensus: ??? unknown at time of posting.

Holdings Watch:


  • (NYSE:HAL) added another tranche of the $37.50 Decembers for $0.70.
  • (NYSE:RIG) re-entered for the first time post deal following a two day drubbing that I (and apparently members of the analyst community) this is overdone. Added December $130 calls for $3.20 late in the day. Last bid $3.10. A e-blast of both these trades did not go out due to technological constraints.

PUTS: No Action

Stocks: No Action

Stocks We Care About Today:

  • Solar Stocks - still building the list and checking it twice. See the Odds & Ends Tab at upper left for a revised valuation table. More on (NASDAQ:FSLR) coming on the weekend.
  • (NYSE:NFX) - A friend of the blog sent me a piece on Raymond James' thoughts on Newfield's Monday PR regarding results the extend horizontal laterals in the Woodford and a few other items that were touched on during the 3Q call. Key points:
    • Raymond is saying the most recent of these longer lateral wells cost $7.1 mm with an EUR of 5.8 Bcf which with an 80%NRI get you a miserly $1.53 /Mcfe.
    • 3Q comments (for the Woodford as a whole) were focused on $2ish F&D. On Monday I said the extra money was well spent alluding to the increase in EUR being something close to proportionate to the increase we are seeing in IP's. $1.50 is a little better than even I expected.
    • RJ believes roughly half of NFX's 155,000 acre Woodford position could be prospective for long lateral development. We'll know more in 1Q08 when the last of 6 3D shoots is in house.
    • RJ also reminds everyone that results from the Cattleman 40 acre pilot results will likely be announced prior to year end. They said the 40 acre wells are coming on line and performing similar to the 640 acre spacing wells. This will push drilling locations and reserves towards the high end of estimates.
    • Near term I think the stock makes for $55 if gas holds $7. Need to add more January calls here. Also, need to get active selling OOTM near month calls against my long position until the Street wakes up a little more to this name.
  • Canadian Superior (SNG) reviewed for Doc. Good luck Doc, I'm taking a pass on this one. Greg Noval is colorful. He can build companies and I see he is taking a more active role now. But their core area in Canada is showing little growth YoY, costs are up on a per unit basis, and prices therr stink. The "high impact" (their quotes not mine) exploration they are doing offshore Trinidad is certainly in big gas country and results should be right around the corner according to their website. But as you know the old oil adage "a barrel is not a barrel is not a barrel" so too does that ring true for a Tcf off Trinidad is not the same as a Tcf in the states. Ask EOG, where the realized price for their Trinidad gas was $2.20/Mcf this past quarter. Also, when I see a picture of a giant gas flare on the cover of a company's website I generally move on. Beyond flattish production in Canada and 3 exploratory shots in Trinidad they are looking at opportunities in Nova Scotia, Libya, and Tunisia. Hmmmm. Again good luck with it. I don't have the kind of analytical control here that I like when playing the little ones. By that I mean everything is on the come like a biotech. They just did a secondary to boost drilling activity in their core region. But the management has called the core Canadian operations good cash flowing assets so that's a head scratcher. Their balance sheet looks better than I would have expected but give that time and the share count just keeps mounting. Management here is experienced but the stock seems to be trading only an exploration. Next week I'll have a piece out on an itty-bitty small cap with big potential (no options, just stock) where I've had extensive experience with half of management in my former life while the other half of management was definitely what you would call "smart money". Perhaps I'm being overly harsh but the language SNG employs in their presentation and press releases is "hypey" and I simply prefer a more under-promise and over-deliver style vs the "multi-Tcf" language I see repeated on just about every other page of a 30 something page power point presentation. If they hit in Trinidad, congrats, it probably tops $4 or even $5 and for a long term bet Noval may do it again but for now, I'm going to pass.
  • (NXY) missing 2007 production guidance, reducing 2008 capex to two-thirds of 2007 levels. Disappointments in the North Sea and Gomex are primarily to blame. Estimates for 2007 and 2008 will undoubtedly be trimmed. Chart looks vulnerable.

Odds & Ends

Analyst Watch: (NYSE:CRK) raised to neutral at Lehman, (NYSE:TLM) cut to neutral at BMO, (NYSE:DHT) picked up at buy at Jefco, (BBG) picked up at neutral at Morgan Keegan.