Oil Review & Gas Preview

What Is The Cure For All Evils? Marsh Mallow. Seashore mallow plant, or marsh mallow, could be a new biodiesel source. This soybean-like (in terms of oil content) perennial (unlike most other crops) grows

in the salty marshes along coast lines, which if you haven’t heard, are soon to be expanded by global warming. Here’s the link to the story  and here’s my favorite quote of the month if not the year, “It’s almost like the pig of the vegetable world; you can use everything but the squeal”.  I’ll bet the rest of the plant could be funneled into a (STKL) cellulosic facility.

Oil Price Watch: Recovering early. (CVX) cut Erskine field oil production in the North Sea. Few details available but I’ll look further into it in comments as its boosting Brent which in turn is boosting everything else.

Contango Erosion. Here’s an interesting piece  Nicky forwarded last night regarding the diminution of the oil contango.

Here’s a look at the near strip as of last night: pretty flat curve.

Pretty tight just one month out and you’re beyond the cost of storage. In the good old days of one month ago, you could buy a barrel, store it for a few months, sell it and make two or so dollars if oil did nothing less your storage costs. No longer. With so much oil bought for speculative purposes (we can see from the CFTC data that crude open interest is near all time highs) and little rise to the forward curve speculators have less incentive to hold, in fact a good reason to unwind barrels, than they did just a few weeks ago. If speculators do see a top (one possible reason for the decline in contango) and this contraction of the contango leads eventually to backwardation…lookout below.

I’m not saying this is happening…yet but it’s another piece in the puzzle calling for a short term, near term retrenchment. In fact, until we see some huge “gap up” style morning hitting at least $75, if not breaching the old high of $78 and change, combined with a mid day trade off I won’t believe the top is in. But this situation bears close watching. If we get much flatter a lot of folks are going to get very worried and potentially they’ll be dumping barrels into a refining market that simply can’t handle them.

Natural Gas: Continued Tuesday’s rally yesterday morning but at some point figured out that no storms were cropping up in the gulf, ran out of steam and closed down a dime to $6.71. Estimates for today’s storage number are varied and mostly higher than last week with some back close to the century mark. Gas needs to hold the lows seen Monday and last Friday or we’re in for a $6 test.

Over / Under. Probably 85 Bcf. I think more eyes are on crude and crude products right now than natural gas and those commodities will have a greater impact on the energy stocks than this gas report. In the event of a light number I believe it will lend support to the rating hobbled OIH. But back to the over / under, I’m going with 85 on that. As in below 90 short term bullish, above 90 short term bearish. I rather we get a weak day out of the way crashing to $6 to give us the best buying opportunity of the year but I’m not able to manipulate storage levels.

My estimate: 90-95 Bcf. This is based on slightly cooler weather than in the prior week offset by a small drop in total natural gas imports and somewhat balanced by what seemed, at least to me, to be an awefully low number last week.

If we do get a smaller number than I’m thinking I’ll be going back to the well on (KWK) and/or (SWN) and (APC) calls, which I’ve been meaning to get back into pre earnings anyway, just after report time.

Holdings Watch:

• CALLS: No action.

• PUTS: No action

• STOCKS: Sold (SCU) for $1.11, a 25% gain after their VP of Canadian operations ducked out to pursue other activities. Canada could be big for them. Having the guy run it jump ship with no explanation is more than a little concerning. Maybe it’s nothing. Canada that is. But if I were thinking I’m in on the ground floor of a potentially company making division then the last thing I’m going to do is quit. I’ll revisit the story when they announce their next quarter results.

Stocks of Interest Watch:

(HAL) Boosts Buyback: Last night the company announced an increase to its buyback of $2B. Current repurchase allowance stands at $3B which at current prices would equate to about 9% of the outstanding shares.

Oil Inventory Review

Well we got the bigger build we were expecting and RBOB did not like it:

• Gasoline stocks rose  1.2 million barrels. Higher than some estimates from Tuesday, lower than the Platts survey issued Wednesday morning. This caused a little confusion early but on MN1 Phil and I said this was a bad report for gasoline prices and a neutral to bullish report for oil. And bad for the refiners from a quick trade perspective. It took a while but the refiners dived for the mat with RBOB into the close of equity trading.

• Production Fell to 9.2 mm bpd while utilization stayed essentially flat at 90.2%. Both numbers were lower than expected. Still, it was a record for this week in history.

• Imports Rose Again. Like I wrote yesterday, high imports are hanging around longer than expect due to the exceptionally high margins this year.

• But So Did Demand. Demand rose to 9.663 million bpd a record for this week in history. Before you bulls get running though I’d point out that this equates to a 0.4% YoY growth. We had been showing growth of 1.5 to 2% this spring and that growth rate has been declining. as we enter the peak months.

Crude stocks declined by 1.4 million barrels but only because oil imports fell off the globe which sounds to me like a one week affair if ever there were one.

Odds & EndsAnalyst Watch: (RDS.A) cut to neutral at UBS. (DNR) cut to neutral at Calyon.

Hat’s Off To Flynn Watch: He’s been right on price; got to hand that to him. At least the direction of price if not the actual levels. Like many of the PB and J (perma bull and jamming it to the media) crowd, the fundamentals take a ride in the big back seat and when the week to week expectations of draws are met instead with builds, eh, just shrug it off and talk about hurricanes, refinery outages (even though production is much higher than utilization would suggest), and geopolitical woes. But hey, right on price is right on price, right? For my part, I don’t see gasoline prices continuing higher here as stocks rebuild though and I expect cracks to resume their downward course.

I Want To Be The Next Nutbag Watch: In a bid to rival the carnie-like antic of Hugo, Vlad, Achmed, Morales, and that disturbed little man in North Korea, Rafael Correa, president of Ecuador has decided to “revise” its contracts with Repsol. He’s even pulling out the environmental card ala Putin.  I can’t think of a better way for a poor country to reduce its oil production than to tick off the foreign oil companies who actually get the stuff out of the ground for them. If you can I’m sure these kinds of “leaders” will utilize it but be careful about signing any contracts with them.

Have A Great Day and I’ll See You In Comments! Z

July 12,2007