Oil Move Overzealous, But That's the Way the Barrel Rolls

Oil was treading water until Occidental Petroleum Corporation (OXY) announced that its Elk Hills field in California had a fire on Tuesday and that 95% of the field’s 120,000 boepd capacity would be shut in indefinitely (the field is 60% oil so this is only 72,ooo bopd).

Crude rallied two dollars even or 3.5% on the news to close at $59.71. Interesting that buyers ran out of steam before they breached $60 but in electronic trading they have now shot through $60.40. I still think it’ll bounce off $60 in the regular NYMEX session and head lower again but only if OXY provides further details on a recovery schedule and if the Nigerian oil worker unions don’t re-threaten to strike.

Why Wednesday’s move in oil was a bit overzealous

Even if it is an over reaction the rally may continue due to short covering and technical reasons. So we got a 3.5% rally in crude off a 0.45% disruption in U.S. total crude supply. If we hold demand and supplies flat from here it would take 58 weeks to eat through the current surplus over the five year average crude inventory level. However, a word of caution would be that a month of this outage would take you into deficit versus year ago inventory levels. Traders have been looking for oil to close over $60 and if it manages that tomorrow all sights will be fixed on the next juicy round number: $65. It’s bunk but that’s the way the barrel rolls.

This is very similar to the rally we got last August when BP (BP) announced it’s little rust problem at Prudhoe Bay. That rally was short lived despite the fact that a lot more production was affected. Prices ended up tumbling when the company released details on when the pipeline would be rerouted. Although this market is a little tighter thanks to OPEC, I’d expect the same reaction here when OXY begins releasing time estimates.

He’s Got A Ticket To Ride, And He Don’t Care

Goldman set a $69 oil price target for 2007. From Bloomberg:

New York oil futures may rise as high as $71.50 a barrel this year and average 4 percent higher than in 2006 because producer investment is “significantly” short of requirements, according to Goldman Sachs Group Inc. The price of the benchmark U.S. crude, called West Texas Intermediate, may average $69 this year, an increase from $66.25 in 2006, Goldman economist James Gutman said at a conference in Hong Kong today.

My comments:

Which producers would that be? The FSU is growing, China is spending cash all over Africa to make sure it grows, Exxon Mobile (XOM) is actually going to grow this year, etc.

OPEC has 3-4 mm bopd of spare capacity now.

True, capital budgets are mixed this year but oil sand s production will be rising as will West African volumes.

Even the long standing decline of US crude production has actually flattened and turned up over the last year.

U.S Crude Production - The Long Slide Appears To Have Stalled

I remember when analysts used to employ price decks that were below current levels. It’s conservative and let’s the user of their analysis judge the company based on the fundamental business, you know, production, costs, cash flow. Conservatism has gone out the window and, I might add, room for upside to GS’ estimates.

Not only are we near an all time high for crude inventories but we’re very near the high for this decade on days of supply (which takes into account demand). OECD inventories are near highs as well and the China/India per capita oil consumption growth card is not playing out as well as many in the industry portray.

Natural Gas Review

Withdrawal: 224 Bcf. My estimate 230. Street 216.

Gas actually backed off on the news since the report was roughly in line with estimates. While the next report will almost certainly be smaller I urge caution in the coming week for when considering adding to put positions. Also, traders are commenting about the large amount of selling that arrives every time gas makes any positive headway over the last several days. They surmise that if gas can break through the $8 ceiling that a wave of short covering would likely ensue driving prices significantly higher.

Close Enough For Hand Grenades (Closer Than The Street)

Gas Inventories Are Still 19% Above The Five Year Average

We’re still on track to end storage north of 1.5 Tcf! If you take the coldest 8 week period (late January to the end of March) over the last 14 years you get demand of 832 Bcf which would still leave 1,515 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels).

Hugo Watch

I once said Chavez’ management of Venezuela was a textbook example of how not to run an oil country based on this chart and his various statements and activities.

I’d like to revise that simply to “how not to run a country” since now there’s no meat or sugar in the grocery stores. When are the people there going to get tired of the blatant mismanagement of their country and toss this guy?

Disclosure: Author has a short position in some of the above-mentioned securities.

Comments

[Malkiel]

"When are the people there going to get tired of the blatant mismanagement of their country and toss this guy?"

The American people have all but taken to building barricades in the streets to show how tired we are of our own "mismanager" Bush and it doesn't do any good. Apparently it isn't a simple matter to curb power abusers when they hold the office...