Option Investor

Terrorist Premium

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It was small but it was enough to rescue oil prices from another afternoon swoon on Friday. It was announced on Friday that Al-Qaeda was planning an attack on Saudi Arabia's massive Ras Tanura oil terminal. Ras Tanura translated means the "top head of the barbeque spit" in Arabic but for the rest of the world it stands for the largest oil export terminal on the planet. 8% of the world's oil flows through it every day. The picture below shows the oil farm and several of the loading terminals built offshore.

Ras Tanura Onshore

Ras Tanura Offshore

Truth is no stranger than fiction in this event. In the BBC docudrama, The Man Who Broke Britain, the price of oil spikes dramatically after a terrorist attack at Ras Tanura. In the FX movie in 2005, Oil Storm, the hurricane induced oil shortage is further crippled by a terrorist attack at the same facility. This facility is well protected on the land side and it would be practically impossible for terrorists to mount a credible attack. On the ocean side considerable damage could be done but it is so large it would be hard to cripple it completely unless the entire tank farm could be set ablaze. The complex serves as a refinery and as an oil export terminal and reportedly can handle more than six million bbls per day.

In theory the threat should now be over since the British and American naval forces have arrived in force to protect it from water borne attack. Reportedly there are missiles based on land to protect against an airborne attack as well. This would be a choice target for terrorists but may be too big a target to handle with weapons at their disposal.

The key here is that the terrorist premium has been reinstated. Even if Ras Tanura is now protected it only means they will try for a smaller target(s) that will be harder to defend but may accomplish the same goal of disrupting oil exports. Osama and al-Zawahiri have both urged the attack of oil facilities in the Middle East to inflict pain on the consuming Americans. The most recent call for attack was on Sept-11th by al-Zawahiri.

This terror premium arrived just in time to coincide with the advent of cold weather in the US. Crude prices appear to be firming in the $59-$61 range and a move back over $62 could begin a new trend higher. Oil inventories took a sharp dive last week of -3.2 mb with a drop if -1.4 mb in distillates and -2.8 mb in gasoline stocks. This may have been just a fluke caused by delivery problems, a platform shutdown in the Gulf or continued refinery outages for maintenance or all of the above. If this week's inventory report shows another decline the bottom in crude should be behind us.

Gas injections into storage also took a sharp drop last week to only 19bcf bringing the total in storage to 3,461 bcf. With cold weather blanketing the nation it is unlikely that we will hit the 3.5 tcf storage target but we are going to come very dang close. The current all time record was 3,472 bcf set in Nov-1990. We are currently at 10% more gas in storage than at this time in 2005 and without a cold winter it is doubtful if it will be depleted. However, one good cold snap of several weeks can deplete it very quickly. The next two weeks are expected to be colder than normal in the northeast where gas consumption is high. The November gas contract expired on Friday at $7.12 and in the last hour of trading the December contract fell from a six week high at $8.46 to close at $7.81 and more inline with the crash of the November contract at the close. The November contract dropped from $7.74 to $7.12 in the last hour. This was simply expiration gyrations as traders rolled over positions into the next month or exited completely taking profits from the $2 rise in the last two weeks.

Energy earnings are in full swing with a large portion of next week's earnings devoted to the energy sector. Last week the top five energy companies reported earnings, which totaled over $20 billion in profits for the quarter. That is more than $240 million per day. Not all earnings were positive with BHI the poster child for being slammed on good news. BHI followed the SLB lead in pre-warning that a warm winter and excess supplies of gas "could" slow drilling next year. Neither have seen any decline but both pre-warned just in case. Thanks guys!

In the earnings table below you can see that the list of reporters is starting to show a lot more symbols you have probably never seen. That is because nearly all the larger companies have already reported. After this week energy earnings will slow to a trickle.

Earnings List

Chart of December Crude - Daily

I removed Chesapeake (CHK) from the watch list after they literally blew away earnings and rocketed for a 10% gain.
CHK beat expectations by a mile with earnings of $1.13 vs estimates of 72 cents and earnings of only 43 cents in the year ago quarter. Revenue nearly doubled to $1.93B from $1.08B. CHK said it had resumed full production from all fields after shutting down temporarily due to falling prices and record storage levels. CHK currently has 120 rigs working, up from 73 in 2005, and has plans to increase to 133 by year end and up to 150 in 2007. The CEO said current prices support continued exploration at favorable economic returns. Maybe this will put an end to the cautious warnings by companies like SLB and BHI.

Shell announced it was going to develop its discoveries in the lower tertiary zones deep under the Gulf of Mexico. Recent discoveries by Chevron, Devon, BP, PBR and partners in the same zone has caused a flurry of activity in the deep water region. Shell is going to build a production platform in 10,000 feet of water with some wells in this pay zone going over 30,000 feet. Chevron announced its first successful test at Jack a year ago and then another successful test at Jack 2 back in September. Shell is going to beat Chevron/Devon to the production punch by announcing a multibillion development in this zone last week. Shell plans to exploit three fields, known as Great White, Tobago and Silvertip. Initial production estimates are for 130,000 boe per day. Rough estimates for initial completion of the development are in the $3 billion range. Shell has already drilled eight wells in the area to develop information about the discovery. New technology will have to be developed to extract the oil, some of which will be a heavy crude. Shell will connect the wells to a floating platform anchored in 8,000 feet of water making it the deepest in the world. Big numbers have been tossed about claiming billions of bbls of reserves but analysis firm Wood Mackenzie thinks recoverable oil will be more in the 400-500 million bbls range for Shell. Of the 12 Lower Tertiary discoveries to date the reserve totals for all companies should be in the 2-3 billion bbl range.

In other news Merrill Lynch announced it was buying Houston based Petrie Parkman & Co. Petrie Parkman provides financial advisory services to the gas industry as well as general energy analysis and equity research. Petrie recently advised APC in its $5.1B acquisition of Western Gas Resources. Thomas Petrie, CEO and founder, is a very influential analyst and has industry leading views on the future of the energy business. A recent webcast with his insightful view of the industry can be heard here: http://tinyurl.com/tb969

I am dropping Cameco after their mine disaster last week. I am replacing them with BHP. See the BHP play description for the update on Cameco.

I did not get any complaints last week about the format change so I assume it worked for everybody. It should cut down on repetitive data and give a higher priority to the new play descriptions. If you have any questions you know my email. Jim at OptionInvestor.com

I am hesitant to add any additional plays this week ahead of the mutual fund year-end on Tuesday. I think we will get a chance to buy the non-energy positions lower. The portfolio list is turning a very nice shade of green with all but a handful of positions showing profits, many with very nice profits. So far the game plan for fall has worked out nicely. If it continues as planned we should have some very happy holidays. I am concerned about the potential for some general market distress over the next couple weeks and that could cause some temporary indigestion for our energy positions. I do believe it will only be temporary to grin and bear it!

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