Table of Contents
Leaps Trader Commentary
Crude prices continue to hover just over $62 on the June contract and $64 on the July contract. This may be your last chance for a buying opportunity ahead of hurricane season. The June contract expires on May 22nd, 6 days from now. That means we are likely to have further price volatility but odds are good that July contract will see some upward price pressure.
We are seeing continued production problems around the world with 100,000 bpd offline in Nigeria due to rebel attacks and another 65,000 bpd offline from shuttered Chevron facilities. Chevron is evacuating non-essential workers and shutting in production until the potential violence passes. Press reports claim Nigerian production overall is down about 700,000 bpd. We are seeing production slowdowns in Venezuela, capacity declines in Mexico and the North Sea and output from Russia is slowing because of maintenance problems due to lack of maintenance.
Locally the refinery problems continue to push gasoline prices higher with the national average 3.037 per gallon. Despite the addition of 5 million bbls of crude to inventory levels last week there was only a gain of 400,000 barrels of gasoline and that was localized to one area in California. Refinery activity is still well below average at 89% with some production offline for months to come. Gasoline supplies at the end of April were said to be at their lowest end-of-April level since 1956. At the current inventory levels we will need to add something on the order of 2 mb of gasoline to inventory each week through June to have enough on hand for the summer season.
Despite the gloom and doom the refiners are still printing money. The crack spread per barrel of oil rose to $37 last week and very close to an all time high. That means refiners are selling refined products for $37 more per barrel than oil costs them. This is an amazing number when you consider a large refinery can produce 450,000 bpd of refined products. That equates to $16 million per day in profits for a refinery of that size. Not bad work if you can get it.
Obviously those margins won't last. At least they won't last for more than a few months if conditions continue to deteriorate. The International Energy Agency said on Friday there could be a global gasoline shortage in June if production runs don't increase and OPEC raises output by 1.6 mbpd. I would say the odds are good that gasoline prices are going higher. The IEA said OPEC production in March was a two-year low and the draw down in inventory levels in Q1 had not been seen since 1999. OPEC says the market is currently "well supplied" meaning we are comfortable with the prices and inventory levels ahead of hurricane season. Inventories are low and any hurricanes will put money in OPEC's pocket. Since 58% of the worlds reserves are held by the top 5 OPEC countries they do control our future and it appears they finally found out that they can manipulate the price and get away with it. To avoid the constant production questions OPEC announced it would not meet again until September. That means no change in policy until September
In March production in Venezuela fell to 2.41 mbpd and well below their stated number of 3.2 mbpd. The 2.41 mbpd is not an official number but is derived from "secondary sources." OPEC does not even believe its own members and relies on secondary sources for reliable input. In the early 1980s Venezuelan oil production peaked at 3.4 mbpd and then declined to roughly half of that by 1985. The government realized they had to do something to rectify the problem. In 1990 they opened the oil fields to outside investment and about 44 different revenue sharing agreements were put in place with major international oil firms. By 1998 production rebounded with the help and investment of these firms to 3.4 mbpd and life was good. When Chavez came to power the problems began. There was a major strike and half of the workers walked out leaving the industry in dire straits. Chavez fired these workers and many of them were the only experienced personnel available. Chavez turned to the private oil companies again and saw production rise but most saw the writing on the wall. These companies hesitated putting additional funds into existing projects and hunkered down to await their fate. Chavez has now nationalized the industry and owns the projects under drastically reduced revenue sharing agreements. Basically, you help us produce oil and we will pay you peanuts for your services and charge you increased taxes on those peanuts. Hostility is rampant and production is falling. Only Conoco has failed to sign the new agreements although they have admitted the fields now belong to PDVSA. Conoco was the largest stakeholder in the Orinoco Heavy Oil Belt. There are rumors of Chinese companies willing to take over the existing contracts and work for Venezuela but so far they have failed to materialize and prior agreements with China have failed to produce any material results. Chavez has threatened to kick Conoco out of Venezuela and forfeit their billions in investments. Conoco has already said it might be in a stronger legal position to not sign a deal and just let Chavez kick them out. Caracas has already said it will not compensate companies in cash for the $30 billion or so in investments made over the last 15 years. In order to get around any claims by the oil companies Chavez has taken a play out of Putin's handbook. He is now threatening to sue the oil companies for undeclared back taxes, mismanaging extractions and environmental violations. He can sue them for $100 billion and they will have no defense and he can claim their properties in payment of the funds owed.
Historically because of the type and quantity of oil found in Venezuela it requires a minimum of 110 rigs working constantly to maintain production. After the recent wave of nationalism there were only 69 rigs in production according to Baker Hughes. In order to halt the production declines he will have to spend the money to at leas double the amount of rigs in operation. With his current attacks on the banking system, telecommunications sector, private hospitals and the cement industry and others with pledges to spend their money on projects designed to keep him in power the odds of any new money going to oil exploration are negligible. As Venezuelan oil production slows it will impact the U.S. as well as the rest of the world. We import 1.2 mbpd from Venezuela even with his threats to cut off that supply. Unless he found another buyer willing to ship his heavy oil half way around the world he can't afford to cut off shipments to us. In fact we have the hammer. If the administration wanted to play hardball they could tax his shipments or forbid them completely leaving Chavez to seek other buyers at what would surely be substantial discounts and much higher shipping costs. We have the power to cripple him and probably get him removed from power but we are slaves to oil. Nobody wants to take the step because it might cause higher prices overall and force Americans to conserve. It would be short-term pain for long-term gain in Latin America but I doubt it will happen.
Chavez suddenly announced last week that Venezuela will be leaving the International Monetary Fund (IMF) seemingly indifferent to the fact that will prompt an immediate default on $21 billion in debt and allow investors to call for an immediate payment in full on the loans. I would not hold my breath.
U.S. oil and gas drilling reached a 21-year peak in the first quarter with 11,771 wells drilled. Canadian drilling activity fell to its lowest rate since 1999 producing another sharp downward revision to well completion forecasts for 2007. 19,200 wells are expected to be drilled in 2007 and that is 18% less than 2006. Higher costs and lower volumes of gas produced are contributing to the decline.
Saudi Arabia said it might halt plans to increase oil production past 2009 because conservation and alternative energy sources could curb global consumption. No kidding that is what they said. It appears they have been breathing gas fumes way too long. Saudi Arabia expects to have production capability of 12.5 mbpd by the end of 2009, up from the 10.3 mbpd of current capacity. One has to wonder why they made this comment. Is it because they don't think they can increase production any further due to aging fields and they are planning their alibi this far in advance?
At the same time they said they may double exports to China within 3 years as demand increases and new refining capacity comes online.
Even stranger in the context of the Saudi announcements was this one. Oil Minister al-Naimi said Saudi Arabia intends to increase its oil reserves by 76% and gas reserves by 40%. "Our petroleum reserves amount to about 264 billion barrels." (It has been reported at that level for the last 20 years despite 10 mbpd of production) "All indications highlight the possibility of increasing those reserves by almost 200 billion barrels." He neglected to say where those reserves would come from and most analysts laughed at the absurdity of the statement. Apparently they are trying to cement their position at the top of the OPEC heap by increasing their bragging rights with undiscovered reserves.
The IEA said higher energy prices are having a diminishing impact on consumption. The increasing wealth of the U.S. and other developed nations are helping these countries withstand the higher energy costs. So much for the demand destruction theory.
Another week has passed and nobody has come up with a silver bullet to replace liquid fuels derived from oil. With the remaining days until peak oil measured in the hundreds or possibly thousands it is time to start thinking about what we are going to do with $8 gas and we will probably be happy just to get it. There are no material solutions in progress other than drill more holes. That is not a solution since experts believe it would take 35-50,000 wells per year in North America by 2010 just to keep current production levels from slipping. Remember that comment on how we could cripple Chavez by refusing his oil? We could be crippled even more ourselves if OPEC suddenly decided not to ship any to us. It has happened before and with the Iraq war getting worse by the day those OPEC countries in the area are not liking us any better as each day passes. It is time for us, those of us awake to the coming oil crisis, to start planning a survival strategy. I will discuss possible alternatives in coming newsletters.
We got a nice Friday bounce in Petrochina (+6.33) and Sinopec (+7.50) from the new China bank investment policy announced on Thursday. Let's hope it sticks as well!
Until next week, buy the dip!
July Crude Futures Chart - Daily
June Gas Futures Chart - Daily
June Gasoline Chart - RBOB Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
TEX - $82.39 +2.44 Terex Corp *** Stop Loss $75.00 ***
Terex bounced out of the gate at the open on Monday triggering out breakout entry at $81 only to fall back on Tuesday to $78. Fortunately with the help of a Prudential upgrade to buy the stock closed at an all time high on Friday.
Terex Corporation (Terex) is a diversified global manufacturer of capital equipment delivering solutions for the construction, infrastructure, quarry, mining, shipping, transportation, refining and utility industries. The Company operates in five business segments: Terex Construction, Terex Cranes, Terex Aerial Work Platforms, Terex Materials Processing & Mining, and Terex Roadbuilding, Utility Products and Other. The Company's products are manufactured at plants in North America, Europe, Australia, Asia and South America, and are sold primarily through dealers and distributors worldwide. During the year ended December 31, 2005, it acquired Halco Holdings Limited and its affiliates, and Power Legend International Limited and its affiliates. It entered into a joint venture with North Hauler Joint Stock Company Limited to produce high-capacity surface mining trucks in China. It has a 50%-ownership interest in Sichuan Changjiang Engineering Crane Co., Ltd.
Breakout target $81.00 Hit 5/07
Position: Jan-09 $90 LEAP Call VXQ-AR @ $16.40
AAPL - $108.79 +7.99 Apple, Inc
Definitely no complaints. Apple broke out to hit our entry target at $102 on Monday and never looked back. We wanted to get into the stock on a breakdown before the iPhone begins delivering in June. Unfortunately it never broke down and we were forced to buy the new high. So far, so good. Various analysts are targeting $125 in the near term but if Apple has a strong iPhone opening it could be much higher.
Apple Inc., formerly Apple Computer, Inc., designs, manufactures and markets personal computers and related software, services, peripherals and networking solutions. It also designs, develops and markets a line of portable digital music players along with accessories, including the online sale of third-party audio and video products. Apple Inc.'s products and services include the Macintosh line of desktop and notebook computers; the iPod line of portable digital music players; the Xserve server and Xserve redundant array of inexpensive disks (RAID) storage products, a portfolio of consumer and professional software applications; the Mac OS X operating system; the iTunes Store, a portfolio of peripherals that support and enhance the Macintosh and iPod product lines, and a variety of other service and support offerings. It sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers and value-added resellers.
Breakout target: $102.00 Hit 05/07
Position: Jan 2009 $110 LEAP Call VAA-AB @ $17.50
DB - $159.60 +3.77 - Deutsche Bank *** Stop Loss $152 ***
I said last week I expected a breakout over $156 but I did not expect it to gap open +$2 on Monday. The stock has been very volatile this week on the various news events. Since it has operations in Europe and Asia it benefited from the Chinese investment policy change. Let's hope it sticks.
Deutsche Bank AG offers investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world. It has three divisions: Corporate and Investment Bank, which comprises Corporate Banking and Securities and Global Transaction Banking that serves large and medium-sized corporations, financial institutions, public sector and multinational organizations; Private Clients and Asset Management, which comprises Asset and Wealth Management and Private and Business Clients and serves retail and small corporate, as well as affluent and wealthy clients and provides asset management services to retail and institutional clients, and Corporate Investments, managing the majority of Deutsche Bank's alternative assets portfolio and other debt and equity positions. In January 2007, the Company acquired MortgageIT Holdings, Inc., a residential mortgage real estate investment trust. The Bank is headquartered in Frankfurt/Main, Germany.
Breakout target: $156.50 Hit 05/-7
Positon: Oct $160 Call DB-JL @ $7.00
TSO - $119.30 +2.34 - Tesoro
TSO has begun to regain ground lost post earnings and a move back over $120 would be another buy signal for those wishing to add to positions. TSO also announced it closed the acquisition of the Shell refinery in California for $1.76 billion including the acquisition of 278 retail stations previously owned by Shell. All the stations will remain Shell branded but supplied and owned by Tesoro according to the terms of the deal.
For initial commentary see April 29th newsletter.
2:1 Split: Record date May-14th, Pay date May 29th.
Earnings: May 3rd, $1.67 vs 61 cents in comparison qtr
Breakout target: $110 hit 10:AM on 4/23/07
ATW $61.83 -5.46 - Atwood Oceanics
That was painful! Atwood missed estimates of $1.08 with earnings of $1.01 and the street punished them severely. Unanticipated downtime at three of their eight rigs affected drilling revenue and costs rose 7% during the quarter. After missing estimates by 7 cents it was completely overlooked that they more than doubled earnings for the same period in 2006. Profit for the same period in 2006 was only 50 cents. Revenue nearly doubled as well to $31.7M from 15.6M. I don't see the problem but somebody really hammered the stock. $58-$60 is strong support and that is where buyers appeared on Friday. Goldman Sachs came out on Wednesday saying this drop makes Atwood an attractive acquisition target.
Interesting article in Investors Business Daily regarding Atwood.
For initial commentary see April 29th newsletter.
Earnings: May 8th est $1.08, actual $1.01
Breakout trigger $60.50 hit 4/23/07
TS - $45.18 -2.34 - Tenaris ** Stopped $45.50 **
Tenaris hit our exit stop at 10:30 on Monday giving us a $1.95 loss on the play. TS fortunes turned against us rather suddenly on their earnings announcement after the bell last Friday.
For initial commentary see April 14th newsletter.
Earnings: May 4th 41 cents
Position: Sept $50 Call TSW-IJ @ $3.80, exit $1.85, -1.95
BHP - $52.34 +0.71 - BHP Billiton
BHP was all over the board this week as takeover speculation between BHP and Rio Tinto (RTP) hit the wires. The talk started when a Citigroup analyst suggested BHP could acquire RTP for as much as a 20% premium and it would still be a good deal. As the talk bounced back and forth both pro and con the stocks of both companies bounced as well. BHP ended the week with a small gain but with the trend still intact. BHP and RTP have not commented on the suggested merger and odds are good it will not happen. The BJP CEO is retiring this year and no successor has been named. It would be a tough task for a new hire to arrive on the scene just as a $154B market cap global company tried to acquire a $110B global company. On the plus side the two companies to share some assets and are involved in some joint operations. It may not be as unlikely as some think. RTP gained +$40 on the news but has since cooled.
No earnings date announced.
For initial commentary see March 17th newsletter.
Earnings schedule: No date announced.
Breakout target $43.50 hit March 12th
Position: JAN-09 $50 LEAP Call ZPK-AJ @ $6.00
CCJ - $50.48 +.13 - Cameco
CCJ held its ground on no news just below the new high as the uranium futures contract got off to a rough start. The contract has not seen any volume and prices have been very erratic from $130 to $148 per pound for June delivery. That covered volume of only 74 contracts for the entire week of trading. That is a $4500 movement for the 250-pound contract. The bid/ask spread was as little as $3 per contract to as much as $10 throughout the week making trading the contract extremely risky. I believe once it settles down and there is daily volume those spreads will shrink considerably. Since the contract is cash settled based on a 3rd party spot price assessment at month end we may need to go through that process a couple times to understand how real market prices are translated back into the cash contract. I have not traded it yet but once we get the first settlement I plan on building a long position several months out and just sitting on it.
Worldwide there are 28 new reactors being built, 64 on the drawing boards and 158 in the proposal stages. If all were built it would be a 57% increase from the 435 reactors now in operation. In 2006 the world consumed 180 million pounds of uranium but produced only 100 million pounds. The rest came from Russian nuclear warheads being decommissioned. The supply from those warheads is dwindling and will be completely gone by 2015.
For initial commentary see March 10th newsletter.
Earnings: Apr-27th, -47% due to revenue timing
Breakout trigger: $37.50 Hit March 7th
Position: JAN-09 $40 LEAP Call ZBK-AH @ $7.80
PTR - $129.23 +3.31 - Petrochina
PTR held its double digit gains from last week until Thursday's implosion but then rebounded +6.33 on Friday's news from China. The $130 high on Friday was a 4-month high. No other news and no change in play.
For initial commentary see March 10th newsletter.
Position: JAN-09 $120 LEAP Call ZJK-AD @ $10.70
Cost reduction play:
SNP - $100.00 +10.01 - Sinopec
Sinopec blasted off to close at a new historic high on the China investment news. There was no news for the week specifically related to Sinopec but the trend is firmly in place. Multiple levels of resistance were broken and short covering from those levels provided much of the gains. I was sorely tempted to close the play this weekend for a $10 (143%) gain but the demand picture is so strong I am going to let it ride. No change in play.
For initial commentary see March 3rd newsletter.
Breakdown target $82.50 hit on 2/27
Position: OCT $85 Call SNP-JQ @ $7.00
CHK $34.30 -1.24 - Chesapeake Energy ** Stop loss $32.00 **
CHK tanked sharply on Wednesday after announcing a new offering of $1 billion in convertible notes. Any offering that converts to stock has the potential to dilute existing shareholders. CHK halted its slide on Thursday when support at $33.50 was reached. No other news and no change in play. Maintain the stop at $32.
For initial commentary see Dec-9th newsletter.
Earnings: May 4th, 87 cents vs est of 78 cents
Current recommendation: Hold
Position: 2009 $35 LEAP VEC-AG @ $5.30
MRO $107.39 +2.98 - Marathon Oil
MRO took a minor hit after being sued by the Kentucky AG for alleged price gouging in the days after Katrina and Rita. Marathon announced it was counter suing the AG and the state of Kentucky to have the badly worded law proclaimed unconstitutional. Marathon said it priced gasoline based at market rates with 25% of production offline in the gulf and multiple refineries out of commission. This suit did not prevent MRO from closing at a new all time high on Friday. No change in play.
For initial commentary see Nov-18th newsletter.
Earnings: May 1st, $2.04 vs est $1.93
2:1 Stock Split June 18th, record date May 23rd
Current recommendation: Buy at $85
Position 2009 $100 LEAP Call VXM-AT @ $12.60
Insurance put: 2/18/07
HES - $58.48 +0.30 - Hess Corporation
Gong nowhere fast seems to be the HES game plan. No news, no movement and no risk it appears. No change in play.
For initial commentary see Nov-4th newsletter.
Earnings: Apr-25th, $1.17 vs $2.22
Current recommendation: Buy at $47
Insurance Put: Triggered Jan-3rd @ $49
Insurance Put: 2/26/07
BTU - $50.53 +1.62 - Peabody Energy
BTU eased slowly over resistance at $50and closed at nine month high on Wednesday and nearly recovered to that level on Friday after profit taking on Thursday. There was no news of note and no change in play.
For initial commentary see Oct-22nd newsletter.
Earnings schedule: April 19th, -32% on special items
Current recommendation: Buy at $46.50
Insurance put: Triggered with drop through $39
SLB $74.38 -.23 Schlumberger
No news and although SLB lost a little ground it is still holding near its historic high set in late April. No news and no change in play.
For initial commentary see Oct-14th newsletter
Earnings: April 20th, 96 cents vs est of 91 cents
Current recommendation: Buy at $60, stop at $55
Insurance Put: 9/18
SUN $74.45 -1.67 - Sunoco
SUN lost some ground after it said it was planning a 30 day overhaul of its 85,000 bpd refinery in Tulsa in June. SUN has declined about $4 over the last 3 weeks but the trend is still intact. No change in play.
For initial commentary see Oct-14th newsletter
Earnings: May 3rd, 70 cents vs 59 cents in comparison qtr
Current recommendation: Buy at $60, stop at $54
VLO $73.83 +0.48 - Valero Energy
Despite Cramer's call to sell Valero the refiner just keeps printing money and holding within a few cents of its historic high. There is definitely no weakness to be seen as they decide if they want to sell any other non-core assets. Valero said it was examining each property and deciding if it fit their core goal. That goal is "not to be the biggest refiner but the most valuable." I added an insurance put just in case we see some profit taking here.
For initial commentary see Oct-14th newsletter
Earnings: April 24th $1.86 vs $1.32
Current recommendation: Buy at $65, stop at $57
DO - $87.39 -1.17 - Diamond Offshore ** Stop $84.00 **
DO is holding within $2 of its high but the momentum has slowed. I raised the stop just in case it turns south. No news.
For initial commentary see Oct-14th newsletter
Earnings: Apr 26th, $1.64 vs $1.06
Current recommendation: Buy at $75, stop at $69
ATI - $115.18 +6.59 - Allegheny Tech
This may turn into the perfect entry. We were triggered in the prior week on a breakdown to $110 and the rebound has already stretched for +$10 from that dip. We need to retest the historic high of $119 from late April and then a breakout would be nice. Notice how optimistic I am about ATI. Cramer continues to pound the table on ATI almost daily so there is plenty of retail buying. No news and no change in play.
For initial commentary see May-5th newsletter
Breakdown target $110.00 hit 04/30
TOL - $28.17 -1.34 - Toll Brothers
Maybe I have this wrong. Toll is supposed to go up and Beazer is supposed to go down. Instead they are acting in reverse. Toll warned early in the week that conditions were still lousy but cancellations had improved to only 18% from the 32% in the prior quarter. Strong support at $27. No change in play
For initial commentary see Apr-21st newsletter
Earnings schedule: May 24th
Breakout target: $28.50 hit 4/16
BZH - $32.79 -.54 - Beazer Homes ** LEAP PUT **
Beazer is finally starting to weaken. Support at $32.50 appe4ars about to crack although the negative news from TOL and HOV had less impact on BZH than the other builders. There is a strong case of denial in progress but once $32.50 cracks I think we will see the rats deserting the sinking ship.
Beazer is being flooded with suits, some seeking class action status on charges it practiced predatory lending, filed illegal loan documents and manipulated its stock price. These types of suits appear whenever bad news appears about a company but in this case it looks grim.
For initial commentary see March-31st newsletter
Earnings: April 26th, -1.12 vs +2.35 in the comparison quarter.
Position: Jan-08 $25 PUT WZF-ME @ $3.10
No stop loss
Leaps Trader Watch List
Current Watch List
After having all our watch list entries triggered over the last two weeks I have nothing to add today. The market is acting very "toppy" and I hate to add any more non-energy positions and we already have a full portfolio of strong energy assets. This needs to be a week to pause and see what the market is going to give us before making any changes.
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