Raymond James Daily Update 1/22/07 (pre-market)
Energy Market: Crude oil and natural gas prices are trading higher this morning as the National Weather Service is predicting lower-than-normal temperatures in the Northeast through February 4th. As a sign that crude prices may have reached a bottom, traders cut their short position by a whopping 91% last week, according to the U.S. Commodity Futures Trading Commission.
As OPEC nations continue to move their crude oil profits away from U.S. dollars, the U.S. Treasury Department stated that OPEC nations are selling U.S. Treasuries at the fastest pace since June 2003. In the last three months, OPEC members have sold $10.1 billion in U.S. Treasury debt. Only Japan, China, and the UK currently hold more U.S. government debt than the OPEC nations. Again, the continued sell-off of U.S. Treasuries may have a negative impact on the U.S. dollar, which has historically led to higher crude prices.
On the natural gas front, gas prices continue their bullish march. The commodity rallied over 10% last week and is up 4.5% this morning. The sharp upward move comes on the back of expected cooler winter weather across the East Coast, as depicted below in the eight- to 14-day outlook.
"Stat of the Week": We Expect Bullish Gas Storage Trends to Show Up Over the Next Few Weeks. Back in October, we forecasted that under normal weather conditions, winter ending storage should end at a relatively bullish 1,200 Bcf vs. the roughly 1,700 Bcf at the end of last winter. Unfortunately, the first half of winter has come in nearly 15% warmer than normal, causing over 350 Bcf less natural gas demand than we originally expected. As a result of this unseasonably warm weather (and reduced gas demand), the U.S. currently has about 350 Bcf more gas in storage than at the same time last year. Because of this, the Street has become increasingly bearish with consensus now expecting to exit the winter season with a record 1,800-1,900 Bcf of gas in storage.
While the warm start to winter has caused us to change our original forecast, we still believe winter gas storage will end substantially lower than the Street expectations. Specifically, we now think that the current (354 Bcf) year-over-year gas storage surplus will be completely wiped out over the next three weeks and winter ending storage will end closer to 1,500 Bcf. Although this level of gas in storage is still well above (~300 Bcf) the 10-year average, it would roughly be 200 Bcf below last year, and more importantly, it would be 300 to 400 Bcf below the current market consensus. If we are right, this could significantly change the market's outlook for natural gas over the coming weeks. For more information, please see the "Stat of the Week."
This morning Patterson-UTI (PTEN/$23.61/Outperform) released EPS guidance of $0.95 to $1.00 for 4Q06; this is below the current consensus estimate of $1.07 and our estimate of $1.05. Patterson acknowledged that less activity in the North American gas market is the primary reason for the lower guidance. Average drilling days for 4Q06 came in at 290.3, which compares to our current assumption of 290. Recall that we recently adjusted our estimate lower to reflect five less rigs working on average. That said, we did expect stronger average margins to help out, which does not appear to be the case. Similar to Nabors (NBR/$29.55/Outperform), Patterson experienced some weakness in Canada attributable to weakness in the shallow drilling market and poor weather. Given that we are in a softer price environment, many people may have taken the holidays off, further affecting 4Q. This is no big surprise, as we have recently taken a more conservative natural gas price outlook. We still think the Street needs to reduce 2007 expectations by ~10%.
Energy Management Institute underscores improving cost-competitiveness of alternative fuels. A new study released today by the Energy Management Institute (EMI), an industry research center, makes the compelling case that alternative fuel sources have become significantly more cost-competitive relative to crude oil over the past three years (since 2004). Specifically, the EMI concludes that ethanol is 17.4% more cost-competitive vs. three years ago, and biodiesel 29.2%. In creating the study, the EMI looked at pricing data collected from more than 80 urban areas across all 50 states. Bottom line: This study's results are consistent with our long-standing thesis that rising prices for conventional energy (i.e., hydrocarbons) are steadily enhancing the commerciality of alternative energy - not just biofuels, but also alternative power sources such as solar power.
Baker-Hughes (BHI/$67.04/Strong Buy) Rig Count: Up 28 from last week to 1,745; the rig count is now up 19% y/y.
Weekly ethanol recap
At the end of last week:
The benchmark CBOT ethanol price was $1.95/gal, vs. $2.17/gal one week earlier.
The benchmark CBOT corn price was $4.07/bushel, vs. $3.97/bushel one week earlier.
The crush spread, a key measure of ethanol profitability, was $0.50/gal, vs. $0.76/gal one week earlier.
PRICES
Oil $53.50, up $0.10 pre-market
Gas $7.22, up $0.33 pre-market |
