Entries by Elliott H. Gue

Just to let you know, I will be on TV this afternoon to discuss the financial crisis, the "bailout" bill and the implications for energy stocks. You can watch me live at 4 PM eastern time over at www.cleanskies.tv. The interview will also be archived there to be viewed at your leisure.

The simple fact is that the only factor that has been keeping the market from a deeper decline over the past week is the potential for some sort of "Bailout" bill to pass the House. To make matters worse, the Fed, Treasury and various politicians from both sides of the aisle have been telling us how bad things would be economically if the bill doesn't pass. It's hardly surprising that the market looks poised to close near its lows for the day. 

As I noted earlier, we are seeing high panic levels in the market right now, these are levels consistent with a low. I still think we could get a fourth quarter rally; however, this vote means that bottom won't happen today. I also hear that realistically, the earliest opportunity for a re-vote would be Thursday. The next couple of days could be ugly as the market sorts through the potential for a deal to happen.

It's truly amazing how some pundits can claim that there is a glut of gasoline or oil in storage around the world. This totally flies in the face of the fact that US gasoline inventories are at the lowest levels since 1967.

Bloomberg offers data back to 1990, check out my chart of that data below.

The energy sector is trading lower across-the-board today. In my view, the trading action in this group in recent weeks has little to do with fundamentals and a lot to do with market sentiment. As I noted in the most recent issue of The Energy Letter (www.energyletter.com) on Friday, valuations for many of the top stocks I follow are approaching levels unseen since 2002. This is setting up a good opportunity, in my view. 

My working hypothesis is that we are seeing panic levels on the S&P Volatility Index (VIX) that are elevated enough to produce a meaningful bottom. We are retesting the lows set earlier this month and the VIX is retesting its highs. I suspect we'll see the market bottom over the next few days, setting us up for a seasonal rally into year-end.

I will have a video up later on today about this; however, it's worth noting that this morning's natural gas report was the most bullish we've experienced since late July. US inventories built by 51 bcf against expectations for around 65 bcf and an average of 77 bcf for this time of year.

US natural gas inventories now sit just 35 bcf above the 5-year average down from over 100 bcf above-average before the hurricanes hit. The hurricanes are one factor as is the shut-in of higher cost production such as that announced by Chesapeake earlier this week. I think Wall Street remains too bearish on gas.

I appeared on CleanSkies TV News this morning at 9 am. My interview is archived over at www.cleanskies.tv for those interested in watching.

For those in the Washington DC metro area, I am also scheduled on the Clean Skies Sunday show this weekend that airs on the local ABC station (Channel 7) at 9:30 AM

Too many people have failed to see the major shift in thinking that has been underway in the US natural gas market over the past few years.

Just a couple of years ago, all the talk was about just how much natural gas the US would have to import in the form of liquefied natural gas (LNG) to meet domestic demand and make up for falling Canadian production and exports. Now, all the talk is about shale -- fields such as the Barnett Shale of Texas, the Haynesville Shale in Louisiana, the Fayetteville of Arkansas and the Marcellus in Appalachia can provide large quantities of domestic gas production over time.

In fact, the US could quite possibly become the world's largest natural gas producer in a few years time. That's a staggering statistic in my view.

The talk is no longer building LNG import facilities but, quite possibly, building LNG export terminals. Natural gas prices in the EU are twice what they are here in the US, so it's only natural producers would want to take advantage of that spread.

I was at the National Press Club yesterday listening to T Boone Pickens discuss his plan for US energy. As most investors know, a big part of that plan is the use of natural gas to power vehicles. Under the assumptions commonplace just a few years ago, that would have been impossible. The result of such a plan would have been replacing imported oil with imported LNG. But in light of these new plays, the US could produce enough gas to meet these demands within a reasonable time frame.

Clearly, crude oil prices have put in at least a short-term bottom around the $91/bbl area. Longer-term the pullback from $147/bbl to that low is nothing more than a nasty correction in the context of a multi-year uptrend.

But don't be fooled by that "spike" in oil prices to $130+/bbl intraday. That move was primarily concentrated in the near-month futures contract, a classic short squeeze.
The more accurate measure of oil prices is the NYMEX 12-month strip price -- the average of the next 12 months worth of futures contracts. That strip is also up today but only by around $5 to $6 per barrel. The "real" price of oil is closer to $109 than to the prices you're hearing on TV tonight.

It's been a busy week for me in terms of TV and radio. For those interested in watching, I will be on CleanSkies TV (www.cleanskies.tv) this afternoon at 4pm discussing oil and natural gas prices.

I wanted to repond to a comment made on the post below concerning Linn's exposure to hedges on which Lehman is a counterparty.

Linn's hedges are with a consortium of banks, not with a single institution. Lehman was among those banks until earlier this week. Linn announced last night that it has terminated all of the hedges on which Lehman was a counterparty and has re-hedged those volumes on identical terms with another banks in its credit line consortium. So, Linn now has absolutely no exposure to Lehman on the hedge front.

Linn stated that under the terms of the hedges, Lehman owes Linn $68 million which it is seeking to recover (Linn and other trade counterparties would be among the first in line to get paid).  Management has stated that Lehman's bankruptcy will not have a material adverse effect on their business.

Ike continues to have a profound effect on the oil and natural gas
markets. For oil markets, the most obvious effect is that refinery
shutdowns have pushed gasoline inventories from below average to
dangerously below-average levels.

Interestingly, natural gas prices are actually higher today even as oil prices tumble. My view remains that gas is finding a low near current levels.

One catalyst for the intra-day spike may be that according to MMS, there is actually more US gas production shut-in today than there was yesterday. SO much for the idea that gas production from the Gulf could be switched back on quickly. This will be a longer disruption than market participants are givign it credit for.

Looks like we're in for an ugly open on Wall Street and there's some good reason for that. After all, Lehman, one of the world's oldest investment banks, is filing for bankruptcy while Merrill is getting bought out for $50 billion by Bank of America. Looks like AIG and maybe Washington Mutual are going bankrupt or, at least, are in big trouble.

The market is looking to open down huge this morning with just about every imaginable sector getting hit. Overseas markets are also getting slaughtered similarly.

Remember, however, that most rallies of importance are preceded by panic-driven sell-offs. It's a sort of necessary catharsis. Not sure a reversal is in the cards today but a few days of panic selling could be enough to set us up for an end-of-year rally.

As for oil and energy-relateds stocks, they're also down big. This is mainly a result of institutional liquidation; when firms and funds are under stress and need to raise cash, they sell indiscriminately. This is why in times of extreme stress, all sectors go down. I think crude goes under $90 short-term though we are setting up for a nice buying opportunity this autumn. Stay tuned.

Hurricane Ike has now lost its tropical characteristics and will
soon no longer be a factor for the US mainland. Early reports for the
storm suggest that it did not produce the 25-foot storm surge that some
had projected.

However, just because Ike didn't destroy
Galveston doesn't mean it won't have a real impact on crude oil and
natural gas ivnentories and prices. At this time, most of the Gulf of
Mexico's oil and natural gas production is shut-in. Just as after the
pasage of Gustav, it will take more than one week for all of that
production to be restored, even if there is no damage.

Here's an updated look at cumulative natural gas shut-ins from the storm based on data provided by MMS:

The 2008 Atlantic Hurricane season may not have produced as much
human tragedy on the US mainland as the 2005 season but it has still
been among the most active in history.

The conventional wisdom
was that Hurricane Gustav weakened right before it hit the Gulf Coast,
therefore, it was a non-event. But that's totally incorrect. Each day,
the Minerals Management Service provides a summary of how much Gulf
Coast oil and gas production is shut-in as a result of storm activity.
This chart summarizes what's been going on over the past two weeks.