This is likely to be another slow day for the market and I plan to save my truly ground breaking work for next week and afterword. First, a look back at the year that was with brief comments:
2008 Was …
1) … A Bad Year For Equities. I know, I know… dub. But it was bad for the broad indexes on a very similar basis for energy and non-energy names. Despite having strong fundamentals than the broad markets the Majors and E&P stocks fell roughly as much as the Dow and S&P. Service vastly underperformed and while I’ve been staying away from most service names and I believe this area will continue to suffer losses as rig counts decline into decade low low levels by early 2Q09, they will probably have a pretty good back half of 2009, especially the deepwater names.
2) … Oil’s Worst Year Ever. After hitting an all time high mid year oil has not been able to gain much traction unless you count the last week of 2008. 2009 will likely be better. If the global economy stabilizes. To that end, refining cracks will need to improve or the U.S. refiners, and I’m thinking of the mid cap and smaller independent ones here (so everyone on the usual list but VLO and SU could be in for consolidation (very doubtful in the first half) or bankruptcy.
- Prediction for prices? I hate these as they depend on so many variables and I take in fresh variables daily that add to my thoughts but if I had to guess now I’d say average price for crude of $60 with a year end price of $70 to $80. Higher than current levels of
3) … Not Too Great For Natural Gas Either. Natural gas suffered first from fear of too much supply and then from a broad based decline in industrial activity. Lower 48 U.S. natural gas production probably grew 7% (excluding the impact of hurricanes Gustav and Ike) in 2008 which is an unprecedented amount. Past years have seen gas growth close to flat with individual years growing or receding by 1 to 2%. So 2007 and 2008 were outliers brought about by accelerated activity in shale plays. Much of this growth comes from wells which decline at a rate of 80% (or more) in the first year so the only way to get growth each year is to drill more wells, and for that, you have to have gas prices that support level of activity or projects start getting shelved in order of lowest to higher IRR. Gas itself appears to be basing in a range of $5 to $6.25 now but the outcome of January weather will have the first shot at price determination early in the year (very cold = $6.50, very warm = $5) before a decline rig count (see next bullet) can start shoving natural gas production down in the really high decline rate plays.
- Prediction for price?: Average $6 to $7 with a close of 2009 closer to $9.
- Prediction of supply growth for 2009: 1 to 2%.
4) …Busy, Busy, Busy for Rig Operators; 2009 Will Be Less So. New shale plays seemed to spring forth each month and while prices were high, operators dusted off old rigs and had new ones built at pace not seen in a decade as capital discipline was replaced with initial production exuberance. But once prices had peaked and quickly tumbled and the financial markets made borrowing to bridge the gap between capex and cash flow exceedingly painful, operators were forced to cut back on their plans and started laying off rigs left and right, especially as the fourth quarter drew to a close. Now this is mostly a gas rig phenomenon and the numbers in the table don’t really do what’s going on justice so let me insert a chart here:
- Prediction for rigs:
- Gas rigs ultimately fall to around 1,000 by late 1Q, early 2Q.
- Horizontal rigs: down 50 more from current levels for the year’s average of 540 or so. Fund managers will watch for this as a sign that gas supplies don’t get too out of hand as the prolific plays are mostly being tapped horizontally
- Prices will fall.
5) …Speculator Heaven Until They Got The Wrap For High Commodity Prices And Abandoned Ship. I have a problem with blaming everything on buyers who provide liquidity because you don’t like what they buy. If a group of traders bought cars and drove up the price of cars to the benefit of the Big 3 Congress would pin a medal on them. Anyway, while there were some speculative excesses, the sell down of crude that came with a sputtering of the global economy has resulted in literally dozens of delayed large scale oil development projects and countless smaller ones. Also, in the case of natural gas, speculators were short natural gas all year and yet gas rose at high as the mid $13s before tumbling back to earth. The net short position for natural gas is actually at one of its lowest points in the last year.
6) … A Pretty Normal Year For Peak Gas In Underground Storage. At present, gas in storage is 2.3% below year ago levels (yep, despite all that extra production) and only 2% above the 5 year average for this time of the year. I don’t expect the falling rig count to show up in the weekly numbers until March and not in the monthly supply numbers (which are released 2 months after the fact) until April. I do expect a slightly bigger year for LNG imports in 2009 as new supply comes on line but for continued declines from Canadian imports with the effect of imports being flat to slightly higher next year, probably not a supply / demand buster.
7) … A Wild and Nonsensical Year For Coal. Just pointing out that while coal pretty much ended the year where it started with both U.S. western and eastern coals actually up 8% YoY, the coal companies got literally slaughtered falling 64%. KOL, the coal ETF, is a rather imperfect way of looking at the group as it contains both suppliers and consumers of various coals but taking a look at the performances of the big U.S. coal miners ACI, BTU, MEE (down 64%, 63%, 61% respectively) confirms a lousy year for the group. Note how close all three of those coals are down pretty much the same amount? Not a lot of though going into stock prices there right now. While steel production is weak at present and while electricity demand is off 1 year to date, the drop in the miners is, in my opinion (which everything around here generally is unless otherwise noted), unwarranted.
8.) … A Bad Time For Green Energy If Not For Green Rhetoric. This one kills me. Obama wins, talks of 2 to 2.5 million "green collar" jobs and oodles of green for the makers of anything, well, green, and the group falls out of bed because oil did. As the sun shall rise again, so shall the solars. 2009 may not be the best year for them, at least the first half anyway, as global capacity is seen exceeding global demand due to the weak global economy by about 20%. My thought is to go with the low cost producer and the one landing the utility contracts as they are forced to augement their generation capacity with green energy (by the way, that would be FSLR).
9) …And An Unbelievably Poor Time for Shipping Things Around The Globe. Like oil, dry bulk rates went from all time highs to long term lows. Unlike oil, they really fell apart crashing to levels that are below the cost of operating a ship on a daily basis. When the economy recovers so will these guys. I will be taking a look at whose balance sheet and contract vs spot status put them in the best position for the rebound (and no, its not DRYS I’m thinking of).
Other Stuff We Care About Today:
Commodity Watch:
- Crude rallied sharply Wednesday closing up $5.57 at $44.60 on a bit of late year short covering that got out of control after a slightly bullish set of oil numbers (gasoline and distillate inventories grew at a slower rate than expected) and stocks of crude at Cushing fell as well. This morning crude is giving back $2 of Wednesday’s gain as traders take short term profits and the dollar puts on a 1% rally.
- OPEC Watch: Angola took over as head of OPEC yesterday (OPEC rotates the presidency on something like an annual basis). They are a growing African producer (unlike Nigeria) and new to the Cartel as of Jan. 1 2007 so look for their voice to be somewhat more moderate than recent group pronunciations as they may be likely to look out for number 1 more than they do for the Cartel. The real power still rests with Saudi but this could mean we hear less talk prior to actionable meetings out of the group.
- Russia Watch: 2008 production fell 0.9%, the first annual drop in a decade. Get used to it. This is the world’s second largest oil producer starting to roll over due to natural declines and a lack of enough spending.
- Natural gas fell 24 cents to end the year at $5.60 after a slightly disappointing gas storage number was released mid day Wednesday. I say slightly disappointment because it was a holiday week in a weak economic setting and the miss was indeed slight. Gas is off a dime this morning.
- Russia to Ukraine: Happy New Year, No Gas For You. Unable to come to terms over a debt of as much as $2 billion Ukraine owes to Russian, Medeyev/Putin turned off the pipes during the dead of winter providing heat for a majority of that country and 1/5 of the gas supply to Europe. Russia also increased supplies via alternate routes to Europe but Western Europe pointed out that they have adequate storage of gas to withstand "days but not weeks" of disruptions. Maybe a slight boost here for LNG prices and therefore a very slight boost for U.S. gas prices.
VLO Announces Reduced Capacity Due To Weak Gasoline Margins. Valero says it downed fluid catalytic crackers at St Charles and Corpus Christi "indefinitely" due to weak margins. Price takes care of price.
I’ll go back to the usual format next week. At that time look for a multiples table tab on the many energy sub sectors we follow around so that I can better keep track of estimate movements within individual groups.
Odds & Ends
Analyst Watch: (SUN) goes from Buy to Hold at Soleil, Piper cuts (CSIQ) to sell, and (ESLR) pick up at Buy at Stanford Research.
