08
Mar

Friday Morning – I’ve Got That Neutral Feeling

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Morning Comments: Flattish broader market (at least ahead of payrolls), flattish oil and gas indications. No picks today but a “Big Picture” picture show.

Yesterday saw slight declines in both commodities:

  • April crude couldn’t hold on to a rally over $62 settling down $0.18 to $61.64 despite continued strength in gasoline prices. That rally looks a bit long in the tooth and most likely snaps back 5% or so with the first full percentage point bump in refinery utilization and/or significant rise in gasoline imports.
  • Natural gas fell $0.13 to $7.24 on the 102 Bcf withdrawal (actually 90 - see Odds & Ends below). Next week’s number should be bigger with the recent cold snap but gas may still make a run at $7 as traders look towards the slacken demand of the shoulder season and the likelihood of trough storage that is 15 to 16% above the five year average (and down about the same from year ago levels).

So where are we relative to historic levels of gas storage? Note: The EIA made some adjustments to their historic data but have not yet released a new version of the database for download (more on that in Odds & Ends).

  • 14% or 268 Bcf below the year ago figure. Last week we were only 12% into YoY territory (239 Bcf) so now the EIA must have taken storage numbers for last spring up.
  • We’re now much further above the “new five year average”. At 13.5% or 194 Bcf above the five year average of 1,437 - the five year range appears to have dropped pretty massively in the revision since we were 11% above it last week and we got a bigger withdrawal this week than a year ago. That seems odd.
  • EIA says that if demand holds at 5 year average levels for March that trough storage will be at 1,426 Bcf - that’s a little higher than the 1,400 Bcf I expected last week despite a big withdrawal…need to see those new numbers.

Nevertheless I’m starting to think that natural gas prices won’t get the large retrenchment I had once expected. I’d bet on a short term sell off during the shoulder season but then upward pressure from a plethora of sources including everything from budgetary constraints to threatened shut ins to hurricanes to La Nina to falling imports from Canada. So I’m transitioning from bearish to neutral and doing the homework to have long bets in place when/if I feel the time is right.

Does this mean I pull my remaining shorts? No! I’ll scale out over time just like I scaled in. Like I said, I still think there will be a period of seasonally induced natural gas price weakness ahead that could lead to a pretty good washout in my current  put names. Then I go to cash and then long.

Here’s a very cursory inspection of the latest gas data as I mull over getting a little bullish. I know it’s shocking since I’ve been bearish since the inception of this blog. For those of you using me as a contrarian indicator (you know who you are!) this is your first and only warning to take profits on longs. Note: service stocks are a different matter and I’m unlikely to get bullish unless they get thrashed this spring as they are earnings momentum animals and they appear to be decelerating (see my note on dissecting the OIH here).

The Near Month Future On This Date In History - Funny how that looks like the broader market.

mar-7-historical-gas-price.JPG

That seems pretty odd given high storage levels. Like I graphically depicted here storage-vs-price.JPG last Friday, the correlation between price and storage seems to have broken down back in 2003.

Let’s have a cursory look at supply and demand. None of this is really new but it lays out the bull perspective pretty well. Early March is an interesting time to analyze past supply and demand because it’s the first time each year that EIA data gives you a first look at the entirety of the preceding year. Granted the data is subject to revision for quite some time but it’s usually not far off their final numbers.

U.S. Annual Gas Production (Bcfgpd)

gas-production-annnual-through-2006.JPG

I’m not bothering with getting this down to dry gas production but am instead just illustrating the point that US gas production is essentially holding flat. It hasn’t been growing but it certainly has not fallen off a cliff. Production may actually increase ever so slightly this year as Shale and non-conventional Rockies growth outpaces reduced output from the Gulf of Mexico.
…And It Has Taken A Rig Count Like This To Simply Maintain Production

rig-count-030707.JPG

Rig count data courtesy Baker Hughes

Other Supply: EIA Still Says LNG Volumes About Skyrocket. According to the EIA: EIA expects total liquefied natural gas (LNG) imports to increase from their 2006 level of 580 Bcf to 770 Bcf in 2007. LNG import projections remain strong for 2008 as well, expanding by 39 percent to exceed the 1 Tcf mark. Comment: That’s an additional 0.5 and 0.8 Bcfgpd in 2007 and 2008 respectively and I’d say that’s pretty gas price bearish but it’s one of the few things you can easily point to beside demand to get real bearish about. I think the analysts will heavily discount rising LNG againsts stories of fall Canadian imports.

Canada: Imports Are Rolling Over Or At Best Not Growing…

canada-through-2006.JPG

…And The Situation Looks Even More Bleak When You Consider The U.S. Volumes Headed North Of The Border Keep Rising.

Net Imports From Canada:

net-canada-bigger.JPG

Many analysts are calling for a 1.0 Bcfgpd drop in net imports from Canada as production falls and oil sands projects and domestic demand keep more volumes north of the border. That’s been argued for a long time and while those factors play a role I wouldn’t expect such a dramatic, one year drop as that.

…And Exports To Mexico Have Plateaued At 1.0 Bcfgpd (Pemex really needs to get on the ball!)

mex-exp.JPG

U.S. Annual Gas Demand (Bcfgpd)

Meanwhile, annual US demand has been falling. The result of warm winters for sure but also a bit of demand destruction. I’ll go into a bit more detail on this over the weekend but suffice it say that the duration of elevated gas prices has curtailed industrial gas demand (not good for gas demand since Industry is the biggest consumer of gas). This has especially been true in Texas which was once home to nearly one-third of all industrial gas consumption but last year was only good for 21%.

tot-gas-demand-through-2006.JPG

All in all, it’s a mixed bag. Production is flat, imports may fall a tick but are probably going to net out as close to flat between rising LNG and falling Canadian supply and demand appear stuck in neutral. I’m feeling pretty neutral myself. Bearish in the near term but leaning towards the other B word longer term .

Odds & Ends:

Gas Inventory Review: The EIA Pulls A Fast One!

My Expectation Was 75 Bcf, Well Below the 102 “Reported”. I was no doubt low but there were mitigating circumstances to the EIA’s 102 number. The EIA included a 12 Bcf adjustment in the numbers.

  • Before yesterday’s report came out, the EIA had indicated that this time last year we had 1,887 Bcf in storage. And the storage withdrawal in the year ago week was 85 Bcf (the guy on CNBC just after the report thought so as well).
  • Now the data shows year ago storage of 1,899 Bcf, 12 Bcf higher. The EIA has a habit of periodically adjusting their historical data without really commenting on it. So the real number for yesterday is 90+ a balancing adjustment of 12 Bcf so I still missed but not as bad as I thought. The EIA database still shows the old numbers relative to yesterday’s summary report.

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