17
Jan

Thursday Night Gas Report Thoughts

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Natural gas traded in a wide range before and after today's storage report, finally ending off $0.052 to close at $8.081 (with a range of $7.933 to $8.175) on what was essentially an inline withdrawal from storage of 59 Bcf (Street was at 62; I had a range of 40 to 60).

This morning I wrote:

I would expect traders to "look through" this week's number unless it is below the low end of my range or gas falls below $8, then you may see profit taking push gas towards the mid $7s. And that's pretty much what happened.

Here's Where Storage Stands Now: 

gas-table-011608.jpg

or if you prefer graphs: 

gas-graph-011608a.jpg

Zcomment:

You Can't Have Your Cake And Eat It Too... As for natural gas prices, I would expect them to eventually fail back into the mid $7s before the coming string of tough comps is through (see last chart below).  As 4Q reports come out it will become readily apparent that the big gas producers had very strong year end exit rates. And many of the big gas producers are looking for double digit volume growth in 2008. As such, when the data comes out, I expect December volumes to be closer to 54.5 Bcfgpd (a whopping 5% higher than where rates started the year).
 
natural-gas-supply-011708.jpg
 
... And There Is No Demand Offset that can soak up all that gas and forestall another year of record gas storage levels if domestic production continues to grow at this pace. The real hope for gas will be a decline in imports, both from:
  • Canada volumes as their production wanes. So far, this decline has not materialized but as activity continues to fall and demand in Canada continues to rise volumes flowing south must slow.
  • and potentially from LNG as low domestic prices don't entice cargoes to come to the U.S. (that's a long shot but the EIA is expecting double digit LNG growth again and I think they are mistaken). 
In the meantime everyone can't simply develop a resource play (a shale or coalbed methane), chalk up big volume growth and then expect prices to continually move North. The old pesky law of supply and demand forbids it.  Without further help from cold weather and with little help expected from the industrial component of gas demand you've got to think gas is on borrowed time above $8.
 
Case in point, here's what happens when you don't get cold weather to help you out. Note that while it was somewhat colder last year in the comparable week it wasn't that much colder. This is what an extra 2.5 to 3.0 Bcfgpd will do to you without cold weather). 
 
gas-graph-011608-b.jpg

Tough Comps On The Horizon. Up until this week, the recent deterioration of the gas storage overhang has been made possibly by a combination of chilly air and easy comparisons relative to last year. However, next week, we enter a period of more difficult comparisons to last year when just about now it was starting to get cold.  Given the extra supply on hand, the only way to match these numbers, let alone best them, is to have bitterly cold weather, something that right now is not in the forecast.
 
tough-comps-011708.jpg
 
While there are plenty of names I want to own Calls on for 4Q earnings and/or reserve reports broader market concerns (as in the fact that it plunges on a daily basis) and my sense that gas prices are due for a slight retreat in the next couple of weeks are now taking precedence. This broad market correction has led to a sharp, albeit unwarranted decline in the gassy stocks of the XNG, which are far more insulated from anything but the more serious industrial economic downturns than the oilier names in the energy patch. But you should never fight the market, especially when the trend is not your friend. On the brighter side of things, the bakers dozen or so of E&P companies I plan to be long during 4Q reports are trading at even steeper discounts to net asset value right before we get fresh reserve reports. Whether the market is willing to listen is a different matter. My guess is they will for at least a few days or weeks allowing for some good short term moves. Beyond that, the market will certainly re-exert a certain degree of dominance.
 
 



 

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