Market Sentiment Watch: Busy but short week from an economic standpoin with all eyes on vacation time, the EU Summit outcome, and Payrolls in the States on Friday. Chinese HSBC PMI came in a touch lower again hitting an 8 month low with orders from the US and Europe particular weak. Not shocking and will just put the ball further in the stimulus court there. So far we have not seen a slowing in Chinese demand for crude (May was a record) but look for it to flatten June through August on refinery turns and I would repeat that the 2 mm bopd expected increase in global seasonal oil demand (to a new record high level) in not a function of increased demand from China in the back half of 2012. In today's post please find a little commentary on the natural gas macro.
- We get ISM at 10 am EST (F = 51.5%, last read was 53.5%)
- We get construction spending at 10 am EST (F = +0.1%, last read was 0.3%)
The Week Ahead:
- Tuesday 7/3: Factory orders, Car sales
- Wednesday 7/4: Happy 4th of July, market closed
- Thursday 7/5: ADP employment, jobless claims (F = 387,000, last week 386,000), ISM nonmanufacturing (F = 52.8%, last read was 53.7%), EIA Oil Inventory Report 11 am EST,
- Friday 7/6: Nonfarm payrols (F = 100,000, last month 69,000), unemployment (F = 8.2%, last month 8.2%), EIA Natural Gas Inventory Report (10:30 am),
In Today’s Post:
- Holdings Watch
- Commodity Watch
- The Week That Was
- The Natural Gas Supply Slide Show
- The Natural Gas Demand Slide Show
- Stuff We Care About Today – NOG
- Odds & Ends
ZMT (Zman Medium Term portfolio)
See ZEB positions tab for updated positions
ZLT (Zman Long Term portfolio)
The blotter is updated
ZLT – C (ZMAN Education Savings Accounts) – the least traded accounts we run, all equity (no options), and up 34% year to date. We've sold 3 full or partial positions this year (2 or which were entered early this year and one early in 2011) and we entered 3 new positions in 2012 so far. Slow and steady and no swings for the fences.
See ZEB positions tab for updated positions
Crude oil rallied 7% last week to close at $84.96, rising a whopping $7.27 (9%) in the Friday session (the front month now looks like this due to:
- EU Summit eupophia in world markets,
- Crude short covering,
- The strike in Norway going into its second week
- The then looming July 1 startup of the EU embargo on Iranian crude (no delay in the start apparent from the EU)
- And despite the US giving China a waiver to consumer Iranian crude since China has been a good boy and reduced consumption of Iranian oil by about 20% in recent weeks.
My sense continues to be that crude should not have been down this far in the first place. Yes we have strong growth in the States but that growth will not continue in a sub $75 environment unless we see a further substantial roll back in Service costs. I have talked to a number of Bakken operators over the last couple of weeks and listened to more presentations from other Bakken players and the consensus seems to be that the Bakken, which is a big piece of the production growth in the States we show in the graphs each Thursday, has not yet seen much more than an alleviation of cost inflation and while all of them expect some CWC price relief in 2H12 none are yet really baking that impact into their 2Q plans. As far as WTI pricing we look for it to stabilize in the not too distant future over $80 as Cushing stocks retreat seasonally and gasoline demand re accelerates. Distillate stocks remain severely understored due to strong export demand which is also WTI supportive as thoughts in a few months will shift to the heating season.
Brent rebounded in similar fashion to WTI on Friday (rising 7% on the week) and while this first move may not be entirely sustainable this is apparently a good first note in the sideways trading game. I don't want to see an unsustainable V-back up here any more than I want to see it in the group. This morning crude is trading off a little over a dollar, with a little profit taking after Firday's fourth strongest $ point move in history.
- Iran Watch: U.S. welcomes beginning of EU embargo this past weekend and looks forward to progress at "expert level" meeting with Iran in Turkey this week. Not. Holding. Breath.
- Strike Watch: Norway offshore oil workers strike enters second week, cutting production by ~ 250,000 bopd or about 13% of total country production. Not a big deal, will likely get resolved soon but puts a little floor under Brent.
Natural gas closed at $2.82 on Friday, up 6% on the week on a sweltering forecast and after EIA reported a slightly bigger than expected injection (57 Bcf vs 53 Bcf which is nearly rounding error and is still a record low for this time of the year). This week look for a sequentially smaller injection which should compare favorably to some mild weather a year ago (+95 Bcf then) and a five year average injection of 87 Bcf. Two words still ring true as the season progresses: Flatter Slope. To the injection line that is. The storage overhang has fallen from 927 Bcf at the end of March to 613 Bcf as of last week (that's an extra 3.8 B's of net demand to the five year average over this period). Look for it to dip well into the 500s this week. The overhang is still a threat and while we will may exceed record storage at the end of the season in October again this year I expect the overhang to be substantially gone by the end of the year to due a combination of falling supply and stronger gas fired generation (see Natural Gas Supply and Demand slide shows below). This morning gas is trading off three pennies.
- Natural Gas Supply Quick Note: Marketed supply for the Lower 48 rose sequentially by 0.5 Bcfgpd to reach 68.3 Bcfgpd (not a new record) in April with "Other States rebounding to a new high and small rise in Texas and Oklahoma offsetting losses in all other major areas. This grudging roll over in supply is as expected with some of the winter month apparent declines attributable to temporary price related curtailments. See next section for regional breakdown of production and rigs.
- Natural Gas Quick Demand notes. April gas fired demand hit an all time high for the month, rising 6.6 Bcfgpd vs last year. Note that this would have been a record had the calendar said May or June at the top as demand continues to steal increasing amounts of share from coal. Sellside and gassy E&P company wisdom suggest between $3 and $4 gas will result in more coal fired power entering the generation scape and after a couple of channel checks I would suggest the number really is closer to the high end of that range.
- Tropics Watch: All quiet on the tropical front.
- Weather Watch:
- Last week saw cooling degree days of 75 vs a forecast of 74 and 71 CDDs in the prior week (which produced the 57 Bcf injection last Thursday). Note, the Mid Atlantic power outages will impact this week's and next week's gas consumption figures modestly.
- This week's forecast calls for CDDs to move up to 97 vs 68 normal for this time of year and 89 CDD's in the year ago week.
The Natural Gas Supply Slide Show
The Natural Gas Demand Slide Show
The Week That Was
Stuff We Care About Today
NOG Receives Increased Borrowing Base
- Borrowing based increased from $175 mm to $300 mm.
- Nothing currently drawn after their recent $300 mm senior note offering.
- Interesting that the borrowing base is already back to pre senior deal levels before an expected mid year reserves report is released.
- Their next redetermination is set for October.
- Bottom line, this shouts a big "we don't need an equity deal in 2012 or 2013 " to the shorts.
Odds & Ends
- Baclays cuts targets on their E&P coverage universe, apparently as part of the commodity price mark to market action for the end of 2Q12. Ratings appear to have been kept intact. This is part of the action we have been looking for.
- PVA – Barclays cuts to Underweight. One of the cheapest names in the gassy getting oily space on $ /Mcfe of proved reserves that also happens to be rapidly transitioning 1P reserves to more oil via their Gonzales and now Lavaca County, TX Eagleford program. Proof that Barclays doesn't get the whole "buy the gassy getting oily names" where the fear of their balance sheet has overly depressed the equity.
- Barclays also cut DVN, WPX and FST to Equal Weight.
Housekeeping Watch: I will be out of the office from Tuesday at 1 pm EST through Thursday for the 4th of July holiday and intern number 1's 9th name day. We will post tomorrow and again on Friday and I will check in from time to time on Thursday and comment on anything if necessary.
Interesting Viewing Watch: GDP CEO talks about the Tuscaloosa
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