Monday Morning + Gas Supply Update

The week ahead forecast: light trading into year end, with perhaps a little bottom fishing in the energy names as tax loss selling runs out of steam. I've run through the most recent gas supply numbers in the post.

  • Monday - no economic data
  • Tuesday - consumer confidence (yep, still damn ugly)
  • Wednesday - Full market day. Oil inventory at regular time, natural gas inventory at 12 pm EST. Also initial jobless claims.
  • Thursday - MARKET CLOSED - New Year's Day
  • Friday - Full Market Day, ISM data, and Single Digit Midget Friday.

Link to weekly wrap.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Gas Supply Update
  4. Stuff We Care About Today
  5. Odds & Ends

Holdings Watch: No changes last week.

Commodity Watch:

Crude fell $4.65 or 11% last week to end at $37.71. Products fell even further resulting in a renewed slump in crack spreads. Still very little light at the end of the refining tunnel. This morning crude is trading over $2.50.

OPEC Watch - OPEC Expects Prices To Stabilize in Jan /Feb Timeframe. States from OPEC Presidnt Chakib Khelil over the weekend ~ "Many countries have implemented the reduction. I think all of them will implement it because they do not have a choice.  I think this reduction will have an impact on prices in January-February because it is a strong reduction. We seek to stabilise the price and prevent it from falling further."

  • Ecuador - said over the weekend it will meet its share of the recent OPEC production cuts (40,000 bopd of its 500,000 bopd output) by taking it out of the hide of foreign oil companies operating in the country. (E), (PBR), and (REP) are likely to take small dings on the news. Expect to see more of this compliance met through beating up on the foreign guy who brung ya. Other names in other lands who are likely to see a bigger negative impact in relation to their overall volumes are (APC) and (APA).
  • UAE Makes Deeper Than Expected Production Cuts - from Reuters ~


The Abu Dhabi National Oil Company (ADNOC), the main producer in the United Arab Emirates, the world's fifth-largest crude exporter, will continue to supply its customers of flagship Murban crude with 15% less than normal contractual supplies in January, while Upper Zakum supplies will be reduced by 3% from the norm. ADNOC said it will reduce supplies of all four crude grades for February, the deepest supply cuts since it started cutting allocations in November. A source with an Asian refiner said the ADNOC cuts were more than expected. "ADNOC had already allocated January volumes, but they reversed the decision, so that messes up our schedule," the source said. "For February, the reduction volumes are very large, so we may need to adjust our ship loadings."


  • Isreal/Gaza: Tension boiled over over the weekend; this kind of activity has a way of drawing threats of support from Iran via closure of the Straits of Hormuz. No threats I've seen yet but I'd bet Ahmed of Iran is looking for a way to quickly re-assert his nutbag stature via a test of the new administration, especially if he believes that a dialogue can be established.

Natural gas rose 9% last week to end up at $5.83. This morning gas is trading up over 20 cents and back above $6 with oil and with the possibility that global LNG prices may rise as Russia threatens to shut off part of Europe's gas supply.

  •  Russia Close To Cutting Off Gas To Ukraine /  Europe. Last minute talks are underway to forestall a disruption of gas service for Jan 1. Russia says pay $2 billion by year end or else. Ukraine says they have gas in storage to withstand a cut and that they owe less and can pay it later. You can see where this is going. Europe would be impacted because volumes coming from Russia traverse Ukranian pipes. 

Winter Weather Watch:

  • Last week: HDDs came in at 222 vs a season high 215 scored in the prior week. This is slightly colder than normal for this time of the year and well ahead of the year ago week's 190 reading.
  • The prior week's 215 reading yielded a withdrawal of 147 Bcf.
  • This week's forecast for HDDs is 181 (much warmer than last year and normal).
  • Favorite names for a rebound in natural gas are EOG and SWN, then GMXR, and HK.


Gas Supply Update:  In a nutshell:

  • Texas continued to show strong growth through October
  • as did "other states" production (the lessor but of late up and coming states when looked at on a combined basis) but
  • Wyoming and Oklahoma (two recent growth stalwarts) started to show weakness. Note that these apparent rollovers in production came well before the recent sharper drop in rig counts.
  • I suspect we will see a flattening of growth in Texas volumes by the time data is released for January or February data time and then potentially, with declines coming during 2Q09.
  • Note also that the rig count is falling smartly in some of the states that are not known for being big gas producers but have come on the scene in the last couple of years due to unconventional plays (like Arkansas and the Fayetteville shale where the rig count used to be 1 or 2, recently soared to 60 last summer and is now back down to 53.
  • Activity in these shale play driven "other states" lives by price and dies by price and rigs are tumbling into dry stack land and I expect this trend to accelerate as E&P companies start spending their smaller 2009 capital programs.
  • The U.S. land rig count is now down 310 rigs since its summer peak (84% of the out of work rigs are natural gas directed ones).
  • What follows is my monthly look at the big pieces of U.S. natural gas production from largest to the smallest that is reported on an individual basis. These numbers, in general, have run up on the back of a seemingly ever rising rig count. Conventional thinking is now that the gas rig count will fall by another 500 to 700 by late Spring.



Stuff We Care About Today

Baron's Says (LINE) Payouts Safe. Here's the article.  I hate to say I told ya so. And now it has a 21% yield. 

(BPZ) Bumps up Corvina Reserves. I'll have more on this in comments today. Interesting little name here.

Odds & Ends

Analyst Watch:  Zip, nada, nothing in energy land. Most analysts still out this week as can be seen by the few ratings changes in all sectors.

42 Responses to “Monday Morning + Gas Supply Update”

  1. 1
    Sambone Says:

    By Angela Henshall

    LONDON (Dow Jones)–Crude oil futures traded briefly more than $4 a barrel
    higher in London, rising swiftly on concerns over escalating tension in the
    Middle East and on expectations more Organization of Petroleum Exporting
    Countries members will confirm production cuts with buyers this week.
    The front-month February contract on the New York Mercantile Exchange spiked
    beyond $42 a barrel but the rally was shortlived with prices retracing some
    gains later in the session.
    “Although ongoing tensions could keep things fairly well bid for a while
    (through to year-end), we suspect that prices will eventually buckle under the
    relentless barrage of poor macro-economic headlines,” said Edward Meir, analyst
    at MF Global.
    At 1212 GMT, the front-month February Brent contract on London’s ICE futures
    exchange was up $3.27 at $41.64 a barrel.
    The February contract on the Nymex was trading $3.00 higher at $40.71 a
    The ICE’s gasoil contract for January delivery was up $29.25 at $431.25 a
    metric ton, while Nymex gasoline for January delivery was up 749 points at
    91.89 cents a gallon.
    After sliding for nine straight sessions in a row crude changed track ahead of
    the weekend on news United Arab Emirates had faxed buyers of its crude to
    confirm it would be trimming production in line with cuts announced at OPEC’s
    latest meeting in Algeria.
    After several days of light holiday trade, investors seized the opportunity to
    buy in to oil Monday boosting volumes, with much of the early buying activity
    driven by worries over Israel’s attacks on Hamas in Gaza, and the weaker
    “There’s been some safe-haven buying into gold, and oil was a very happy
    follower, especially with what has been going on in the Middle East,” said Ole
    Hansen manager of futures and fixed income trading at Saxo Bank.
    Hansen said while the market has been focused on demand in recent months
    increased tension in Gaza raised fears of wider violence in the oil-rich Middle
    East region. “It’s a bit tricky but I really see it mostly as a market recovery
    from a heavy oversold state. We’ve seen the market going in one direction for a
    long time now, so any news of this character is enough to set off some position
    squaring ahead of New Year.”
    Both Israel and Iran are in a run-up period to national elections and this
    could lead to some increase in “tough talking,” said Olivier Jakob analyst at
    Petromatrix, adding that both countries are also in the process of positioning
    themselves for the start of the new U.S. administration.
    Looking further ahead if OPEC countries follow through with their promises and
    actually cut all of the output they have agreed to cut, global supplies of
    crude will be tighter in 2009’s second quarter.
    “If each country, in turn, sends notes making production cuts official, prices
    could well continue to rally,” said energy analyst Peter Beutel at Cameron
    Hanover, adding that with prices already oversold there could be a sharp
    response in coming weeks to any fresh, bullish news.
    Traders were also talking about increased tension between Russia and its
    neighbors over energy supplies, following weekend reports Russia’s natural gas
    monopoly Gazprom (GAZP.RS) plans to discuss possible sanctions against Ukraine
    if it doesn’t pay its debt for Russian gas supplies

    -By Angela Henshall, Dow Jones Newswires

    Dow Jones Newswires
    12-29-08 0724ET

  2. 2
    nifkin Says:

    Berry Petroleum announces customer filing for Ch 11 bankruptcy.
    Since February 1, 2006 Berry Petroleum company (“company”) has been selling 100% of its California oil production to Big West of California, LLC (“BWOC”). On the morning of Monday, December 22, 2008, BWOC and two of its affiliates, who were guarantors under the agreement, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. On the prior Friday afternoon, December 19, 2008, BWOC had informed the company that it would not be making the approximate $26M payment to the company that was due that day for November production. In addition to the invoiced amount for November, BWOC’s bankruptcy filing also covers 21 days of production in December, payment for which would have been due January 20, 2009. The amount for these 21 days of production is approximately $12M for a total pre-petition claim amount due to the company of approximately $38M. On December 23, 2008, BWOC advised the company that due to interruptions in its other business relationships, it was unable to receive the company’s production but was making efforts to re-establish its own operations.

  3. 3
    zman Says:

    Thanks Nifkin. So far it looks like BRY and NFX have been stung by these guys. Can’t keep cracks in the gutter forever and not have some fallout. NFX has already found some alternative processing for their volumes that went to Big West.

    Big open for energy on tap, much higher indications for the deepwater drilling crowd and Big Oil. Indications up but barely so for the gassy E&Ps. I’d expect that to change pretty quickly to a strong rally into mid morning.

  4. 4
    zman Says:

    LINE up $2.50, just because Baron’s says its payout is safe.

  5. 5
    zman Says:

    ZTRADE: Entered SU Jan $22.50 calls for $0.40 with the stock at $19 as a play on bouncing oil and a cheap, overly beat down name.

  6. 6
    zman Says:

    for my own reference that trade was done with oil up $1.10 on the day at $38.81.

    Tater, can you take a look at SU for me when you get a chance. Looks like a nice round bottom base.

    From a fundamentals standpoint they are one of the best positioned oil sands names around, trading at less than 9x 2009 EPS which have been marked down severely for oil prices but still set to be profitable at $2.24 consensus.

  7. 7
    Sambone Says:

    By Hyun Young Lee

    OTTAWA (Dow Jones)–Crude oil futures were higher Monday, buoyed amid thin
    volumes by the first evidence of OPEC production cuts, but futures slipped back
    from highs above $40 a barrel in early trading.
    The specter of wider Middle East tensions was also supporting prices as the
    Israeli airstrikes in Gaza continued for a third day.
    Light, sweet crude for February delivery rose $1.14, or 3%, at $38.85 a barrel
    on the New York Mercantile Exchange, after hitting $42.20 a barrel earlier.
    Brent crude on the ICE futures exchange was up $1.44 at $39.81 a barrel.
    On Thursday, United Arab Emirates confirmed it was reining in crude
    production, barely a week after OPEC announced a 2.2 million barrel-a-day
    output cut – its biggest-ever – at its Algeria meeting. The state-owned Abu
    Dhabi National Oil Co., or Adnoc, said it will cut January and February
    allocations by up to 15%, in line with the agreed quotas. The U.A.E. is OPEC’s
    third-biggest oil producer.
    Market participants found some optimism on expectations that others could soon
    follow suit, potentially leading to tighter supplies early in 2009 and shaking
    some of the attention off gloomy demand numbers.
    “With OPEC, the proof will be in the pudding…but it’s good to see it trade
    above $40 at the start of the week,” said Gene McGillian, an analyst at
    brokerage Tradition Energy in Stamford, Conn. “The market’s been under pressure
    for so long, we’re going to see some seesawing action but it’s weakening
    already – we’re still in a bearish trend.”
    Geopolitical tensions in the Middle East also came into sharper focus after
    Israel launched airstrikes against Hamas targets in Gaza. Some 300 Palestinians
    have died since the attacks started on Saturday, according to Hamas, and Israel
    has massed forces against the border in what could be preparations for a ground
    Crude prices also found support on signs that China will try to capitalize on
    low commodity prices by raising oil and natural gas imports. China, whose
    rapacious demand in recent years helped spur crude’s rally to nearly $150 a
    barrel this summer, also plans to encourage further investment in the global
    oil and gas sector and speed up its strategic oil reserve program, the head of
    the country’s National Energy Administration said Monday.
    Front-month January reformulated gasoline blendstock, or RBOB, was up 3.69
    cents, or 4.4%, to $0.8809 a gallon. January heating oil was 3.68 cents higher
    at $1.2818 a gallon.
    -By Hyun Young Lee, Dow Jones Newswires
    Dow Jones Newswires
    12-29-08 0950ET

  8. 8
    elduque Says:

    I know there are a lot of cheap stocks around, but SD seems to me to be totally out of line with its intrinsic value.

  9. 9
    tater Says:

    SU – eyeballing just now, careful with the 20 EMA and the 6 month downtrend line which meets up at around the Dec highs at 22ish. I’ll post it in about a half hour.
    Fundamentally, anecdotally I heard a Bucyrus worker relative tell me that they have a $35 number for oil that gives them profitability.

  10. 10
    zman Says:

    El – D – I suspect SD can’t get out of jail until after new year’s and maybe not until after their 4Q report and reserve write down. Long term, almost unreal cheap, near term, very hard to play with options unless it can attract some fresh blood to the shares.

    Tater – thanks. Yep, if you look at the analyst with the lowest price for oil in 2009 at $25, they are still carrying an EPS number for SU of just under $1.

  11. 11
    zman Says:

    Those BPZ numbers look good. Very interesting company, see initial report here,

    saw these guys in person at IPAA and came away very impressed with their little low cost workover program.

  12. 12
    zman Says:

    Nicky’s not happy with the oil move over $40 and then the big sell off back to only up a buck on the day. She should be on shortly.

    For my part, I think traders saw 2 days in a row of gains and could not resist taking quick profits, knowing that tomorrow, without further news from OPEC or further Israeli / Gaza escalation crude could sink simply on the fog of oil demand destruction. Meanwhile, projects get canceled on a weekly basis and last time I checked, people still need oil and will want more when the global economy does indeed recover.

  13. 13
    Sambone Says:

    WASHINGTON, Dec 29 (Reuters) – U.S. oil demand in October
    was 598,000 barrels per day more than previously estimated and
    down 833,000 bpd from a year earlier, the Energy Information
    Administration said on Monday.
    U.S. oil demand in October was revised up by 3.14 percent
    from the EIA’s early estimate of 19.045 million bpd to the
    agency’s final demand number of 19.643 million bpd, and was
    4.07 percent less than demand of 20.476 million bpd a year
    (Reporting by Ayesha Rascoe)

    Mon Dec 29 15:08:48 2008

  14. 14
    tater Says:

    SU charts are the last two at the link.


    Not sure if at the top right location of the page you guys get a choice for display of 10 per page or a click for “chartbook”. If you get chartbook choice, that is a much easier way to find a chart.

  15. 15
    zman Says:

    Thanks T and nice tip, we get the chartbook option with pulldown which is a big help navigating. Thanks for the read on SU. Agree nothing there to say today is the day but as oil is starting to act like it wants to put on a reflex bounce, SU stock prices should benefit.

  16. 16
    zman Says:

    Dollar index looking to move back into 3 month low territory after a small bounce last week in another plus for crude.


  17. 17
    md Says:

    Monthly Product supplied as borne out in #13 indicates that (cheap) price takes care of demand. While the group is down 4Gasoline down only 2.8% yoy and distillates down 1%The Nov. contract was at $66.75 on 10/23. With current contracts in the $30’s the latest product supplied of above 20000 is very realistic. No reason for OPEC not to tighten supplies and bring price back up to $75.

  18. 18
    zman Says:

    MD – could not agree more.

    Oil has taken to tracking the broad markets today where volumes are very holiday light. Even oil, with the big swing it had earlier today is only trading to come in in line with an average volume day and slowing so I doubt it gets there. Seems that many people in the market are taking this week off as well, more than usual I mean.

  19. 19
    md Says:

    Re: NG monthly Oct.
    ( EIA skeptism aside)
    A couple of thins of note. Industrial numbers have not been affected by economy yet.
    Electricity (preliminary) have been affected.
    Balancing -91 shows further downward adjustment in consumption.
    At the end of the day the economy takes a back seat to heat and even electricity.
    Add your drill reduction scenario and higher oil demand and I’d have to say that NG can only go higher.
    The caveats would be any general market downturns.

  20. 20
    Nicky Says:

    Morning all. Oil looks like it is in wave iv which would require another leg up here before a last move lower.

  21. 21
    zman Says:

    CNBC Addison Armstrong saying the sell off in oil shows the market doesn’t care about Israel vs Hamas. Bertha of CNBC saying at $70 Iran had enough money to make waves, now in the $30s they are too broke to really cause trouble. Where in the world do these people come up with this stuff. I agree that Israel and Hamas is probably not a big pushed of crude price at present but that’s not the only reason crude is up last few days as OPEC members start proving they are cutting and demand is not as weak as it has been made out to be. I think this is profit taking in a light volume week. I think we are much closer to a bottom than a top.

  22. 22
    zman Says:

    re 21. I find it funny that when the price moves up these guys like something more, not less and vice versa. I’d love to have a retail shop where I could mark up the merchandise to insure that I sell to them. “don’t like this $1,000 flat screen tv? how about now, at $1,200?” Its simply unfathomable to look at the price drop we’ve had vs the very slight reduction in demand and the amount of project cancellations said price drop has caused and come up with price will fall more because its been going that way.

  23. 23
    zman Says:

    Nicky – technically, where do you see that lower leg going to?

  24. 24
    zman Says:

    Well kids, the market is just about dead with regard to volumes, makes last week look busy. I’m going to do a little reading and run a few errands. Buzz if you want anything but it does not look like much of anything is going to happen worth watching today.

  25. 25
    tater Says:

    Oil – Seems to me like we got a short covering rally based on the Gaza news. When the market did not observe new buying, I think the shorts moved back in. Seems like nobody has a dime to play with long until the new year. Why should they? Half of them don’t know if they will still have a fund to come back to in January.
    The bullish view on that in my opinion for oil (3 month time frame) is that there are apparently shorts (are you out there GS?) that need to get out should we see the $300 quadrillion spending plan get going. Could light the spark once again.

  26. 26
    zman Says:

    Hear ya on that Tater – do you really think the stimulus stops at a $Trillion if we don’t see signs of a recovery by 2Q09, lol?!

  27. 27
    ram Says:

    “Gas nears 5-year low”, CNN headline for an article on low gas prices. In CA, I have been tracking a particular Union Oil/COP gas station. The lowest price of $1.69 came in almost two weeks ago ($4.59 at the peak). This morning it is $1.89. CNN might be calling the bottom in gas prices.

  28. 28
    tater Says:

    Posted a VERY SPECULATIVE 5 minute chart of USO for anybody who is bored silly this afternoon. Last chart at link. Don’t hold me to it.


  29. 29
    zman Says:

    NG up 30 cents, gassy stocks not yet noticing

  30. 30
    ram Says:

    Thanks tater. I especially like the pull down menu at the right to go right to the chart. I sincerely appreciate the info you post.

  31. 31
    Sambone Says:

    Off subject – You know times are hard for the bankers since M&A biz dried up, they are trying to sieze assets. “You’d better borrow from us, or we’ll sell off your plants”.

    HOUSTON, Dec 29 (Reuters) – Merrill Lynch is suing Reliant
    Energy RRI over the termination of a $300 million line of
    credit, a matter that may result in the investment bank
    foreclosing on assets from the independent power producer’s
    retail business, according to a regulatory filing on Monday.
    Merrill said in the lawsuit filed on Dec. 24 in New York
    State Supreme Court that a prompt resolution was essential
    because Reliant is in talks with one or more parties as part of
    its previously announced plan to explore strategic
    alternatives, including a sale of the company or some of its
    Reliant plans to oppose the lawsuit vigorously, it said in a
    filing with the U.S. Securities and Exchange Commission.
    On Dec. 5, Reliant terminated the $300 million working
    capital facility with Merrill Lynch after a poor showing from
    its retail unit due to disruptions from Hurricane Ike and other
    But Merrill argued in its lawsuit that the termination of
    the credit facility without Merrill’s consent constitutes a
    default under the agreement, which is secured by assets from
    Reliant’s retail business.
    Reliant operates more than 14,000 megawatts of generating
    capacity in the United States, markets energy commodities, and
    sells electricity to more than 1.8 million residential and
    business customers primarily in Texas.
    Shares of Reliant fell 32 cents or 5.7 percent to $5.28 on
    the New York Stock Exchange at midday on Monday.
    (Reporting by Anna Driver in Houston, editing by Matthew
    Mon Dec 29 17:26:13 2008

  32. 32
    zman Says:

    Oil up $2 into the close. Guess CNBC and Addison were wrong. Volume is light to be sure but these guy’s comments sway from tick to tick. Maybe they are more bullish now that the price rose since they talked, lol.

  33. 33
    Dman Says:

    Z – on your SD comments. Are you saying that you are happy with the fundamentals/finances but the stock will be challenged for a while?

    How about the debt questions. I know I’ve asked before but my brain (unlike the Z-brain) seems to have limited capacity for balance sheet retention.

    Also, I guess I’m pondering the idea that all the little names that are beaten up due to their debt and the credit freeze will be the big movers when credit unfreezes. The small matter of timing notwithstanding…

  34. 34
    Dman Says:

    Last Q was more oriented toward SD stock than options, BTW.

  35. 35
    zman Says:

    D – near term fundamentals represent a challenge at $5 to $6 natural gas. Not going out of business type challenge, just price depressed cash flow vs a pile of debt. Good management and I think the stock has probably suffered enough since they also sit on a pile of reserves. These guys are in the rare position of owning their own rigs so when capital is constrained they are laying down their own rigs, I was musing about this the other day with Wyo – you don’t really benefit from the coming fall in service costs if you own the rigs. And the flexibility they give you also isn’t much of a benefit in this type of lower activity environment. Finally, I see them taking some sort of write down due to low regional gas prices. Longer term, not much of a problem and probably discounted in the stock price.

    Agree very much your last…a working credit market will do a lot for the likes of SD, CHK, anybody with a good sized debt load.

  36. 36
    apbd Says:

    I bought some LINE this AM. Thanks.
    Anybody have any other suggestions for income, while we wait for the trend to turn solidly up?

  37. 37
    elduque Says:

    re SD Would you explain to me why with 81% of the production hedged for 09 at 8.44, the market totally ignores the fact.

  38. 38
    Dman Says:

    apdp: I’ve been adding some Canadian trusts: ERF & PVX. They’ve both cut distributions lately but still very good yields

  39. 39
    apbd Says:

    Thanks Dman.

  40. 40
    ram Says:

    SEC Revises Oil-Reserve Accounting Rules – Is this effective immediately and should this be a positive bias for energy stocks?

  41. 41
    md Says:

    How does ceiling ____? regulations as per play with or against oil reserve acctg. rules. eg. KOG writedown due to ceiling ___ rules
    I asked about this last week but don’t remember if you replied.

  42. 42
    zman Says:

    re 40 and 41 I will attend in the Tuesday post.

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