Natural Gas Breaks Out On Chilly Forecast…

…But Folks, We’re Almost Through The First Month Of Winter And It’s Been A Bust For Gas Demand.

Yes natural gas prices are up. A lot. Again. Traders can’t get their eyeballs unglued from the weather channel long enough to realize that from this point even the coldest winter on record would still yield above average trough storage levels in March.

• So far this month we haven’t pulled ANY gas out of storage.

• This week I’m expecting a draw of between 20 and 25 Bcf… Data from the Climate Prediction Center (CPC) shows it was indeed a bit colder last week and Wall Street analysts are looking for a draw of anywhere from 5 to 40 Bcf. Those guys at the low end don’t care much for accuracy but are instead engaged in a blatant effort to pull up consensus for an easy beat. I don’t think we’ll get the big draws expected by some because the data is skewed by where it was cold (the northeast) which is not as gas intensive as other regions of the country which were warmer.

• …but next week’s inventory reading will be a smaller draw since its been “short sleeves” weather in most parts of the country since Thanksgiving- say 10-15 Bcf.

• That leaves November with a smallish draw to kick off winter. Using the high end of my 2 weekly estimates for the remaining two weeks of November (and forgetting the fact that 2/5ths of the final week is really in December) that leaves November with a withdrawal of roughly 40 Bcf.

• On average November sees gas withdrawals from storage of 175 Bcf. Over the last 10 years this means that November has represented 8% of gas withdrawn over the winter months (Nov-Mar).

November generally sees sizable pulls from storage but not this year:

• Even with a repeat of the coldest Dec – Mar period on record, trough storage comes out at 1,235 Bcf which is above average. In the event of an average winter from here on out, we arrive at trough storage that is just short of last year’s record.

But Gas Prices Have Been Rocketing. So despite the facts that: 1) we’ve gotten off to a slow start on drawing down inventories this winter and 2) that gas will likely reach trough levels above average, gas pirces are racing ever higher. January gas is up $4.50, or more than 100% since late September to $8.57, a level not seen since last winter which was somewhat justified in the wake of Katrina and the devastation of production facilities in the Gulf.

This year those facilities continue to come back on line on an almost weekly basis. And don’t forget that the shale plays only continue to add production and long term reserves. The fall from these levels should be swift once traders realize anything but a severely cold winter will leave us right back where we started.

Tuesday Morning

Oil: Up another $0.40 this morning and likely to test $61 today. Yesterday’s like sized rally was fueled by the first real batch of arctic air, rebels in Sudan this time, dollar weakness, Opec, and two pipeline explosions in Iraq. Look for more of the same reasons today. I’ll get more nervous if we cross $61.40 where a technical reversal could set the bulls on a $5 buying spree but for now the trend remains down.

Natural Gas: up on weather expectations as well. Historically natural gas is a big “buy the rumor, sell the news” commodity often peaking for winter during or slightly after the first serious cold of the season. Either way, $8+ gas is simply too high given storage levels and the lack of evidence that gas production is crashing. Remember this week’s weather is next week’s inventory number so although we’re likely to get a moderate draw this Thursday, December will open with a whimper as it’s been downright tropical over much of the country before and since Thanksgiving.

Opec Watch: Unlike the two weeks before the last meeting, Saudi has come out swinging early in favor of “additional” production cuts… Given their recent statements that supply and demand, not the price of oil is the deciding factor in this decision, I’d say they’re seeing a real lack of compliance towards the October cuts from the other opecies (not altogether bad news for the likes of FRO or OMM‘s 4Qs but if Opec gets serious, day rates could tumble and then watch out for these guys).

…And If Opec hasn’t really cut yet this should mean that when the TAPS and LOOP are functioning properly and refinery maintenance season draws to a close both US crude and product inventories will march higher. This will be especially painful for the refiners as crude inventories rise more slowly than products (refineries will be consuming them to make more products) supporting oil prices while heating oil and gasoline prices fall. I’ve still got puts on VLO but HOC, TSO, SUN, and WNR should all be impacted.

Analyst Watch: Goldman apparently agrees with my call yesterday on several gas weighted stock and took KWK from neutral to buy but demoted SWN to neutral this am based on relative valuation. This should create a nice buying opportunity in SWN as further strength in gas prices will lift all four names mentioned in yesterday morning’s post.

Holdings Watch: Like I wrote yesterday, I’m not playing much until commodity prices start to make a little more sense, especially natural gas. The stocks had a bad yesterday (down with a down market) despite the rise in oil and gas so my puts scored with LNG, XOM, MRO (the company) leading the pack. If we get a good bounce down off $61 I’ll be looking hard at EOG for puts but a technical rally over the $61.40 mark could inspire me to take calls on the same names.

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