zman’s Energy Brain

oil, gas, stocks, etc…

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Natural Gas Breaks Out On Chilly Forecast…

Posted by zmann on November 28, 2006

…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.

hdd-comp.JPG

  • …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 Over the last 10 years this means that November has represented 8% of gas withdrawn over the winter months (Nov-Mar).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:

nov-storage.JPG

  • 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.

trough-storage-1128.JPG

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.

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14 Responses to “Natural Gas Breaks Out On Chilly Forecast…”

  1. zmann said

    As I said early this week, I’m really not playing the oils until things settle down a bit. Today is a perfect example of the manipulation that goes on prior to an Opec meeting.

    Analysts decide that despite weather that was twice as cold as the prior week, the last busy driving weekend of the year , and an expected increase in refinery utilization there would be builds in both heating oil and gasoline. How does this have anything to do with reality?

    What a shock, we get a draw in both which is reported on CNBC as “very bullish” and oil takes out $62 (and breaks trend). The stocks are off to the races for the second day this week and many are putting in either 6 month or all time highs today.

    I’m looking to add new put positions at higher levels but will continue to bide my time as oil needs to bounce off $65 before real weakness can take over again. Remember, there is scant evidence that the last round of Opec cuts were even begun and inventories of crude and prodcts remain high.

  2. Wow refiners continue to drag their feet on maintenance (88.1%). Aren’t we usually over 90% by now?

    I am surprised at the 300k draw ( Smaller than I expected ) d/t issues with TAPS

    Product draws don’t surprise me, with refining at 88% and Thanksgiving holiday only 600K.

    What does concern me is that distillate production ticked down (WTF) with heating oil season here.

    This only equates to one thing ……. Greed

    -SaneO

  3. Jon said

    Thank goodness I was too chicken to buy more refiner puts! TSO over $70!!??

    Another subject – Zman, just to let you know, your blog updates are coming sporadically and late via e-mail and RSS. The latest post (from yesterday) just showed up this morning’s mail. Also the RSS comments from previous days came in one bunch yesterday.

  4. Jon said

    BTW, have you been following the “hot fuel” topic? Just another way the oil crooks are grabbing a few more pennies per gallon from us.

    http://www.kansascity.com/mld/kansascity/15991253.htm

  5. zmann said

    Jon – hear ya slow updates. wordpress seems to be having a few slow run problems last few days. Hopefully it’ll clear up soon because I’m having trouble accessing my own site today.

    Hot fuel – yup, that’s been brought up in the past to no avail but they keep trying.

    On the refiners and energy stocks, I’m still not really playing (bot a little SU put this am but otherwise I’m steering clear until they look toppy). I won’t go long except for spells of “trading the madness”.

  6. zmann said

    Covered LNG puts at $1.30 earlier and will likely reenter. Back in SU 75 Ps at $0.90 ($78.36 entry)

  7. Attacking Mid said

    I’m playing (or should I say getting pounded by) the SU 80’s. If they’re ITM, I’ll hold ’em till the bitter end if I have to.

    You can “buy” $5 of intrinsic value for only $2 with the 80’s, so I don’t like the 75’s at this price point.

    HOC Dec 75’s looking interesting.

    No one should buy oil co puts at this time, as I have yet to flip to calls. Am way upside down on my SU puts at the moment. Sigh…..

    AM.

  8. zmann said

    FRO continues to break down. OMM can’t be far behind. VLCC rates continue to weaken.

  9. walter said

    wow, OIH at 145 – madness lol

  10. duckamn said

    You should be very careful making NG investing decisions on very faulty data. Check the data for storage withdrawls! You’ll discover that november in total is about flat – no net withdrawls or injections. Try the NG storage link on americaloilman.com (its on the right). It gives a nice table of 5-yr avg. and a link to a chart.

    In October, we were 100 BCF below the normal injection, inspite of the warm weather in November, its not as much as would expect given the heat. What this says that on a weather-neutral basis we have to move to a supply-demand deficit. It looks like we are going to get a cold December, watch what happens to the numbers then!

    You’ve got the picture all wrong becuase you’ve got the fundamental data wrong. Garabe in- garbage out. The energy markets are manipulated, but it does trade around the fundamentals in a 3-4 month time frame. This is why NG went from $15 to $3 (spot in Wyo in Sep.). Each was extreme, but long-term avg of $7-$8 is about right. It costs $6 to bring new NG online in the GOM. With a decent return on capital for the risk, you’ll not see NG in the long-term below $7.

  11. walter said

    I guess we’ll be seeing OIH at 150 tomorrow?

  12. zmann said

    Hey duckman,
    The more the merrier.

    Like to know what you think about my data is false. The storage data comes directly from the EIA.

    As to the 100 Bcf light on injections for October that’s about right but then we went into the month almost 400 Bcf heavy. Ya think that surplus and the prevailing $4-5 gas had something to do with 100 Bs of “excess” demand? Looks like the industrials took advantage of cheap gas to increase consumption. Price goes back up and they’ll slack off again.

    Anyway, as you say, price tends to gravitate to long term fundamentals. You’re talking about one month (October) while I’m looking ahead to the end of winter. Why are thinking December is going to be colder than normal? Got any basis for that claim?

    Oh and by the way, that GOM LOE number is way high, try again.

  13. duckamn said

    I’m not sure where you get you EIA data, but try this weekly data:
    http://tonto.eia.doe.gov/dnav/ng/hist/nw_epg0_sao_r48_bcfw.htm

    you’ll see that last 2 years we injected in November. We withdrew in ’03 and we had a big withdrawl in ’02 due to a very,very cold November. In you adjust for the weather in the last 5 years, you get a very flat november in terms of storage.

    Check the accuweather.com maps of temperature out to 15 days. There is 30-day but no one is very good that far out, the NOAA missed December completely.

    As for the GOM, check the latest income statements of the smaller GOM E&PS. For example ATPG and WTI. I’m talking all-in costs. ITs the full cycle costs that determine long-term investment decisions. If we had $5 gas, the drilling in the GOM by all the small players would stop. Thus you would lose the marginal producers who easily produce a few BCF/day. That’s huge in terms of commodity pricing. You can’t make that up w/ land drilling as the results of the last 5 years show.

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