zman’s Energy Brain

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Archive for December 21st, 2006

Thursday – Gas Withdrawal Could Be Smaller Than Expected

Posted by zmann on December 21, 2006

First Things First. Wednesday Was A Pretty Good Day:

  • Oil inventory numbers cancelled each other out. The impact of a BIG draw in crude (6.3 mm bls vs “expectations” of 1.8 mm bls) which surprised no one but the analysts who get paid to track it was offset by truly unanticipated builds in gasoline and heating oil. February crude rose a meager $0.26 to $63.72 after bouncing off $64. No runaway crude price meant no activation of my emergency hedge policy outlined in yesterday’s note.
  • Crude oil inventories remain oversupplied:

crudeinv1220.JPG

  • Oil is down $0.43 in overnight trading. So much for the “very bullish inventory number” as reported by CNBC. The cheerleading continues despite the fundamentals.
  • Once the build in heating oil was reported natural gas fell a whopping $0.31 to $6.77, just a hair off my $6.80 prediction from this morning. Bet the CFTC shows another outflow on the part of the longs this Friday as this chart is becoming truly scary. Coal and specifically BTU traded off in sympathy.
  • The stocks had a bad day. XOI/XNG/OIH were down 1.1%, 1.4%, and 1.9% respectively giving up much of the 50% retracements made yesterday. As I said yesterday, these charts are starting to look a little hairy and a bad day for natural gas today could result in them falling below Monday’s lows (as long as no rebels or operational blunders on the part of a certain unnamed foreign oil major muck about with the price of crude).

Today is all about natural gas inventories: And for once I think the analysts are expecting too much of a withdrawal.

Disclaimer/Warning: I’m not taking new bets before the report because you just never know and this is a critical number since gas has fallen hard and fast in recent weeks. With that out of the way on to my thoughts:

  • It wasn’t very cold for this time of year last week: heating degree days fell to 135 from 215 in the prior week. This is almost a third below normal for this week of the year and 40% below last year’s levels. That’s downright tropical.
  • Last year the withdrawal was 168 Bcf but it’s not a good comp due to the hurricane related Gulf shut-ins and the much cooler weather then. The 5 yr average pull from storage (excluding 2005) is 109 Bcf (with a range of 43 to 159 Bcf).
  • I’m calling for a withdrawal of between 45 and 55 Bcf. However the draw could be even smaller. As shown in the table below we had much smaller withdrawals just 2 and 3 weeks ago with very similar degree day readings. That’s too recent for a change in supply or increased industrial demand to greatly swing the number.

hdd-vs-with1220.JPG

  • The Street is calling for a withdrawal of 62-67 Bcf. Anything bigger and we could get a bounce over $7 . Smaller than 50 Bcf and we should test $6.50 on the February contract. Sub 30 Bcf and we could be looking $6 squarly in the face by Friday afternoon.
  • How To Kill A Gas Trader’s Eggnog Buzz: No White Christmas

white-xmas.JPG

  • The following graph shows degree days vs changes in storage. The increase on the red line is the 62 Bcf analysts expect, up from last week’s big withdrawal. I think the red line could spike higher here because if you trace back to those weeks with similar weather you’ll note the withdrawals average only about 20 Bcf. This situation is setting the analysts up for a miss with downside ramifications for gas prices.

gas-vs-hdd-1220.JPG

  • Next week’s weather was originally forecast at 155 HDDs but forecasts appear to have warmed up a bit since then in most gas producing regions.

December Looks To Be A Bust For Gas Withdrawals. We’re through the first third of the month and withdrawals to date total about 170 Bcf. Say we get 62 tomorrow as the guys on the street think. That get’s us to 230 Bcf at mid month. The next week is a bit colder so say we get 100 Bcf for that followed by 143 for the last week of the month (that’s the five year average withdrawal for the 4th week of December). That totals roughly 470 Bcf for December and I think I’m being more than generous given the warm weather forecast from now until New Year’s.

  • The five year average for December is 510 Bcf – we’re running behind again.
  • Without the El Nino influenced 2001 December, which only saw a withdrawal of 265 Bcf, the December average climbs to 571 Bcf – oops, we’re really behind!
  • I actually think we’ll be closer to 425-450 Bcf for December based upon past weather and current forecasts. – really, really behind!!
  • The high end of my estimate leaves year end storage at 2,950 Bcf (only 2001 had higher year end storage levels)
  • From there, the coldest January through March period would yield trough storage close to 1,300 Bcf vs 5 year average trough storage of 1,025 Bcf. – That’s pretty high but not a complete disaster for gas.
  • The warmest Jan-Mar period would yield a new record for trough storage levels of 2,080 Bcf. The old record was set in March 2006 at 1,695 Bcf. This would send gas to $4.

If you made it through all that congratulations. In short, we’ve got quite a bit of gas on hand. The current price of just under $7 is ridiculous.

Want more evidence that it could get a smaller than Street Consensus withdrawal? Try the annual comparisons for the last five years of heating degree days with withdrawals from storage. It’s pretty compelling:

annual-hdd-dec.JPG

Sentiment: I’m happy with puts on MUR, EOG, APC, DVN, LNG, and especially BTU and ACI here. I won’t be adding to any positions because I don’t like to bet on a government sponsored survey. Given the still bullish sentiment towards energy stocks there’s no need to front run gas reports. If it’s bearish you can generally add to put positions after the number comes out without missing much of the fall. If I’m wrong and it’s bullish, it’ll be next to impossible to get out of puts unscathed and any new positions would be just a gamble.

3Q GDP revision is due out this morning. Anything less than the 2.2% forecast which is unchanged from the prior estimate will be bad for oil prices.

Analyst Watch: will publish in comments in the morning along with anything else that’s important.

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