zman’s Energy Brain

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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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46 Responses to “Thursday – Gas Withdrawal Could Be Smaller Than Expected”

  1. zmann said

    Turkmenistan’s President for Life, Saparmurat Niyazov has died.

    According to the 2005 Reporters Without Borders World Press Freedom Index, Turkmenistan had the second worst press freedom conditions in the world behind North Korea, and as of a 2006 report, is listed as one of the 13 “Internet enemies”, calling President Separmurad Nyazov a “central Asian Kim Jong-Il.”

    Turkmenistan also has the second largest natural gas reserves in the FSU and the fourth largest in the world (2 Trillion cubic meters). They also have substantial oil reserves (283 mm bls). Niyazov was a thug and no friend of Russia. Since the president acted like he was a god there is no succession plan in place. I wonder if Putin will roll his tanks. Who’s to stop him. Not us.

  2. zmann said

    Gazprom gets a major component of its gas from Turkmenistan and under threat of being cut off Putin agreed to a 54% increase in the price it pays for Turkmen natural gas this past September.

    And then the president dies of a cardiac arrest at age 66. I’d check for poison guys.

  3. zmann said

    Turkmenistan borders Afghanistan, Iran, Kazahkstan, and Uzbekistan. They have virtually no military. 11,000 troops at last count with 500 outdated tanks.

    Iran could take these guys in a week. Again, who would stop them. Russia. Nope, they’re partners in large scale development. The EU, doubtful. The US – not possible.

    This is not a boost to oil as althoug it’s pretty destabilizing since they’re a rogue state with a very unhappy populace (60% unemployment) and no plan of succession, they only produce about 200,000 bopd, almost half of which they consume themselves.

  4. zmann said

    Not bullish for Oil:

    NEW YORK, Dec 20 (Reuters) – The number of ships waiting to get into the Houston Ship Channel has dropped to 35 from around 50 this morning, as clear weather allowed the waterway to open, the Houston Pilots Association said.

    “We’ve been open since 7:45 am (1345 GMT) and we’ve nearly cut the inbound backlog in half,” a pilots official said. He added that outbound traffic was still shut.

    Vessel traffic on the waterway feeding the nation’s busiest oil and petrochemicals port has been interrupted every day for nearly a week by intermittent fog.

    CNBC’s data was old…she kept saying it was closed yesterday when it was open and that the vessel backlog was up but it’s actually off.

  5. zmann said

    Sandford Berstein calling for $50 oil in 2007. That’s the lowest I’ve seen yet.

    http://www.theglobeandmail.com/servlet/story/LAC.20061221.RBELL21-3/TPStory/Business

  6. zmann said

    MEND attacks Total facility. Kills three. Oil flow uninterrupted.

    http://tinyurl.com/tq8hk

  7. zmann said

    US 3Q GDP final of 2.0% vs 2.2% expected. Not terrible but shows we’re still slowing.

  8. Damn z, on the ball this morning. Thanks for the info. 🙂

    -SaneO

  9. size123 said

    Thanks Z, lots to digest.

  10. zmann said

    Hey, hey…natty gas off a dime this am pre market after being up overnight. Guess they’re reading my stuff!

  11. Attacking Mid said

    I was expecting to see energy stocks dropping. Who would be bidding them up in these market conditions? Amazing.

    AM.

  12. zmann said

    hear ya amazing…as long as oil stays off a bit this am, nothing really matters until 10:30. There’s a little fishing going on but it’s really light volume in most cases. USO is punching to new interday lows while I’m typing. 😉

  13. gungagalonga said

    Z-

    I think we’re do for a “bounce of irrational proportions”. It’s similar to a +3 Cloak of Fate.

    It’s the reverse of the ole’ buy the rumor sell the reality and may offer an opportunity on the short side.

    My number is a 63 B draw, right with concensus.

    tick tock….tick tock….

  14. Jon said

    CHK is not expecting a good number…

  15. zmann said

    71 Bcf. Bigger than I thought and a touch higher than consensus.

  16. zmann said

    That’s why I don’t pretrade these numbers. Group still looks nice and weak. Wall Street’s going to run for the exits (literally) for the holiday over the next few hours.

  17. zmann said

    Gunga, when will I ever learn? As usual your “herd mentality” form proves superior to my “way of the back of the envelope” form.

  18. zmann said

    ACI getting crocked. BTU not far behind.
    MUR trying to hold but weakening.
    Bounce in EEE remains a mystery.

  19. woah d&d reference

    -SaneO

  20. gungagalonga said

    I like being part of the herd.

    If you’re right— you’re right and it feels good regardless.

    If you’re wrong— you’re wrong with the herd which adds comfort that you aren’t suffering alone.

    NG is actually rolling back over a bit after a tiny 5-10 cent bounce. Maybe the bigger number wasn’t enough to inspire irrational herds yet.

  21. zmann said

    I let it slide because the guy’s a pro. Generally those types get banned. Plus he could be right that bounce. We’ve fallen a lot (the commodities but not the stocks).

    Oil seriously testing the $63 level.

    When will CNBC tell us how bullish the numbers are on gas? They actually shrugged it off. Guess they just want to go home to give their kid the GI Joe with the Kunf Fu Grip.

    BTU getting whipped with HO and Nat Gas down post inventories.

    Jon – are you short CHK? That’s on the list of “things that will cause you pain and suffering” – Lots of better ways to short nat gas through the stocks exist.

  22. Jon said

    Heavens no, not short CHK, just watching 🙂

  23. zmann said

    Hearya Jon…thought we might have to check you into rehab

  24. gungagalonga said

    Whoa!

    NG trying to make a break to the upside…

  25. non-nonymous said

    why will shorting chk cause pain?

  26. Attacking Mid said

    This smells like a suckers’ rally in energy stocks. I’m holding onto my puts for a while longer.

    Might have sold a few in the downdraft, but was outside trying to get a car out of a snowdrift. We had a pretty good blizzard here in CO.

    AM.

  27. zmann said

    Crikey – there goes the XNG. Had hoped we’d break through Monday’s lows on this light volume today and this doesn’t help. It’s sitting on it’s 50 dma (actually bouncing off it to the upside now). Hopefully this mini rally will run out of gas ;->

  28. zmann said

    CHK’s a good company almost entirely hedge at higher prices with a huge expected production jump in 2007 and beyond. It’s not that it can’t go down – it just has a habit of producing good news just when you think it’s chart is toast. On an NAV basis it may a bit pricey but who cares about that now. Besides, why short good companies when there are so many average to poor ones?.

  29. zmann said

    MRO getting whacked. Somebody tell MUR it should do the same.

  30. Attacking Mid said

    I picked up a few UPL puts as the NG “rally” appears to be losing steam. I have lost my shirt in the past on NG stock options. Hopefully my luck will change.

    AM.

  31. zmann said

    AM – I like that play on UPL – gas trying to give us some trouble but with XOM and oil moving lower the group looks like it’s going to cave. I’d do the UPL but I’m comftably extended for now on the put side. GLTY.

    3.5 pts to go for XOI to break Monday’s lows and then we could see a real slide. Who want’s to worry about owning energy over the long Christmas weekend while we all walk around in shorts and tshirts?!

  32. Attacking Mid said

    Well…. c’mon over to my house. My youngest boy is stranded at a friends for the past two days (fortunately, they are having a blast snowmobiling). My HS Senior and two friends were stranded here last night – my bride’s been serving pancakes for an hour and I haven’t yet had ANY!

    No shorts and t-shirts here!

    AM.

  33. zmann said

    AM – just console yourself that all those thousands of grounded flights around Denber won’t be consuming any avgas. LOL

  34. Attacking Mid said

    I guess they opened the Co Spgs airport, but hardly anyone could get there.

    What do you think will happen at the 2:30 NYMEX closing? I hate being extended around that time, as it can often do wild things (usually bad wild it seems).

    CHK might become a buy if it goes down much more. I still hold shares and plan to hold for long term.

    AM.

  35. zmann said

    No idea on NYMEX close. I’d bet we get a rally between now and then that fails but it’s just a guess, not even a hunch really.

  36. zmann said

    XOM taking on new low of day again…how long can MUR hang on? It’s right on the brink.

  37. Attacking Mid said

    BQI finally breaking under 4.50. This is a news-driven stock, and the next company update isn’t due for 3-4 weeks. Might even be able to snag it down around 4ish. If it drops below 4, I’d HIGHLY recommend it.

    AM.

  38. jim said

    thanks for the site, i am xom bull, at least i hope so. never can figure on when to sell or buy. so i do appreciate your site for its comments. merry xmas

    etswd@aol.com

  39. zmann said

    MUR breaking through 50 dma now…200 dma is pennies away.

    Glad you like the site Jim. Merry Christmas back atcha!

  40. Attacking Mid said

    Sold my SU puts…. don’t trust the NYMEX close. SU acts ready to pop up at the first sign of any oil price recovery. Hopefully, I’ll be able to buy ’em back cheaper in an hour.

    AM.

  41. zmann said

    With 20 minutes until NYMEX close the afternoon pump looks pretty pathetic.

    XOI fell below Monday lows. Starting to look troubling.

    XNG within a hair of doing same.

    OIH below monday lows and testing 200 dma

  42. zmann said

    Oil closed down $1.07
    Gasoline down $0.04
    Heating oil down a penny

    Cracks held $8 this week but barely. First week of dec saw crack spreads north of $9 – which explains the pullback in VLO, TSO, SUN, HOC etc. this week.

  43. Attacking Mid said

    I’m still amazed how most of the energy stocks opened up so strongly this morning. What in the world were people thinking?

    I was somewhat expecting a bit of a rally this afternoon, but it’s awfully weak so far. Perhaps buying will materialize going into the market close.

    I took a few CHK calls looking for a short-term bounce. So far, it’s more of a scratch and claw, but at least it’s going up.

    Going to wait for a rally before reloading the SU puts. That stock just has too many fans out there who will bid it up in a hurry at the first sign of improving market conditions.

    I dunno about MUR, Z. It just looks to have pretty good support right here for now.

    AM.

  44. zmann said

    AM re MUR – agree it’s not acting the way I’d like but this beast is expensive and unloved by the street. Estimates have been severely chopped over last 3 months yet the stock ran up with XOM even as bulge bracket firms cut it to sell ratings. I fiugre it’s upside is limited but when/if it breaks to the downside it will go towards $45 quickly.

  45. Attacking Mid said

    XOM trying to go positive before the close. This is definitely a trader’s market. Wish I was better at it ;^ )

    AM.

  46. zmann said

    I don’t often try for day trades. Too frustrating and distracting. Hard to focus on research if I’m worried over the one minute charts. It’s hard not to watch em though.

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