Fiasco Friday – Market Looking Lower
Posted by zmann on March 2, 2007
Stocks continue to be led around by the broader market and it looks like another bad day for bulls is in the offing.
Oil has had a heck of ride this week… Oil has been trading a little fishily this week. Closing at $61.50 on Tuesday, $61.75 on Wednesday, and $62 even yesterday. Reporters will tell you this is the gasoline rally and they’re right. That rally has been powered by a long list of infrastructure issues from refinery fires to fog shrouded waterways.
…But The Latest Rally Should Run Out Of Steam Soon. As those issues sort themselves out and gasoline inventories remain at high levels (I’m not kidding, look here if you don’t believe me!) crude should snap back. However, the current rationale is that because crude is higher, it will go higher. I’d like to sell stuff to these guys. “Wait, you’ll take another if I agree to mark up the price for you?! Sold!”
- One Caveat: Crude may still reach $63 or $64 before any kind of retrenchment occurs (I’d also note that the continued dollar weakness is nothing but fuel for the oil bulls- yet another bit of near support for crude.)
Natural Gas Review: 5 Weeks of Winter To Go!
Gas Inventories Fell 132 Bcf Vs My 130 Estimate And The Street’s 140… First the errata. My table had the correct 130 Bcf estimate but the I had earlier been estimating 120 Bcf and forgot to change it in the text. Sorry for any confusion. Second, I got pretty close on the total but the west still had a draw which was offset by lower than expected demand (or greater supply) from the producing region.
…But Gas Took Its Cue From A Rallying Crude Market To Close Up Slightly On The Day. After a brief dip gas traded higher with crude closing the day off a couple of pennies. No matter. Winter is rapidly drawing to a close and the next withdrawal number will again be smaller.
Here’s a brief summary of my thoughts on gas storage with 5 weeks traditionally left in the gas withdrawal season:
- Storage as of February 23, 2007: 1,733 Bcf (updated March 1, 2007).
- Max storage for this week in history: 1,972 Bcf (2006). At present gas is at it’s 4th highest level in history for this date.
- We have fallen 12% (239 Bcf) into year over year deficit. This is actually up 39 Bcf from last week as last year’s comparable week withdrawal was 177 Bcf.
- We remain 11% (179 Bcf) above the 5 year average.
- If you take the coldest 5 week period (last week of February to the end of March) over the last 14 years you get demand of 485 Bcf which would still leave 1,250 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). Could happen but I feel its unlikely given the predicted warm end to February and the pronounced warming trend expected beginning around March 10th.
- Conversely, the warmest 5 week period (late Feb to the end of March) saw demand of only 165 Bcf which would leave storage at 1,568 Bcf (and probably drop gas to $5.50/Mcf). I don’t think that happens either. I’m estimating we reach trough storage of about 1,400 Bcf. Note: I’m taking the low end of the my gas price range for Spring up $0.50 because storage levels have come down a bit faster than I thought and the expectation of a hot summer will likely provide additional support to gas prices that I had not previously expected.
So It’s Likely We’ll End The Heating Season Amply Stored…
…And That May Not Be Enough To Significantly Hurt Gas Prices. The relationship between gas prices and end of heating season storage levels has changed over the last few years. The cost of getting gas to the end user has risen due to a combination of factors ranging from a tight service market in terms of both rigs and skilled labor to accelerating decline rates to increasing use of gas (although demand really haven’t grown much over the last several years). Because of these inflationary pressures high gas storage levels at the end of the heating season have been less of a factor in determining the direction or level of gas prices.
I realize the following chart is a gross oversimplification (it doesn’t take into account forward looking data and is just a snapshot in time) but at the same time it is illustrative of the change in this relationship.
While I still think gas prices will fall this Spring I think the impact may be muted, say to a low of $6 (maybe $5.50) unless a significant demand response occurs. I’d also note that those prices will make it pretty tough on some of the higher cost Rockies producers.
Odds & Ends:
Russian February Oil Production Up 4.2% YoY. According to upstream, Russian oil production reached 9.86 mm bopd this past February (up slightly from January) while pipeline exports from Russia climbed a little over 100,000 bopd (2.5%) from January.
Hillary Watch: The other day the oil companies recorded the highest profits in the history of the world. I want to take those profits. And I want to put them into a strategic energy fund that will begin to fund alternative smart energy, alternatives and technologies that will actually begin to move us in the direction of independence. ~ Hillary Clinton at the DNC winter meeting yesterday. That was the scariest thing I’ve seen in a long time. Her quote was pretty frightening as well.
Zman Bullishness Watch: This doesn’t happen very often but once in a while, in this high cost, low growth, bloated global inventory, surplus production laden environment I find something I really like. Not for a trade but for the IRA. Click here for a link to the Addax Petroleum post.
Analyst Watch: HAWK, CRZO, UPL started at Buy at Jefferies.
Snafu Watch: About 45,000 oil workers in India are planning a two-day strike demanding restoration of the selection panel to head the Oil and Natural Gas Corp (ONGC), a union official said on Thursday. ~ from Upstream.