Energy Stock Trader: Friday Outlook

by: Steve Zachritz

Despite firm to rising commodity prices, the energy stocks were down with the broader market yesterday, the result of lower-than-expected retail sales. What, you thought $3 gasoline had no impact?

  • ExxonMobil Corp. (NYSE:XOM) -- down 1.9%
  • XNG -- down 1.5% -- notice the gassy stocks outperformed. Hmmm...
  • Oil Service HOLDRs ETF (NYSEARCA:OIH) -- down 2.1%

Nigeria + Early Tropical Storm + Hurricane To Hit Gulf Prediction = Gasoline Rally. June RBOB attempted to close at new highs for the year, but ended up just less than a dime at $2.326. Between more dire predictions of a "greater than ever chance of a named storm hitting the Gulf of Mexico," and people asking whether or not having an early tropical storm brew up translated into a busy hurricane season (which by the way it doesn't), and finally having the folks at MEND take a few more hostages and make more threats, gasoline surged to new highs. I still think it won't reclaim the $2.45 level seen at the end of April and will begin to soften with more data in coming weeks. But I've been wrong so far.

Gas Storage Summary: 96 Bcf and all is well. June gas rose on the data ending the day flat at $7.72.

Here's a Review of the Natural Gas Numbers:

Gas inventories are 21% above the five year average, but 12% below year-ago levels:

  • Storage as of May 4, 2007: 1,747 Bcf (updated May 10, 2007).
  • Max storage for this week in history: 1,989 Bcf (2006). At present gas it's at its 2nd highest level in history for this date.
  • We are now down 12% (242 Bcf) relative to year-ago storage levels. Due to the larger injection this past week relative to the year-ago comparable week we eroded the YoY deficit by 1% (see second chart below).
  • We are now 21% (306 Bcf) above the five-year average, which includes 2006's record levels (see third chart below).

Looking Ahead:

Here are some quick stats for the period running from the end of first week in May through the end of October (the traditional end of the injection season):

Gas vs Storage 5yr 11 05 2007

  • Five-Year Average Injections: 1,830 Bcf. Taken with current storage, that scenario would put us at a pretty bearish/very comfortable 3,577 Bcf in storage, or 127 Bcf over record storage.
  • Minimum Injections: 1,452 Bcf in 2002. This would yield storage of 3,199 Bcf.
  • Maximum Injections: 2,351 Bcf in 2003. That year saw storage trough at a very low 642 Bcf. This won't happen with this year's much higher storage levels going into the injection season.
  • Last year we injected 1,461 Bcf into storage during this period, which would yield storage of 3.2 Tcf.

Previously I thought natural gas would suffer "a little bout of seasonal weakness, potentially falling as low as $6.50."

I'm setting aside thoughts of hurricane-induced spikes and/or several consecutive weeks of excessive heat for now. Taking into account that while current Lower 48 production is up only slightly relative to 2006's storm impacted volumes, but that Canadian volumes are more-than-likely to decline more than LNG imports will increase, I don't see natural gas trading on average much above or below current levels of $7.00 to $8.50 this summer.

The well run E&P industry mints money at those levels.

Gas storage 11 05 2007

As you can see from the following rather ugly chart, year-to-date injections are on trend. If you compare the chart above with the chart below, you can see just how much of an impact that bit of cold starting in mid-January had in terms of reversing the YoY surplus into the current YoY deficit.

Avg Withdrawals with injections 11 05 2007

Analyst Watch: Canadian Natural Resource Ltd. (NYSE:CNQ) cut to neutral at RBC. Imperial Oil (NYSEMKT:IMO) to outperform also at RBC. The other brokers must have slept in.

LNG Imports Watch: According to Apache, LNG is now running about 2.9 Bcfgpd, or 0.9 Bcfgpd higher than this time last year. I thought the guest on CNBC was out of his tree yesterday when I heard him say 3 Bcfgpd, because in February we were only running 1.6. That's quite an acceleration, and in-line with the EIA's statements earlier in the year. Apache says summertime regassification could reach 3.6 Bcfgpd, which would be a new record. Liquefaction (the front-end of the process) capacity remains far behind the current and certainly the planned regassification capacity in the U.S.

Canadian Imports Watch: While the above paragraph would seem bearish for prices, don't forget about that expected drop in Canada. Courtesy of APA's excellent weekly newsletter comes news that imports from the North have fallen to 7.9 Bcfgpd, down a whopping 1.2 Bcfgpd versus the year-ago week. Blame oil sands needs, flat production, what have you -- the drop is there.

Putin Watch: Those petrodollars have gone to his head. Describing the foreign policy of his "allies" as reminiscent of the Third Reich. He didn't say the U.S. or U.K., but we all know what he meant. The next cold war will be fought by withholding energy.

IEA Watch: The IEA urged OPEC to increase oil production now or face sharp draws on oil inventories this summer. IEA sees non-OPEC growth slowing and the demand on OPEC increasing (both by about 100,000 barrels).

Wind Watch: The American Wind Power Association says 3,000 megawatts (the equivalent of three good nukes) will come online this year. That's a just-over a 25% bump from the 11,600 megawatts in service during 2006. Of course, Texas leads the way in that too with over 2,700 Mw in place in 2006 and with one-third of 2007's additions to be added there. California is a distant second in clean power, at around 2,400. No matter where it's placed, it's more good news for General Electric Co. (NYSE:GE). Man I wish they would spin out some of their divisions. Talk about unlocking value. Maybe these guys will go public.

Best of luck today and have a great weekend!