The EIA reported a withdrawal of 36 Bcf, just shy of the Street's estimate of 42 Bcf. Gas traded from down $0.16 at the time of the EIA's report to flat by the close at $9.68 on the May contract, which becomes the front month tomorrow, on the back of surging crude prices. The weather is getting warmer and I expect gas to begin to soften as we enter the slack demand of the "shoulder season" where heating demand collapses before making the hand off to gas-fired generation demand.
CNBC Guest Watch: A CNBC guest gas trader on late in the day commented that gas storage is low and that this will keep gas prices going higher with a small pullback in the near term. He sites all the bull side and none of the bear and saying gas storage is low is woefully misleading. Storage is above the five year average and is right in the middle of the range as you can see in the first chart below. He mentions LNG not coming to the U.S. (that will change in April since we need test volumes to commission new facilities) but neglects to put numbers to the equation so let me:
- LNG off 1.0 to 2.0 Bcfgpd depending on the week on a YoY basis.
- Canadian imports are actually running flat to a touch high to year ago levels (call it 0 to 0.5 Bcfgpd). I expect imports to the U.S. to begin to ebb this year but I've been looking for that to happen for the last 2 years and still volumes keep coming south.
- Domestic production: (ah, this was totally skipped). Up 3 to 4 Bcfgpd and potentially higher now. The industry has worked hard to debottleneck the West and the Barnett and newer shales like the Fayetteville are cranking. The top E&P companies are looking at high single digit and even double digit North American gas volume growth which is almost unheard of. These volumes are treadmill volumes for sure meaning you can't slow your pace of drilling without seeing a quick response in rate but few are talking about slowing down at present.
- So I'm Back To UNG Puts. Subscribers please see the Holdings Wiki for specific contracts.
- Yet I Remain Long Numerous E&P Stories. Why is that? Several reasons really, chief among them being valuation, then opportunity set, strength of balance sheet, an improving operating cost environment … I won't go over the whole list tonight as I have dinner guests.
Valuations Remain Low. The E&P names are by no means expensive and by no means discounting anywhere near the futures market view of natural gas prices. Analysts are slowly raising their pricing assumptions but a healthy discount between strip and estimates remains.
Strip Pricing Remains Buoyant:
- 12 month strip: $10.17
- 24 month strip: $9.72
Analyst Price Decks Remain Conservative:
- 2008: $7.72
- 2009: $7.88
The Charts:
This article has 3 comments:
All of the charts point to lower storage. While I agree that on a short term basis, say 5 weeks, Nat. gas should trend lower. The fact remains that in May hurricane forecasts will be issued. Personally, I can't see the gulf being free of hurricanes three years in a row.
Speculation will keep prices above where they should be. Additionally, starting in 2009, Gazprom will stop accepting US $$$ for its gas. And $ priced gas will easily breach $10. On a BTU basis, nat. gas is extraordinarily cheap even at that level relative to oil.
Since the hurricane forecasts have been wrong for 3 years in a row is anybody going to pay attention to them?
"On a BTU basis, nat. gas is extraordinarily cheap even at that level relative to oil."
Everybody that could switch from oil products to NG did so a year ago. There won't be any more gain in demand from switching.