BAMWX Bottoms Natural Gas. The Energy Report 11/14/19

I am not sure if Bamwx Meteorologist Bret Walts makes the weather or just predicts it but yesterday he sure seemed to move the natural gas market! If you have been following the natural gas market lately, you know it has been moving on the weather. Natural gas prices started to rally before Halloween but really spiked as weather forecasters like BAMWK  started forecasts and the rumors of the arctic blast that blanked large parts of the country for the last couple of days. Yet despite that cold, natural gas had been selling off on the fact. The fact of the surge of cold and that there were warmer temperatures ahead.

Yet wait! Not so fast. Just when you thought you could put the winter coat away and get short the natural gas market, an update from BAMWX seemed to turn the market around.

Right before that natural gas rally, Bret Walts BAMWX Meteorologist put out a special update. Bret said, “You can’t really get much colder than we are today, but I am seeing more signs of cooler risks returning in the extended range. Following several days of demand closer to normal mid-late next week, we think colder risks can return with more notable above normal heating demand. High latitude blocking will likely help keep the northeastern US consistently colder than normal, with the potential of a more widespread cooler risk developing in the 10-15-day period. This certainly does not look to be a repeat of last year where we warmed up and never looked back. Colder pattern drivers are definitely more at play in 2019 into December.’

If you remember last year’s natural gas market, a November cold blast caused a massive spike in natural gas only to crash as record production and a warm December eased concerns about any impact on supply. Yet if Bret is right and so far, he has been, then December may give us a natural gas rally to remember. Or at the very least fill some of the gaps in the chart above and at least give the $300 area a test.

Oil prices continue the recent slow, choppy uptrend on OPEC optimism as well as a reported crude draw according to the American Petroleum Institute. In yesterday’s action we saw a crude rally on comments by OPEC Secretary-General Mohammed Barkindo who once again suggested that oil demand next year looks very strong. The comments reflect our contention that oil demand will exceed expectations on the upside because the talk of recession in the U.S. and now Germany is missing and that will lead us to more and more upside demand surprises.

Yet the rally midday stalled as crude gave back part of the day’s gains on a Wall Street Journal report that U.S.-China trade talks hit a snag. The snag report came from an unnamed source that suggested the size and scope of Chinese agriculture purchases were in question. Of course economic data overnight would seem to suggest that China could really use a trade deal about now, not to mention some of our record supplies of pork. Inflation in China is rising, led by pork that has been impacted by Asian Swine Fever. On top of that, China’s industrial production rose 4.7% year-on-year in October, data from the National Bureau of Statistics reported, well below the median forecast of 5.4% growth.

The crude oil market got a bid on a reported 541,00-barrel crude oil draw as reported by API. The draw was led by a 1.2 million barrel drop in Cushing, Oklahoma. On the other side gasoline saw a bigger than expected 2.3 million barrel increase along with an 887,00-barrel increase in the distillate.

The Energy Information Administration releases data today for petroleum and natural gas but it was the EIA longer-term forecasts that generated a lot of interest from traders. Not only from the supply and demand side but from a lot of people who still believe that the EIA is estimating the future of shale oil production. The EIA reported, “The United States remains on course to set new crude oil production records this year and next. In fact, EIA’s November outlook expects that U.S. crude oil production will average more than 13 million barrels per day this month, the most U.S. oil production in one month on record.” Yet there are some that think that is wrong.

Nick Cunningham at Oil Price dot-com wrote that, “Forecasts from the U.S. Energy Information Administration (EIA), along with those from its Paris-based counterpart, the International Energy Agency (IEA), are often cited as the gold standard for energy outlooks. Businesses and governments often refer to these forecasts for long-term investments and policy planning. In that context, it is important to know if the figures are accurate, to the extent that anyone can accurately forecast precise figures decades into the future. A new report from the Post Carbon Institute asserts that the EIA’s reference case for production forecasts through 2050 “is extremely optimistic for the most part, and therefore highly unlikely to be realized.” Nick writes that, “The U.S. has more than doubled oil production over the past decade, and at roughly 12.5 million barrels per day (mb/d), the U.S is the largest producer in the world. That is largely the result of a massive scaling-up of output in places like the Bakken, the Permian and the Eagle Ford. Conventional wisdom suggests the output will steadily rise for years to come.

It is worth reiterating that after an initial burst of production, shale wells decline rapidly, often 75 to 90 percent within just a few years. Growing output requires constant drilling. Also, the quality of shale reserves varies widely, with the “sweet spots” typically comprising only 20 percent or less of an overall shale play, J. David Hughes writes in the Post Carbon Institute report. After oil prices collapsed in 2014, shale companies rushed to take advantage of the sweet spots. That allowed the industry to focus on the most profitable wells first, cut costs and scale up production. But it also pushed off a problem for another day. “Sweet spots will inevitably become saturated with wells and drilling outside of sweet spots will require higher rates of drilling and capital investment to maintain production, along with higher commodity prices to justify them,” Hughes says in his PCI report. In addition, this form of “high-grading” does allow for rapid extraction, but it doesn’t necessarily mean that more oil is ultimately going to be recovered when all is said and done. A must read.

There have been fears that in recent days that shale pioneer Chesapeake energy night be headed for bankruptcy. Yet a report by Forbes suggests that maybe Cowboy’s owner, Jerry Jones, might save them from that fate. The report says, “Reuters reported that Chesapeake management and Comstock have agreed to the outline of a deal that would transfer Chesapeake’s assets in the Haynesville to Comstock for a reported valuation of $1 billion.

The EIA reported, “The United States remains on course to set new crude oil production records this year and next. The EIA also pointed out that, “Global oil market risks have moderated over the past month. Saudi Arabian oil production appears to have recovered from the attacks of September 14. Some of the demand side risks stemming from concerns over economic growth also seem to be diminishing, as Americans set a new record for the month of October by consuming nearly 9.4 million barrels of gasoline.” “In our November outlook, EIA forecasts that the average spot price for Brent crude oil in 2019 will be almost $64 per barrel, a year-over-year decrease of $8 per barrel. In 2020, EIA expects the average crude oil price to continue decreasing, albeit at a slower pace than the change from 2018 to 2019.”

Still, the great news for our country and pocketbook is that the, “EIA estimates that the United States is now exporting more crude oil and petroleum products than it imports and will publish more exact data later this month. We also expect total U.S. net exports of crude oil and petroleum products to average 750,000 barrels per day next year.” Yahoo!!
Phil Flynn

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In case you missed it! Phil’s guest appearance on the McKeany-Flavell Hot Commodity Podcast last Friday, September 20th talking about current energy market dynamics. LISTEN HERE!