Here’s Why Crude Oil Stocks Haven’t Bottomed Yet

By Justin Spittler

Oil companies are hemorrhaging money. The oil market is in its worst downturn in decades. The price of oil has plummeted 72% since June 2014. Oil is trading below $30 a barrel for the first time since 2003.
If you’ve been reading the Dispatch, you know the world has too much oil. In recent years, technologies like “fracking” have unlocked billions of barrels of oil that were once impossible to extract from shale regions.
Global oil production has climbed 20% since 2000. Last year, global output hit an all time high. Yesterday, The Wall Street Journal reported the global oil market is oversupplied by 1.5 million barrels a day.
Because oil is leaving the ground faster than it’s being consumed, oil storage tanks are overflowing. 

Companies are now storing oil on tankers floating at sea, according to Bloomberg Business.

Low oil prices have slammed oil stocks..…
Since June 2014, Exxon Mobil (XOM), the world’s largest oil company, has dropped 27%. Chevron (CVX), the second biggest oil company, has plunged 38%. European oil giants Royal Dutch Shell (RDS-A), BP (BP), and Total S.A. (TOT) have plummeted 46%, on average, over the last 18 months. Together, these giant companies are known as the oil “supermajors.”

BP had a $3.3 billion net loss last quarter..…
And it lost $6.5 billion for the year, its worst annual loss in at least 30 years. Exxon sales fell 28% last quarter. Its profits plunged 58% to $2.78 billion, the company’s lowest quarterly profit since 2002. Chevron also booked its worst quarterly profit since 2002. Shell expects to report a 42% decline in profits for their fourth quarter.

Oil and gas companies slashed spending by 22% last year..…
Analysts expect another 12% cut this year to $522 billion, according to Reuters. The industry hasn’t spent that little since 2009…when the U.S. economy was going through its worst downturn in almost a century. More spending cuts are coming this year. Chevron plans to cut spending by 24% this year. The company laid off 10% of its employees in October. Exxon plans to cut spending by 25% in 2016. And BP plans to eliminate 9% of its jobs over the next two years.

The supermajors have not cut dividends yet..…
Regular readers know these oil giants pay some of the steadiest income streams on the planet. Shell hasn’t cut its dividend since World War II. Exxon and Chevron have both increased their annual dividends for at least the past 25 years, which earns them a spot in the “Dividend Aristocrats” club. Investors view these dividends as sacred. Some have even passed along their original shares to children and grandchildren, like grandma’s ring or the family farm. These giant oil companies have been paying regular dividends for decades, even through the 2001 dot com crash and 2008 financial crisis. Cutting their dividends would be a last resort.

The world’s oil giants may have to do the “unthinkable” if oil prices stay low..…
Financial Times reported in December,

…(J)ust weeks ago, BP and France’s Total each pledged to balance their books at $60 a barrel oil, saying they aimed to cover their dividends from “organic” cash flow by 2017.

…(E)ven at $60, the three biggest European majors will need to take further cost-cutting action to cover investor payouts…Total’s $6.8bn dividend would exceed its projected organic free cash flow by $800m two years from now. For BP, the cash shortfall is put at $500m…

These oil companies cut costs to be profitable at $60 oil. But with oil now at $30, they need to make even more drastic cuts.
BP is running out of places to cut spending according to Bloomberg Business.

While Chief Executive Officer Bob Dudley has trimmed billions of dollars of spending, cut thousands of jobs and deferred projects in response to the plunge in crude prices, BP’s cash flow still doesn’t cover investments and dividends…

BP has already cut “a lot” from capital expenditure, Chief Financial Officer Brian Gilvary said Tuesday at a press briefing in London. When asked how much room it has to reduce spending further before cutting into the bone, Gilvary said “we are around that zone.”

Standard & Poor’s (S&P) downgraded Chevron and Shell this week..…
Ratings agencies downgrade a company’s credit rating when they think the company’s financial health is getting worse. Like a person having a bad credit score, a downgrade can make it harder and more expensive for a company to borrow money. S&P cut Shell’s credit rating to the lowest level since 1990. S&P also put the debt of BP, Total, and Exxon on watch for downgrades.

S&P doesn’t think oil companies have cut spending enough. Bloomberg Business reported:

S&P’s moves come after the ratings company lowered its 2016 oil-price assumption Jan. 12, reducing Brent crude by $15 a barrel to $40. The 52 percent average price decline in 2015 won’t be matched by most companies’ cost and spending reductions, S&P said.

As regular readers know, the oil market is cyclical. It goes through big booms and busts. Eventually we’ll get an amazing opportunity to buy world-class oil companies at absurdly cheap prices. But with dividend cuts looming, the bottom likely isn’t in yet. We recommend avoiding oil stocks for now.

Louis James, editor of International Speculator, sees an opportunity to profit from cheap oil..…
Louis is our resource guru. He specializes in finding small miners with huge upside. Louis is an expert in the cyclical nature of commodities. He knows how to make money during booms and busts. And now, Louis sees opportunity in airlines. Jet fuel, which is made from oil, is a major operating expense for airlines. So, airline stocks often move up when oil drops. Last year, jet fuel prices fell by more than one-third. Major airlines are now raking in cash. The U.S. airline industry made $22 billion in profits during the first nine months of 2015, according to the Department of Transportation. That’s more than any entire year in its history.

In December, Louis recommended his favorite airline stock in International Speculator.....
The company has doubled its profits during the third quarter of 2015. On Monday, Louis said the company doubled its profits again last quarter.

The company just announced more-than-solid financial results for last quarter, doubling its quarterly profit. The company says it’s on track to hit the high end of its operational goals for the fiscal year. All great, but even better is that the stock rebounded from its recent slide on the news. That’s “proof of concept” that this stock can buck the market by delivering to the bottom line when other businesses are hurting, which was one of the main reasons we bought this stock.

The stock surged 4% with the quarterly news…and Louis thinks the stock will continue higher. You can learn more about Louis’ favorite airline by signing up for a risk-free trial to International Speculator.

Chart of the Day

BP just had its worst year in at least three decades. Today’s chart shows BP’s profits since 1985. Since then, the oil giant has made money in 27 years and lost money in 3. Last year, BP lost a record amount of money. It lost more than it did in 2010 when one of the company's oil rigs exploded in the Gulf of Mexico. BP has cut billions of dollars in spending. It’s laid off thousands of workers. Yet, it’s still bleeding cash. The company may soon have to do the unthinkable and cut its dividend.

The article Here’s Why Oil Stocks Haven’t Bottomed Yet was originally published at caseyresearch.com.

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The New Normal for Crude Oil?

By Marin Katusa, Chief Energy Investment Strategist

You may have come across the word “contango” in an oil related news report or article recently and wondered, “What’s contango?”

It isn’t the Chinese version of the tango.

Contango is a condition in a commodity market where the futures price for the commodity is higher than the current spot price. Essentially, the future price of oil is higher than what oil is worth today.

The above forward curve on oil is what contango looks like. There’s more value placed on a barrel of oil tomorrow and in the future than over a barrel today because of the increased value of storage.

I personally believe our resource portfolios are in portfolio contango—but that’s an entirely separate discussion that I’ll get to later. In today’s missive, I want to focus entirely on oil contango.

Crude oil under $50 per barrel may seem to put most of the producers out of business, but many oil and gas exploring and producing (E&P) companies are sheltered from falling prices in the form of hedges.

Often, companies will lock in a price for their future production in form of a futures commodity contract. This provides the company with price stability, as it’s sure to realize the price it locked in at some future date when it must deliver its oil.

But the market will always figure out a way to make money—and here’s one opportunity: the current oil contango leads to plenty of demand for storage of that extra oil production.

With US shale being one of the main culprits of excess crude oil production, storage of crude in US markets have risen above seasonally adjusted highs in the last year. This abundance of stored crude has pushed the current spot price of crude oil toward five year lows, as current demand is just not there to take on more crude production.

When in contango, a guaranteed result is an increase in demand for cheap storage of the commodity, in order to clip the profit between the higher commodity price in the future versus what’s being paid for the commodity at present. This is precisely what’ playing out in oil today.

Contago, Five Years Later

Looking back at the similarities of the 2009 dramatic free fall in oil prices to $35 per barrel, after a five year hiatus, crude has returned to a similar price point, and the futures market has returned to contango (green shows oil in contango).

Floating Storage Is Back in Vogue

Oil traders are now taking advantage of the contango curve through floating storage in the form of waterborne oil tankers.

This is what a big oil tanker looks like:

I’m personally reminded of contango whenever I look out my living room window:

Here’s a photo taken out my living room window—and this is non-busy part of the harbor. At times when I do my runs along the seawall, there have been up to 30 large oil tankers just sitting in the harbor. (On a side note, Olivier and I went for a run in July along the Vancouver seawall, and we counted 26 oil tankers.) All that pricey Vancouver waterfront will have an incredible view of even more oil tankers in the years to come when the pipelines are eventually built. I can only imagine what the major import harbors of China and the US look like… never mind the number of oil tankers sitting in the export nations’ harbors and the Strait of Hormuz. Multiply the above by at least 50 red circles.

As the spread between future delivery of oil and the spot price widened, traders looking to profit from the spread would purchase crude at spot prices and store it on oil tanker ships out at sea. The difference between the spread and the cost to store the crude per barrel is referred to as the arbitrage profit taken by traders. Scale is a very important factor in crude storage at sea: therefore, traders used very large crude carriers (VLCC) and Suezmax ships that hold between 1-2 million barrels of crude oil.

In the late summer of 2014, rates charged for crude tankers began to climb to yearly highs because of the lower price that spurred hoarding of crude oil. This encouraged VLCCs to lock in one year time charter rates close to and above their breakeven costs to operate the ship.

Time charter rates share similarities to the oil futures market, as ships are able to lock in a daily rate for the use of their ships over a fairly long period of time. VLCC spot rates have reached around $51,000 per day; however, these rates tend to be booked for a shorter period of around three months. These higher spot rates tend to reflect the higher cost paid to crew a VLCC currently against locking in crew and operating costs over a longer-term charter that could last a year. Crude oil is often stored on floating VLCCs for periods of six months to a year depending, on the contango spread.

Floating Storage: Economics

Many VLCCs are locking in yearlong time charter rates at or above $30,000-$33,000 per day, as that tends to be the breakeven rate to operate the vessel. If we assume that a VLCCs charge their breakeven charter rate and we include insurance, fuel, and financing costs that would be paid by the charterer, storage on most VLCCs in the 1-2 million barrel ranges are barely economic at best.

However, they’ll soon become profitable across the board once the oil futures and spot price spread widens above $6-$7 per barrel.

The red star depicts the current spread between the six-month futures contract from the futures price in February 2015. Currently companies are losing just under $0.20 per barrel storing crude for delivery in six months. However, once that $6-$7 hurdle spread is achieved, most VLCCs carrying 2 million barrels of crude will be economic to take advantage of the arbitrage in the contango futures curve.

The VLCC and ULCC Market

VLCC= Very Large Crude Carrier
ULCC=Ultra-Large Crude Carrier

VLCCs store 1.25-2 million barrels of oil for each cargo. Globally, there are 634 VLCCs with around 1.2 billion barrels of storage capacity, or over one-third of the US’s total oil production. The VLCC market is fairly fractioned, and the largest fleet of VLCCs by a publicly traded company belongs to Frontline Ltd. with 25 VLCCs. The largest private company VLCC fleet belongs to Tankers International with 37 VLCCs. In early December, Frontline and Tankers International created a joint venture to control around 10% of the VLCC market. Other smaller VLCC fleets belong to DHT with 16 VLCCS, and Navios Maritime with 8 VLCCs.

The lowest time charter breakeven costs of $24,000 per day are associated with the largest VLCC fleet from Frontline Ltd. and Tankers International. This is followed by the smaller fleets that have time charter breakeven costs of around $29,000 per day. Of course, on average the breakeven costs associated with most VLCCs is around $30,000 per day, and current time charter rates are around $33,000.

Investing in companies with VLCC fleets as the contango trade develops can generate great potential for further profits for investors. The focus of these investments would be between the publicly traded companies DHT Holdings, Frontline Ltd., and Navios Maritime.

But one must consider that investing in these companies can be very volatile because of the forward curve’s ability to quickly change. It isn’t for the faint of heart.

However, if current oil prices stay low, there will be an increase in tanker storage and thus a sustained increase in the spot price of VLCCs. However, eventually low prices cure low prices, and the market goes from contango to backwardation. It always does and always will.

Shipping companies have been burdened by unprofitable spot and charter pricing since the financial crisis, and these rates have only recently started to increase.

Warning!

As I sit here on a Saturday morning writing this missive, I want to remind all investors now betting on this play that they’re actually speculating, not investing.

There’s a lot of risk for one to think playing the tankers is a sure bet. I have a pretty large network of professional traders and resource investors, and I do not want to see the retail crowd get caught on the wrong side of the contango situation.

In the past, spot rates for the VLCCs usually decline into February and have dropped to as low as under $20,000 per day. It is entirely possible that if the day rates of VLCCs go back to 2012-2013 levels, operators will lose money.

Conclusion: this speculation on tankers is entirely dependent on the spot price and the forward curve.
The risk of this short term trade is that these companies are heavily levered, and some are just hanging on by a thread. Although this seasonal boost to spot rates has been a positive for VLCCs and other crude carriers, the levered nature of these companies could spell financial disaster or bankruptcy if spot rates return to 2012-2013 levels.

What should be stressed are the similarities to the short-lived gas rally in the winter of 2013-‘14, and the effect these prices have had on North American natural gas companies. A specific event similar to the polar vortex has occurred in the oil market, which has spurred a seasonal increase in the spot price tankers charge to move and store oil.

However, much like the North American natural gas market, the VLCC market is oversupplied; a temporary increase in spot prices that have led to increased transport and storage of oil will not be enough to lift these carriers from choppy waters ahead. Future VLCC supplies are expected to rise, with 20 net VLCCs being built and delivered in 2015 and 33 in 2016. This is much more than the 17 net VLCCs added in 2013 and 9 in 2014.

Another looming and very possible threat to these companies is the same debt threat that affected energy debt markets as global oil prices plummeted. If VLCC and other crude carriers experience a fall in spot prices, these companies’ junk debt could be downgraded to some of the lowest debt grades that border a default rating. This will increase financing costs and in turn increase the operating breakeven costs to operate these crude carrying vessels. The supply factor, high debt, and potentially short-lived seasonally high spot market could all affect the long-term appreciation of these VLCC stock prices. Investing in these companies is very risky over the long run, but a possible trade exists if storage and transport of oil continues to increase for these crude carriers.

Portfolio Contango—An Opportunity Not Seen in Decades

If you talk to resource industry titans—the ones who’ve made hundreds of millions of dollars and been in the sector for 40 years—they’re now saying that they’ve never seen the resource share prices this bad. Brokerage firms focused on the resource sector have not just laid off most of their staffs, but many have shut their doors.

The young talent is the first group to be laid off, and there’s a serious crisis developing in the sector, as many of the smart young guns have left the sector to claim their fortunes in other sectors.
There’s blood in the streets in the resource sector.

Now if you believe that, as I do, to be successful in the resource sector one must be a contrarian to be rich, now is the time to act.

I have invested more money in the junior resource sector in the last six months than I have in the last five years. I believe we’re in contango for resource stocks, meaning that the future price of the best juniors will be worth much more than they are currently.

I have my rules in speculating, and you’ll learn from my experience—and more important, my network of the smartest and most successful resource mentors whom I have shadowed for many years.

So how can we profit from the blood in these markets? Easy.

Take on my “Katusa Challenge.” You’ll get access to every Casey Energy Report newsletter I’ve written in the last decade, and my current recommendations with specific price and timing guidance. There’s no risk to you: if you don’t like the Casey Energy Report or don’t make any money over your first three months, just cancel within that time for a full, prompt refund, no questions asked. Even if you miss the three month cutoff, cancel anytime for a prorated refund on the unused part of your subscription.

As a subscriber, you’ll receive instant access to our current issue, which details how to protect yourself from falling oil prices, plus our current top recommendations in the oil patch. Do your portfolio a favor and have me on your side to increase your chances of success. I can’t make the trade for you, but I can help you help yourself.

I’m making big bets—are you ready to step up and join me?

The article The New Normal for Oil? was originally published at caseyresearch.com

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Is this a "Bearish Outside Reversal" in Natural Gas?

June Natural Gas (NG.M14.E) opened sharply higher in Sunday evenings session, but since the open prices plummeted to a 5 day low. The sell off confirmed a bearish outside reversal ahead of today's U.S. session. June Natural Gas futures remain under pressure from last week's EIA storage report that showed a larger than expected supply build of 82 bcf. Recent weather forecasts have been calling for warmer temperatures across the country which could limit the size of upcoming supply injections.

In recent weeks, we have been in a sideways trend in the June Natural Gas Market as the market decides on which direction it is headed next. The technical analysis in Natural Gas points to bearish in the near term, making way for a potential swing trading opportunity.

In today's trading session, I will be looking to sell June Natural Gas futures at 4.660, or a breach of the 20 Day Moving Average. This breach would confirm the outside reversal in today’s trading session. My first downside target would be 4.500, a recent area of support in the market, at which point I would roll stops to break even. If the 4.500 are is hit, then I would look at 4.380 as my next target, which would be support from the long term trendline. To mitigate risk on the trade, stop loss orders should be placed just above today’s trading range and rolled behind the trade accordingly.

See you in the market!
 Posted courtesy of James Leeney and our trading partners at INO.com



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EIA: Underground Natural Gas Working Storage Capacity

Natural gas working storage capacity increased by about 2 percent in the Lower 48 states between November 2011 and November 2012. The U.S. Energy Information Administration (EIA) has two measures of working gas storage capacity, and both increased by similar amounts:

*   Demonstrated maximum volume increased 1.8 percent to 4,265 billion cubic feet (Bcf)

*   Design capacity increased 2.0 percent to 4,575 Bcf

Maximum demonstrated working gas volume is an operational measure of the highest level of working gas reported at each storage facility at any time over the previous five years, according to EIA's monthly survey of storage operators. Working gas is the volume of natural gas in an underground natural gas facility available to be withdrawn, not including base gas.

The maximum demonstrated working gas volume is a practical measure of full storage. Filling storage, which requires compressors to inject the gas into the storage facility, becomes more difficult and expensive as storage volume nears its maximum and pressures inside the facility increase.

That's why the demonstrated maximum is generally less than the design capacity, averaging 93% over the past two measurement periods (see Table 1), and why any given week's storage inventory is generally less than the demonstrated maximum. The maximum demonstrated volume provides guidance to operators and market analysts on the economics of filling the system.

Last October, for example, when working gas in storage reached a record-high of 3,930 Bcf, a simple calculation using the then current maximum demonstrated volume (4,188 Bcf) showed storage to be 94% full.

Read the entire EIA Report


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Crude Oil Spikes to Near $94 After Sharp Drop

The price of oil rose to near $94 a barrel on Monday, rebounding after sharp losses last week that were due to concerns over abundant supplies and weak U.S. employment figures.

By early afternoon in Europe, benchmark oil for May delivery was up 97 cents to $93.67 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 56 cents on Friday and was down 5 percent from midweek.

The price of oil last week fell after a weak jobs report cast doubt on the strength of the U.S. economy. The Labor Department reported the economy added 88,000 jobs in March, the fewest in nine months. The slowdown may signal the economy will weaken this spring.

"The latest jobs data provide a useful reminder that this is still an uneven recovery in the U.S. economy," said Caroline Bain, commodities analyst at the Economist Intelligence Unit.

She expects oil prices to average less than $90 a barrel in the second quarter of 2013 "reflecting a comfortable market balance, lower refinery runs and only very modest growth in consumption."

The U.S. Energy Department last week reported that crude in storage was at its highest level since 1990 even though refiners had begun to ramp up gasoline production to get ready for the summer driving season. Now the economy looks like it might not grow fast enough to churn through the nation's high supplies.

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EIA: Low U.S. Injections Reflect Already High Natural Gas Storage Inventories

The increase in U.S. working natural gas inventories nearly half way through the 2012 injection season the period from April through October when most natural gas is stored underground to help meet heating demand during the upcoming winter was the lowest in 12 years. The slow start to the injection season reflects record high inventories at the end of this winter, leaving less space to be filled, and a large increase in natural gas use by the U.S. electric sector for power generation. EIA estimates that, by November, working natural gas inventories will hit a record high, exceeding 3,900 billion cubic feet (Bcf). U.S. dry natural gas production was up almost 7% from January through May of 2012 compared to the same period in 2011, so natural gas injections have not shifted lower due to a downturn in domestic natural gas production.

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The amount of working natural gas in underground storage increased 625 Bcf during April-June 2012, according to EIA's Weekly Natural Gas Storage Report. That is the smallest build since adding 564 Bcf, on a net basis, during the same period in 2000 (see chart above). While the increase in inventories is low, the amount of total gas in underground storage facilities is at a record high for this time of year, after topping 3,000 Bcf for the first time ever during any June month.

Here is the EIA injection and usage charts

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Working Crude Oil Storage Capacity at Cushing, Oklahoma Rises

As of March 31, 2012 working crude oil storage capacity at the Cushing, Oklahoma storage and trading hub was 61.9 million barrels, an increase of 6.9 million barrels (13%) from September 30, 2011 and 13.9 million barrels (29%) from a year earlier, as reported in EIA's recently released report on Working and Net Available Shell Storage Capacity.

Utilization of working storage capacity on March 31, 2012 was 64%, an increase from the 53% observed in September 2011, but lower than the 86% observed on March 31, 2011. The report also noted that operating shell storage capacity increased 8.1 million barrels (12%) from September 30, 2011 to reach 74.6 million barrels.

Both storage capacity and the level of inventories held at Cushing are closely watched market indicators, as Cushing is the market hub for West Texas Intermediate (WTI) crude oil that is the basis for crude oil futures contracts traded on the New York Mercantile Exchange. High inventory levels at Cushing have been a symptom of transportation constraints that have resulted in WTI trading at a discount relative to comparable grades of crude oil since early 2011.

Growing volumes of U.S. crude oil production, along with a higher level of imports from Canada, have helped contributed to the record levels of inventories at Cushing. Increased flows of crude oil from these two sources, along with expectations for future increases, have consequently created the need for additional storage at the hub.

Weekly data show that as of June 1, 2012, crude oil inventories held at Cushing were 47.8 million barrels, the highest level on record and very close to total working storage capacity as of March 2011. However, due to the growth in storage capacity between March 2011 and March 2012, the utilization rate for working storage capacity at Cushing has actually declined over the past 14 months.

Natural Gas Pipeline Capacity Additions in 2011

The U.S. Energy Information Administration estimates that U.S. natural gas pipeline companies added about 2,400 miles of new pipe to the grid as part of over 25 projects in 2011. New pipeline projects entered service in parts of the U.S. natural gas grid that can be congested: California, Florida, and parts of the Northeast (see map above). Only a portion of this capacity serves incremental natural gas use; most of these projects facilitate better linkages across the existing natural gas grid.

By convention, the industry expresses annual capacity additions as the sum of the capacities of all the projects completed in that year. By this measure, the industry added 13.7 billion cubic feet per day (Bcf/d) of new capacity to the grid in 2011. The six largest projects put into service in 2011 added 1,553 miles and about 8.2 Bcf/d of new capacity to the system. Much of this new capacity is for transporting natural gas between states rather than within states. Golden Pass, Ruby Pipeline, FGT Phase VIII, Pascagoula Expansion, and Bison Pipeline projects added 6.1 Bcf/d, or about 80%, of new state to state capacity.

Natural gas pipeline capacity additions in 2011 were well above the 10 Bcf/d levels typical from 2001-2006, roughly the same as additions in 2007 and 2010, but significantly below additions in 2008 and 2009 (see chart below). Capacity added in 2008 and 2009 reflected a mix of intrastate and interstate natural gas pipeline expansions, related mostly to shale production, liquefied natural gas (LNG) terminals, and storage facilities.

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Natural Gas Spot Prices Near 10 Year Lows Amid Warm Weather

 Natural gas prices have continued their downward trend this winter as a result of warmer than normal temperatures, ample natural gas in storage, and growing production. Population weighted heating degree days since November 1, 2011 are down 12% nationally from the 30 year average. Total working natural gas in underground storage in the lower 48 states was 3,098 Bcf for the week ending January 20, 21% above the storage levels from one year ago. Daily dry gas production averaged about 64.2 billion cubic feet per day (Bcfd) in January, up almost 10% from last January.

Click on the tab headers below to see charts highlighting factors affecting natural gas prices.

Spot Prices      Weather       Storage         Production       Weather Outlook        Futures Prices

Average spot natural gas prices for January were $2.68/MMBtu. Spot natural gas prices in January 2012 reached their lowest level in 10 years except for a 4-day period over the Labor Day weekend in 2009.


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Spot Natural Gas Prices Dipped to Two Year Low in November

Spot natural gas prices at the Henry Hub in Erath, Louisiana fell to $2.83 per million British thermal units for delivery on November 24, 2011, the lowest price since November 17, 2009. Henry Hub is the benchmark location for key natural gas financial instruments on the New York Mercantile Exchange and the IntercontinentalExchange such as futures contracts, swaps, and options.
Key factors affecting natural gas prices include:

• Growing domestic production. U.S. domestic marketed production averaged 65.4 Bcf/d through September, based on EIA data, an increase of about 7% from the same period in 2010, while demand for the corresponding period was up 2% this year.
• High natural gas storage levels. For the week ending November 25, 2011, natural gas storage inventories were 3,851 billion cubic feet (Bcf), down one Bcf from record inventory levels set the prior week but over 7% above the five-year average.
• Seasonal weather. Warmer-than-average weather across most of the United States has delayed the start of winter weather and the corresponding increased natural gas demand for heating. Through November 28, cumulative U.S. population-weighted heating degree-days in the 2011-2012 winter season are 8% below the 30-year average and are down 16% in the natural gas heating-intensive Northeast region.

Spot prices at Henry Hub rose about $0.70 per million British thermal units after the Thanksgiving Holiday weekend due to cooler temperatures and higher demand.

Source: U.S. Energy Information Administration, based on Bloomberg.
Note: Data included through November 30, 2011.

  

The Currency War Big Picture Analysis for Gold, Silver & Stocks

Phil Flynn: Oil Is Fed UP!

Oil prices still are having a hard time following through on its breakout over $85 a barrel. Obviously you have to respect that fact that the market has broken out yet at the same time, the bulls have to wonder what the market is waiting for.

It is very possible that the market is waiting for reassurance and permission to buy from our very accommodative Federal Reserve. The Fed has been taking baby steps back from the historic payload of economic stimulus and the oil market fears the impact that the removal of stimulus might have on the price of oil. The oil market has never before experienced the artificial amount of stimulation that it has experienced over the last year and so there is no wonder why there may be some angst building as we get closer to the judgment day. We can talk a lot about the demand growth in China but that too is the product of massive government spending. The Chinese spent 586 billion dollars to prop up their economy and it is unlikely that they will be pumping the economy with that kind of money again. Asian stocks fell hard on rising concerns that China, instead of adding stimulus, will actually be taking it away.

Oil just can’t get going because it is worried about the never ending Greece crisis and the concerns over other weak members in the PIIGS zone. Oil is worried about China and it is worried about what the Fed might say. The Fed has raised interest rates and removed most of its emergency lending programs. Now the market wants to know when the rates will start to rise. Every oil trader in the world is waiting for the answer. The removal of stimulus is a bearish oil event just waiting to happen.

If the bulls cannot get reassurance from the Fed maybe they can get it from Schlumberger. Chief Executive Andrew Gould said he feels that oil near $80 a barrel should hold and that customers will boost spending at oil prices near $80 a barrel. "Our customers will loosen their purse strings on high end technology," Gould said during a conference call to discuss the oil field services company's first-quarter earnings.

There is a lot of oil in storage. Bloomberg News reports that, “Traders increased the number of vessels used to store crude oil by 75 percent last week as the potential profit from storage rose, Morgan Stanley said. There were 21 oil tankers storing dirty products last week, 20 of them are very large crude carriers, up from 12 vessels in the previous week, a Morgan Stanley analyst, said in a report yesterday. Among the nine vessels there are four in Iran. About 41 million barrels of oil were stored in the tankers, Morgan Stanley said, enough to meet more than two days of U.S. consumption. That’s up from 24.5 million barrels a week ago.”

We also need to get prepared for the possible market impact from potential sanctions on Iran. I know that the Iran situation is well known that even with their abundant production of oil, they still do not have the refining capacity to produce what they need in refined products. So it is widely expected that any sanctions on the country will be a ban on gasoline. The AFP is reporting that Iran has increased its gasoline by inventories by about 220 million gallons and plans to boost domestic production to offset possible fuel sanctions according to Nooreddin Shahnazi-Zadeh, the head of National Iranian Oil Refining and Distribution. He claims that, "At the moment the volume of Iran's strategic petrol supplies has increased by over a billion liters" and dismissed the threat of sanctions saying, "it is impossible to impose such limitations in the current situation."

Phil can be reached at pflynn@pfgbest.com And as always watch him each day on the Fox Business Network.


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IEA - Oil Market Report

Highlights of the latest OMR dated February 11th 2010.....

Benchmark crude oil prices fell to six week lows by early February, after warmer weather in the Northern Hemisphere, negative macroeconomic news and sudden strength in the dollar set in motion a $12/bbl slide. Prices regained some of their losses in recent days, with WTI last trading at $73.80/bbl and Brent at $72/bbl.

Forecast global oil demand is revised up 170 kb/d for 2010 as more robust IMF GDP projections are partly offset by a higher price assumption and persistently weak OECD oil demand. Global oil demand is estimated at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.5 mb/d in 2010 (+1.8% or +1.6 mb/d versus 2009), with growth entirely in non-OECD countries.

Global oil supply fell 45 kb/d to 85.8 mb/d in January, with higher total OPEC output (mostly NGLs) offset by lower non-OPEC production. Average 2009 non-OPEC production is revised 70 kb/d higher at 51.4 mb/d while 2010 supply is revised up by 120 kb/d to 51.6 mb/d on slightly improved US and North Sea crude prospects.

OPEC crude output was up 105 kb/d at 29.1 mb/d in January. OPEC NGL production is forecast to rise 0.8 mb/d to 5.5 mb/d in 2010, with just over half of the increase related to ramp up from 2009 project start-ups. The call on OPEC crude and stock change for 2010 is revised up 300 kb/d to 29.4 mb/d.

OECD industry stocks fell 67.8 mb in December to 2 678 mb, around 0.8% below 2008’s level, on lower crude and middle distillate inventories. End-December forward demand cover fell to 58.1 days, now only 0.1 day higher than a year ago. Preliminary data point to a January OECD stockbuild of 11.4 mb, but with lower floating storage.

Global 4Q09 and 1Q10 refinery crude throughput forecasts remain unchanged at 72.3 mb/d and 72.6 mb/d respectively, though in the latter’s case, higher Canadian, Mexican and OECD Pacific runs offset lower non-OECD throughputs. Despite some signs of improvement for the refining industry, the sector’s short-term outlook remains fundamentally bearish.

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Traders Ditching Oil Hoarded At Sea As Market Tightens

The amount of oil held in tankers at sea has halved from its April 2009 peak of 90 million barrels according to ship broker ICAP. Given that much of this oil was held in order to arbitrage current vs. future oil prices, a reduction in floating storage implies a tightening of the oil market.

WSJ: ICAP said there were currently 21 trading VLCCs offshore with some 43 million barrels of crude. Seven of these are expected to discharge in February and one more in March. So far, it appeared those discharged cargoes wouldn't be replaced by new ones.

"I haven't seen any fixtures for VLCC storage in the last two weeks," said Simon Newman, ICAP's senior tanker analyst. "That would imply that storage looks set to fall in the short term."

Assuming there are no new fixtures, the amount of crude in storage could sink to 27 million barrels by March, the lowest level since the current contango play began in late 2008.

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Will China Supersede Saudi Arabia as the Key to U.S. Oil Prices?

BY KEITH FITZ-GERALD, Chief Investment Strategist, Money Morning

I bought a Toyota Prius last Saturday.

The signs are everywhere that oil is headed for stratospheric highs, $200, $250 or even $300 a barrel. Some of these signs are just plain obvious. But even the subtle indicators are telling us that some very expensive energy costs headed our way.

Let me tell you about one such indicator that I came across over the New Year holiday. A tiny news item said that Saudi Arabian oil concern Aramco is abandoning a lease on Caribbean oil storage, and further reported that PetroChina Co. Ltd. (NYSE ADR: PTR) is moving in to take Aramco's place.

Most investors here in the West - if they even read the item - would've dismissed it as just another minor business transaction, one among the thousands that take place each day. But this particular deal was much more than that. It's another indication of China's continued global emergence. And it also underscores this country's relegation to the growing legion of "former" world powers that have been eviscerated by the financial crisis that they created.

In case you missed the story, let me share the details, and then explain what I believe those details actually mean.

On the last day of the year, the state-owned Saudi Aramco walked away from a 5 million barrel storage capacity lease at the Statia Terminals Group NV facility on St. Eustatius Island in the Caribbean. Ordinarily that wouldn't be significant. After all, oil leases come and go - change is a normal part of doing business.

But two facts make this transaction different:

First, Aramco had renewed this lease - which accounts for 38% of the total storage capacity on the island - since 1995 as a means of staging oil near its primary market: The United States.

And, second, with Aramco's departure, PetroChina, China's state-run oil company, has opted to move in.

From a strict numbers standpoint, I grant you that a 5-million-barrel facility doesn't appear significant. That much oil will meet U.S. energy needs for all of about five hours. And it equates to less than 1% of the U.S. Strategic Petroleum Reserve, which holds about 726.6 million barrels of oil. So it's not like China will suddenly have a lock on the U.S. oil market.....Read the entire article.



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EIA Natural Gas Weekly Update

Overview for the week ending Wednesday, November 18, 2009

Since Wednesday, November 11, natural gas spot prices rose at nearly all market locations in the lower 48 States, with increases of up to 55 cents per million Btu (MMBtu). Prices at the Henry Hub climbed $0.15 per MMBtu, or about 4 percent, to $3.74 per MMBtu.

At the New York Mercantile Exchange (NYMEX), the futures contract for December delivery at the Henry Hub settled yesterday, November 18, at $4.254 per MMBtu. The price of the near month contract decreased by 25 cents or about 6 percent during the report week.

Natural gas in storage was a record setting 3,833 billion cubic feet (Bcf) as of November 13, which is about 12 percent above the 5 year average (2004-2008). The implied net injection for the week was 20 Bcf.

The spot price for West Texas Intermediate (WTI) crude oil increased by $0.39 per barrel since Wednesday, November 11, to $79.55 per barrel or $13.72 per MMBtu.



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Weekly EIA Natural Gas Storage Report

Working gas in storage was 3,813 Bcf as of Friday, November 6, 2009, according to EIA estimates. This represents a net increase of 25 Bcf from the previous week. Stocks were 350 Bcf higher than last year at this time and 409 Bcf above the 5 year average of 3,404 Bcf. In the East Region, stocks were 118 Bcf above the 5 year average following net injections of 8 Bcf. Stocks in the Producing Region were 223 Bcf above the 5 year average of 976 Bcf after a net injection of 10 Bcf. Stocks in the West Region were 67 Bcf above the 5-year average after a net addition of 7 Bcf. At 3,813 Bcf, total working gas is above the 5-year historical range.

Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2004 through 2008.
Source: Form EIA-912, "Weekly Underground Natural Gas Storage Report." The dashed vertical lines indicate current and year ago weekly periods.

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