Global equity markets continue to slide overnight. Concerns over the European banking industry persist. Fund held positions of long crude / short natural gas are rumored to be getting unwound. This may cause a short-covering bounce in natural gas. Corn and other agricultural markets continue to be pulled down by outside macro-economic influences as opposed to their bullish internal fundamentals.
Tag Archives: Natural Gas
Weaker Tone to Start; Renewed Fears of Slowing; Weather Helps US Planting
US commodity price are weaker to start. The fear of slowing of slowing is widespread, but not one of a severe slowing. The influence of a private service reporting falling housing prices will be hard to shake off until Friday’s employment report. A deal for Greece may be on the horizon. US weather looks to help planting, but some areas are still well behind normal pace. Natural gas may continue to gain on crude oil as spreads are unwound.
Good Jobs Number Last Week Underpins Some Markets
A more positive tone in many physical commodities this morning. Slightly weaker dollar, $3.00 rally in crude oil and many other markets showing positive. With the magnitude of last week’s washout has taken much of the bullish technical aspects out, and will likely take decreased volatility and a few positive days to renew confidence.
Japan, Middle East, and Inflation Threats
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Even under the most optimistic turn of events, one has to think that the situation in Japan will initially serve as a drag on global economic activity. While the copper market last week seemed to already be looking forward to the potential demand off the Japanese rebuilding effort, the combination of high oil prices and supply chain interruptions has clearly complicated the intermediate economic outlook. Some might suggest that clean-up and reconstruction costs in Japan in excess of $300 billion could stimulate the Japanese economy in a way that the Bank of Japan could not over the last 10 years. Others are suggesting that the additional liquidity needed to pull Japan back from the brink of an economic collapse is something that will add markedly to the global inflationary threat. Therefore, it is safe to suggest that the Japanese disaster could be a short term negative to the economy, but perhaps over time the situation could provide further lift to a host of physical commodity prices.
The Japanese disaster also has the potential to profoundly impact the world energy situation. While advocates of nuclear energy maintain that they can safeguard facilities against disasters, in the best case we have probably seen another example of “escalating energy costs”. In the worst case, the situation in Japan might take a sizeable portion of the 325 nuclear plants that are currently under consideration off the drawing board. It could also idle existing plants for retrofits and safety enhancements. The question of nuclear power has become even more complicated from an economic perspective. It has now become clear that plants might have to be moved from unstable geological zones and from coastal areas that are prone to tsunami flooding. France derives as much as 75% of its total energy from nuclear power. With that country also getting a portion of its fuel from Libya, it wasn’t surprising that thy reacted with historical speed to enforce the Libyan no-fly zone.
According to the World Nuclear Association, nuclear power provides about 14% of the world’s electricity, almost 24% of electricity in OECD countries, and 34% in the EU. Current estimates of the lost production in Japan are 55 TWh per year or just over 2.0% of the world’s nuclear energy capacity. Some estimates indicate that it could take as many as 185,000 barrels per day of oil to make up for the lost production. Other countries have idled plants for safety checks, which means even more production could be lost. Seeing 10% of nuclear plants worldwide taken off line could increase petroleum demand by nearly 860,000 barrels per day. Therefore energy analysts might downplay the impact of the shift in nuclear power generation, but since that development has come in the wake of curtailments to deep water drilling and increased geopolitical concerns in the Middle East, the risk of even higher energy prices has grown.
Middle East Considerations
Currently the US produces more energy from ethanol than it derives from oil imports from Saudi Arabia, but lingering tensions in the Middle East should not be minimized. We continue to emphasize that the removal or reduction of ethanol from the US gasoline supply chain would have a larger impact on gasoline prices now than ever before. Refiner margins in the US continue to hold at moderately low levels (just above 80%), which suggests that retail gasoline prices aren’t high enough to prompt the refiners to run actively, build supply and reduce prices. With crude oil supplies at Cushing, Oklahoma holding at record levels, US refiners have enough crude oil to refine and all kinds of extra capacity to make more gas and diesel, which in turn would deflate prices. While Congress would like to force the refiners to increase output and deflate prices, without a profit incentive that just won’t happen. In other words, world energy prices are not high enough across the board to reduce demand and stimulate supply.
Natural Gas: Undervalued Asset?
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While we have been giving natural gas a lot of attention recently, the events in Japan have added to our belief that it may have become one of the most undervalued of the actively-traded physical commodities. As outlined in our introduction this week, the situation in Japan has clearly altered the hope of deriving a large amount of our future energy needs from nuclear technology. The fact that Middle East geopolitical turmoil presents a threat against other key energy sources gives natural gas fresh political, environmental and economic consideration.
As we mentioned in the Commodity Outlook, there are supposedly 324 new nuclear plants in the planning stage around the globe. Once the geologically active, tsunami-threatened sites are reconsidered, we suspect that many of those projects will be killed. The fact that there was a desire to build 324 new nuclear plants highlights the steadily growing global demand for energy, and that in turn suggests to us that there is indeed a real, not contrived, energy shortage.
At the risk of sounding like a broken record, we note that at this month’s lows, natural gas prices were only at 37% of their 2008 highs and only at 23% of their 2005 highs! It should also be noted that natural gas prices in terms of energy output are at some of their cheapest levels ever relative to petroleum. (Is anyone in Washington paying attention?) The really disturbing portion of the argument for the expanded use of natural gas is the fact that supplies inside the US have become almost burdensome and for the most part natural gas energy is a cleaner fuel than petroleum. While prices have recovered off the 2009 lows, they are still in close proximity to the cost of production at expensive, off-shore wells.
Lastly, it should be noted that natural gas futures have continued to maintain a large speculative short position. This could actually serve to fuel an initial wave higher in natural gas prices, especially if there is a shift in global energy policy in favor of natural gas. In conclusion, users of natural gas need to seek protection, and investors need to wake up to the prospects of an extremely undervalued asset!
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Video – Early Update – 2011.03.03
Rumors of a peace plan for Libya are bringing some stability to world markets. ECB reported the first positive Retail Sales readings in about 10 months. While rains across the Midwest looks to provide some relief to dry areas. Ongoing strikes in Argentina are providing support to the soybean complex.
Natural Gas – End of the Downtrend?
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Last week the natural gas market was presented with a headline story that suggested prices were poised for a decade of weakness. In a way, that should signal the beginning of the end of the natural gas downtrend. The analyst behind the near term bearish forecast was right-on with projections that supply was expected to continue to swamp demand. In fact, that analyst might also have been accurate by suggesting that the supply flow was so great that even robust demand might not be able to alter the fundamental condition very quickly. One could also suggest that a net spec and fund short position in natural gas of 170,000 contracts is not fully oversold, as the market saw a much bigger net spec short position of 242,000 contracts in the face of the sub-prime recession. In viewing current storage levels, one comes away with an equally depressing view. On the other hand, if there really is a world energy shortage, then we suspect that events prior to the end of the year will result in a sudden paradigm shift in the natural gas market. We think that the pattern of excess supply will be altered by a surprising change in one of two areas. 
The first and mostly likely change could come if the BTU price of natural gas falls substantially below the BTU price of coal or petroleum. With Brent Crude oil already trading $13 a barrel above WTI crude and the Middle East facing what could be the biggest political upheaval since the formation of OPEC, the seeds of a price-inspired change could have already been sown. The latest supply disruptions out of Libya prompted Italy to boost natural gas production to near full capacity, as they severed their dependence on Libyan gas imports. A less likely but still possible catalyst for change could come from the environmental or political front. In this scenario we could see some legislation to aggressively encourage the use of natural gas. But for the natural gas lobby to lose out to the petroleum lobby it would probably require a real shortage threat from the Middle East. With the idea that EPA is poised to issue new Mercury rules for US power plants soon, it is possible that environmental change will begin to foster public awareness. But it seems that a change in energy policy will only come by force and necessity.
Since we agree with the view that natural gas prices are set to fall until there is a structural in energy consumption, we suggest that traders use a strategy of shorting natural gas futures and buying multiple long-dated call options against that position. In the event that prices fall further, which would serve to shut off fresh production and in spark a push to alternative fuel sources, we can hopefully capture a decent portion of the premium we paid for the long calls by the break in the futures.
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Natural Gas – 2010.11.08
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By most classic, fundamental arguments the downtrend pattern in natural gas looks like it can continue. The lack of a weather threat, abundant US storage levels and a no imminent change seen in US energy policy suggests that the bear camp could retain control over prices for a while longer. However, with the spec and fund position in natural gas having recently moved to more than 92,000 contracts net short and some commodity funds reportedly moving to increase their allocation into natural gas, it could be a signal of an end to the downside pattern. While it might require some forward movement on tax credits for diesel engine conversions or news of a genuine effort to bring about a new energy program that would force the increased use of natural gas, the pressure to consider natural gas as a supplemental source of energy could be set to increase directly ahead, as nearby crude oil prices last week managed to climb back above $85.00 per barrel for the first time since May 13th. With the change in the Congress from the recent election and a temporary call for bipartisan action, it is possible that the tea leaves might be starting to line up for the bull camp in natural gas. Some will suggest that supply is so burdensome that Washington will have to play a role in any bottoming of natural gas prices. On the other hand, on the day of the big spike down low on October 25th, the natural gas market finally saw volume and open interest fail to confirm that new low move, and subsequently the market was able to climb back above a series of key downtrend channel resistance points. This could be the start of a technical bottom. If nearby crude oil prices were to rise back toward $90.00 a barrel or Congress were to toss around ideas of changing the energy policy, it could be enough to invoke a rather significant short covering rally.
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Energy Market Commentary – 2010.11.02
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CRUDE OIL MARKET FUNDAMENTALS: December crude oil sits in the middle of the overnight range as it digests central bank rate hikes from Australia and India and a weaker US Dollar. The reserve Bank of Australia surprised the markets overnight with a 0.25% hike in their interest rates to 4.75%, and that was seen as a key factor that drove the US Dollar to its lows of the session. Meanwhile, there are a number of key market-moving events in the US that are likely to keep crude oil prices confined inside a trading range. As far as crude oil supply is concerned, October Russian crude oil output was up 4.0% on the month and reached a new record high of 10.26 million barrels per day. This makes Russia the world’s largest oil producer in the world and outpaces Saudi Arabia by over 2 million barrels per day. Petrobras noted September oil production in Brazil was down 3.9% on the month due to maintenance work on three platforms. Despite the ample crude oil production, the market remains focused on external factors for more demand clues. Onto the demand side, there were comments from the IEA overnight that seemed to echo those from Saudi’s oil minister yesterday that crude oil prices between $70 and $90 per barrel was a “happy range” and were needed to stimulate investment in unconventional oil resources. While there is a lot of talk about where prices should be, the key wild-card remains demand and whether it justifies prices within their current range. Meanwhile, the government in the North Sea is calling for tax breaks to help support more oil extraction, and that nearly 75% of oil is at risk and likely to remain untapped. Back in the US, early estimates for this week’s crude oil inventory report are for a build in the range of 1.25 to 1.50 million barrels. Monday’s price action in December crude oil was bullish with a positive wide range reversal. The bulls have a slight edge this morning with key overhead resistance that lies at $83.95 to $83.25.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: December RBOB prices traded higher during the overnight session and seemed to retrace ground lost Monday afternoon. Perhaps providing some underlying support to RBOB prices were comments from a noted global analyst that forecasted French product inventories with a large deficit, and that is likely to require higher imports, lower exports and increasing refinery runs in coming months to overcome. Meanwhile, the US Department of Energy posted average gasoline price in the US on Monday that marked their second weekly decline to $2.81 per gallon. Early expectations for this week’s inventory report are for a minor build of 100,000 to 250,000 barrels after last week’s unexpectedly large draw of 4.4 million barrels. It appears that December RBOB prices are carving out a bear flag pattern on the daily charts that are also working on their 10th day of correcting the mid-October plunge. While it could take more time for this pattern to materialize, it is likely that today’s early morning trade could see prices climb back up for another test of $2.1250 to $2.130 resistance.
HEATING OIL: December heating oil traded higher during the initial morning hours, supported by a weaker US dollar and a slight improvement in risk attitudes. There is also some support coming into this portion of the product market on firm spot demand for European distillates, as France replenishes inventories. Meanwhile, there is a great deal of uncertainty in the outside markets with US midterm elections today, as well as the start of the two day FOMC meeting. Early estimates for this week’s distillate inventory data point to a sixth consecutive draw in the range of 1.0 to 1.3 million barrels. December heating oil had a wide range day on Monday that came on below average trading volume, and that seems to call into question to the early attack of $2.30 resistance. It appears that December heating oil is locked within a large trading range with topside resistance at the $2.30 area and downside support at $2.220. Forced into a position this morning, we would look to sell on strength up into $2.30 resistance, looking for a downside retest of $2.220.
TODAY’S ENERGY MARKET GUIDANCE: The question for the markets is whether or not early strength can be sustained.
Energy: Crude Complex Remains Vulnerable to Headline Risk
by Dave Hightower on September 29, 2011
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CRUDE OIL MARKET FUNDAMENTALS: November crude oil made an overnight drive below the $80 level and has since rallied nearly $3.00. It appears that the upside reversal action was fueled by a rally in global equity markets and gains in the Euro currency. The German parliament approved power changes in the Eurozone bailout fund, and that is seen as a positive step toward resolving the European debt crisis. This progress has boosted risk appetites and provided a level of support for risk assets like crude oil, and with the tight correlation between crude and equities, it is possible to see more upside follow through this morning. November crude oil has recouped some of the disappointment from yesterday’s larger than expected EIA inventory build. EIA crude stocks rose 1.915 million barrels, but they remain 16.897 million barrels below year ago levels. Also, crude stocks stand 12.842 million barrels above the five year average. Crude oil imports for the week stood at 9.702 million barrels per day compared to 8.351 million barrels the previous week. The refinery operating rate slipped 0.5% to 87.8%, which compares to 85.8% last year and the five year average of 84.01%. There were reports earlier this morning indicating that a key Singapore refinery has experienced another fire, and that has reduced capacity around 350,000 barrels per day. This could be a factor that tightens up the market in the region and provide an added level of support this morning. Talk of a potential strike at a French refinery appears to have been resolved overnight and production has returned back to normal levels. The technical action in November crude oil turned negative with yesterday’s action, but appears to be stabilizing. We see an upside pivot level for November crude oil at yesterday’s midpoint of $82.56. A further advance above that level this morning would set the stage for a further push toward $83.80.
PRODUCT MARKET FUNDAMENTALS: GASOLINE: November RBOB prices broke down below yesterday’s inside day trading range last night but has since turned back into positive territory. A rebound in crude oil prices, weakness in the US dollar and improvement in risk attitudes this morning have helped inspire the turn higher. Yesterday’s EIA weekly gasoline stock report showed an increase of 791,000 barrels, which was slightly below expectations. Meanwhile, current inventories are 7.723 million barrels below last year, but 10.854 million above the five year average. Average total gasoline demand for the past four weeks was down 2.43% compared to last year. Gasoline imports came in at 541,000 barrels per day compared to 692,000 barrels the previous week. Upside reversal action in November RBOB this morning favors the bull camp for a further advance to $2.6450. There is downside support at the September 27th gap of $2.5441 to $2.5284.
HEATING OIL: November heating oil prices broke down to a new three session low overnight that challenged Tuesday’s gap support at $2.8025. The market was able to rebound from that level, helped in part by a positive turn in risk sentiment and US Dollar weakness. Another positive force offering support in the distillate market comes from an increase in diesel demand from the agricultural sector. Wednesday’s EIA report showed distillate stocks rose 72,000 barrels, which was quite a bit less than expected. This brought current inventory levels to 15.911 million barrels below last year, but 6.656 million above the five year average. Distillate imports came in at 150,000 barrels per day compared to 158,000 barrels the previous week. Average total distillate demand for the past four weeks was down 1.04% compared to last year. EIA heating oil stocks fell 770,000 barrels and are 11.555 million barrels below last year. The upside reversal action this morning favors the bull camp and points to a test of yesterday’s high at $2.8970.
TODAY’S ENERGY MARKET GUIDANCE: The crude oil complex extended yesterday’s late day sell-off into the overnight session, but has reversed those losses this morning. The crude oil complex faces a number of catalysts this morning, including a decision by European auditors to approve another round of aid for Greece and a final reading on US Q2 GDP. The complex remains vulnerable to headline risk. A weaker than expected read on this morning’s GDP number has the potential to ignite global recession concerns and pressure energy markets down toward last week’s low.