More stormy weather
Posted by Heading Out on August 24, 2005 - 3:26pm
Tropical Storm Katrina, the 11th named storm of the year, is forecast to reach hurricane strength before crossing Florida August 26 and moving into the Gulf, the Miami-based National Hurricane Center said. The Gulf of Mexico accounts for 24 percent of U.S. gas production and 30 percent of oil output.
Hot weather pushed U.S. cooling demand to 14 percent above normal last week, according to the National Oceanic and Atmospheric Administration. Oil followed natural gas higher because some factories and power plants can switch between petroleum-based fuels and gas depending on cost.A year ago it was similar concerns about weather, unrest in Nigeria (to which we can now add Colombia, Ecuador and others) and projected downturns in production from Iraq that led to increased prices up through the end of the year. One wonders if there are any rays of hope to suggest that the situation has done anything but get worse in the interim? It is interesting to note in the story on Ecuador that:``When crude oil goes higher there's upward pressure on natural gas,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte. ``We could easily see $11-plus natural gas this winter if the weather is cool and injections don't increase.''
Gasoline supplies plunged 3.2 million barrels to 194.9 million last week, the eighth-straight decline, the Energy Department said. Stockpiles are at the lowest since November 2003. A fall of 1.5 million barrels was expected, according to the median of responses in a Bloomberg survey.
U.S. consumption of the fuel rises between late-May's Memorial Day holiday and the Labor Day holiday in early September, when motorists take to the highways for summer vacations.
Crude-oil supplies jumped 1.9 million barrels, the fourth- straight increase, to 322.9 million in the week ended Aug. 18, according to the report. Stockpiles are more than 10 percent higher than a year ago.
In a bid to alleviate that situation, Ecuadorian officials were in Caracas Tuesday negotiating with their oil-rich Andean neighbor about "borrowing" some crude to make good on Quito's international commitments. Their trip came after Venezuelan President Hugo Chavez acceded to Ecuador's request for help in this matter.Hmm! I wonder where they are going to get it from, if the OGJ figures are more accurate than the EIA ones (there is a difference of about 500,000 bd last time I looked).
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With demand and supply so tight, this has all got to be adding up.
Look at all the variables:
Are the inventory reports accurate? Are they high, low, both?
What exactly is in inventory (our post earlier about light sweet vs sour crude)
What will the weather do?
Have we even recovered from Ivan and Dennis in the gulf? (Hello, Thunder Horse, can you hear me now?)
What will Opec do?
What about other countries?
The China Syndrome
etc etc.
How anybody can make sense of this mess is amazing. I'm amazed our predictions aren't off further than they are.
I don't want to try and predict this winter (see my list of variables) but I'm fairly certain that next summer we'll set new record gas prices. And next summer we'll have a whole new batch of excuses (Venezuela, Iraq, Iran, Russia, China, Saudis, etc) about why oil is high and how it's expected to change "soon."
It seems clear that the settle price in the daily and futures markets are not set based on some "deep" understanding of what is going on. These prices are based on short-term data like this week's hurricane, pipeline bombing in Iraq or Ecuador, current inventories versus perceived demand, etc.
Given the horrendous uncertainties in the market, which we can't do much, if anything, about, the commodities market is like Democracy--the worst possible solution, except for all the others that have been tried.
Prices aren't high on Decembers contract because of today's storms; they are high because of perceived scarcity and continued supply/demand issues. How much pure speculation plays into this is irrelevant - the market simply... is. All comers can play, some will win and some will lose.
As for demand - 21.3 M bbl/day is a new 12 month high, following on last weeks 21.2 new 12 month high and a trend from may. The interesting thing is jet fuel demand dropping off sharply, more than last summer but I've not gone back further to look. Chart:
http://www.trendvue.com/charts/2005/08/tv20050824-16.gif
Demand still above projections, esp. distillates:
http://www.trendvue.com/charts/2005/08/tv20050824-30.gif
CL and next two months of spread
http://www.trendvue.com/charts/2005/08/tv20050824-28.gif
So far Crude is acting like any strong market in an up trend. Eventually all up trends pause and ultimately all up trends do reverse, even for a little while. This one continues to find new levels of support. We can assume that 58 is now at least intermediate support (meaning prices are less likely to trend lower than 58 for now) and its certainly feasiable that last week's low may become that next highest level of support. In fact, if events conspire to push price down for more than a day or two under last week's low, we (technical analysts and traders) will assume that the trend has bent, reversed, for a period of time. We've not seen that since the spring in CL, and except for perhaps a Sept - Oct lull, I would lean to not seeing a reversal through the end of this year.
On the other hand, when price jams up rapidly, the opportunity rises for a fast reversal of lasting measure. Has crude ramped up "fast" - perhaps on a percentage basis compared year to year, but its not extraordinarily fast if indeed supply crunch is on the near term horizon. One could argue in that event that price is acting very rationally indeed.
Heads up:
Natural Gas
http://www.trendvue.com/charts/2005/08/tv20050824-29.gif
Now this one has been rising in parabolic fashion and that is always a concern. Lifted in part by oil as usual, there's been extra lift on supply concern. A bit of self-reinforcing feedback loop here too - its highly unusual to see these prices in the summer! Fear is driving buyers in subsequent months. If prices remain anywhere near these levels into the deep of winter, 12 - 14$ NG may be seen at peak usage. That's going to hurt anyone heated by NG in cold areas of the N.A. continent with heating bills 4 - 7 times normal (as compared to a low cost year like 2002 if I recall correctly).
To put that in context a drafty old house in the middle of a cold winter might have costed 150$ a month to heat and will now cost $400 - $1000 during those one or two cold months. I have a drafty old house :) - last year we cut our heating bill in half by very carefully using heat and... dressing warmer indoors...
Better invest in sweaters. We have.
I know I read a couple years ago where Simmons was concerned about how many power plants were switching to Natural Gas (at least here in Texas and nearby). It's cleaner than coal, sure, but then with declining production you never have a chance to refill the stocks during the summer since electricity demand goes way up.
My gas bill this month (we use it for hot water, cooking, and heat): $2.00 for gas, $9.00 "customer charge", and $18.00 "gas cost adjustment". And this is a month where we don't really use any gas (I too have a drafty older house but fortunately moderate winters)
The west coast of Canada is fairly temperate - not too cold in the winter but does get some snow and below zero weather. Damp. Heating is unavoidable.
Cost of gas will show up in vegetable prices in the winter, at least for "hothouse" produced goods (we have a lot of tomatoe and cucumber grown under glass... they are going to be pretty pricy, as will food shipped up over the winter.