Fri Jun 16th, 2006 at 07:18:06 AM EST
Before you flame me
- I fully believe the era of cheap energy is mostly over (I think $3/mogas is pretty cheap on a historical basis).
- Barring the invention of a magic bullet, energy prices will be significantly higher in 10 years than today
Then why the diary?
I offer the following just so people understand that there will not be a straight line path from here to there and why the "market" may not agree with "peak oiler" visions. We all need to stay nimble as orthodoxy of any sort can prove to be expensive. Prices could well be much lower or much higher this time next year.
US Natural Gas was $15/MMSCF ($90/bbl equivalent) this fall/winter past. The late summer hurricanes shredded production capability as we all know. Typical speculation/panic buying drove prices of both oil and gas to very high levels. Predictions of gas piercing the $100 oil equivalent price were common.
We got lucky with a mild winter, aggressive restoration of supply and price led demand reduction. As a result, nat gas prices have collapsed back to $6.5/MMSCF ($39/bbl equivalent) even while crude prices remain near the highs. The key difference is nat gas is much more a local mkt insulated from international political problems.
A WAPO article outlines the current nat gas situation:
At the end of last week, natural gas in storage amounted to 2.4 trillion cubic feet, up 23 percent from a year earlier and 38 percent higher than the five-year average,
that's huge. As Jerome has shown, natgas production curves decline more steeply than oil fields so drilling rates are a key indicator of near term supply. The EIA has a data series showing proven reserves and another showing Prices.
The data show a real drop off in proven reserves from the early/mid 80's when prices were relatively high to the 1990's when prices were much lower. From 2000, when electricity markets really began to lean heavily on natgas and prices responded, reserves have been growing. Lots of holes are being poked.
By OGJ editors
HOUSTON, June 9 -- US drilling activity continued its slow growth with 1,661 rotary rigs working this week, 4 more than the previous week and up from 1,339 during the same period last year, said Baker Hughes Inc.
The bulk of the increase was in land operations, up by 9 rigs to 1,539 working. Activity in inland waters gained 1 rig to 25 drilling. Offshore drilling declined by 6 rigs to 97 in US waters, including the decrease of 4 to 92 in the Gulf of Mexico
Rig data from Baker Hughes (large PDF!)
This data shows just how much rig activity can vary. When prices were this high in 1981, the USA had almost 4000 rigs in action 5000+ worldwide. Today we have about 1650 (3000+ worldwide) and in 1998 when OPEC were fighting over price we were down around 800 (1800).
these rig counts are oil and gas combined, but gas is generally affected by both as about 1/4 of nat gas production is a byproduct of oil production.
The lesson here is like most commodity markets, gas is volatile. And while the oil industry is slow to react, they do react eventually and usually over-react damaging their profitablity (back handed proof that if they collude, they don't do it very well).
Will gas spike this fall? If the hurricane season spares the USG facilities, we could see the opposite. Storage capacity could hit max, leaving producers nowhere to put the gas until winter comes. After that, it's just weather.
Last fall's Katrina price spike has not really abated. We're still sitting at $70/bbl. But there are other reasons we're not seeing any relief.
- Venezuela lost 1 mmbd production when Chavez broke PDVSA's resistance to his rule. They've never gotten back up to their prior production peak.
- Nigeria has roughly 800 MMBD off line due to internal unrest. The locals are pissed that all the money is sent to Lagos (and then Switzerland) instead of staying in the production area. They're killing folks to keep the production levels down.
- Iraq is still bumping along well below their pre-war capacity. Mr. Wolfowitz's 5 MMBD production levels turned out to be just an opium dream.
- General world paranoia that the worst president ever will invade Iran and risk the entire PG production due to military action at the Straits of Hormuz. ($150/bbl in a heartbeat)
- Hedge funds are actively investing money in longer dated futures shifting the price band upward. It's a market. More buyers, higher prices.
US crude stocks in commercial hands are about 342 million bbls. That's high relative to the 5 yr average. But when you look longer term, we've got less in tank than in the early 80's. Moreover, when you consider days cover we've got 342/16 = 21 days of crude runs. Back in 1982 we had roughly 350 MM bbls with just 12 mmbd crude runs or more like 30 days cover.
Why? Oilcos got tired of tying up so much working capital in crude oil. Especially as that capital was tied up in the refining end of the biz which was making little to no profit. Consolidation of refiners and just-in-time inventory control both came to pass. The number of refineries was reduced, tankage was bulldozed to keep line personnel from using it etc.
As you might expect, refiners are much more nervous about covering their needs and are forced to pay up for crude even with decent stock levels. Prices do show that there is no prompt shortage as front month futures are below outers (contango)
See: NYMEX data (may have to go to the main page and click thru accepting the NYMEX's data delivery terms)
Where are we going on price? Ask Bush. If his broker tells you he's buying calls, watch out Iranians. If he's flat, call the hurricane prediction centers.
One very contrary opinion comes from BP. It's one we should all consider as they actually have thinking management unlike the rest of the majors. They're calling for a decent chance that we head back to $40 in the medium term.
Capacity continues to grow. US capacity damaged last year is basically back up and running with mogas production back at last year's highs.
Still the spread (or crack) between mogas and crude is wide at $16/bbl. People are still worried that we cannot cover demand which is not dropping off much despite the price increases. Stocks are building back into the 5 year average range, but we've no great cushion forming.
Better slightly down than up, year on year, but so far the demand reduction I expected hasn't been seen. The US consumer still has enough money in pocket to buy gas even though we all whine about it.
Longer term, there have been a bunch of new refinery projects announced. The Saudis alone have announced 2 new 400 MBD refineries.
Each week the OGJ reports on the talk in the trade. In the latest:
Interesting that the Venezuela are considering 3 new ones at a total of 700 MBD. If all these projects go, we'll repeat 1979-82. Massive expansion followed by margin collapse due to overcapacity.
Conclusion -- who actually read this far? I've no great insight other than the energy markets are far more complex than meets the eye. Don't make any sucker bets.