Schork Oil Outlook: Nearby Fundamental Picture Appears As Bearish As Ever

As expected underground storage in the Gulf surpassed last year’s 974 Bcf peak (14-Nov-08). In other words, there is now more gas in the ground than at the start of last winter’s heating season. Therefore, Northeast utilities, which store gas in the Gulf, have tremendous flexibility this summer to manage peak a/c load…assuming we’ll actually have to turn our air conditioners on this summer (i.e. temperatures where we are in the Philadelphia area have averaged around 66°F over the five days… or about 7 degrees below normal).

In the East, where the bulk of the nation’s winter storage facilities are concentrated, inventories rose by a seasonally large 73 Bcf or 6.7%. It was the eleventh injection of the season, the sum of which is 523 Bcf. The seasonal disposition in refills is still in deficit, i.e. injections were currently running around 2.3% lower as of last Friday. But, that shortfall has improved every single week since the start of the season. More importantly, the year-on-year surplus increased both on an outright basis to 167 Bcf and on a percentage basis to 16.8%.

Finally, out in the West supplies increased by 13 Bcf or 3.3%. That is a seasonally normal injection. The year-on-year surplus increased to 129 Bcf and the percentage slipped from 47.9% to 46.2% as a result. Injections this season now sum 132 Bcf, which is more than 9% above the norm.

Bottom line, the nearby fundamental picture appears as bearish as ever. Underground caverns, mines and aquifers are brimming. The 5-year average surplus (interpolated) increased by 79 bps to 22.6% or 472 Bcf.

According to an article in the New York Times, estimated natural gas reserves rose to 2,074 Tcf in 2008, from 1,532 Tcf in 2006. “New and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resource – especially ‘unconventional’ gas – which, not that long ago, were considered impractical or uneconomical to pursue,” said the report’s principal author, John B. Curtis, a geology professor at the Colorado School of Mines.

Indeed, vertical rigs have accounted for the bulk the decline in the Baker Hughes count (see today’s Chart of the Day). Vertical rigs, which tend to be associated with conventional fields, have dropped by two thirds or 664 rigs. This drop accounts for 58% of the 1,159 rigs that have been pared since the September peak. On the other hand, horizontal and directional rigs, which generally represent unconventional plays, have dropped by a combined 491 rigs or 42% of the total decline.

As a result, vertical rigs share of the total count have dropped from around 50% to 37%, while the share of horizontal rigs have increased from 30% to 43% and the directional share has held steady around 19%.

Therefore, the extant purge in rigs notwithstanding, analysts at The Schork Reporthave yet to identify a commensurate knock-on to production.

Bottom line, there is a lot of gas above ground and a lot more gas below it… and the curve on the NYMEX reflects this fundamental accordingly.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.