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Current DateTime: 02:59:51 28 Nov 2009
LinksList Documentid: 30626172
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Schork Oil Outlook: We're Still Waiting
Published: Tuesday, 3 Nov 2009 | 10:33 AM ET
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By: Stephen Schork, Editor, The Schork Report



Stephen Schork
Editor of
"The Schork Report"

Last week the EIA released its latest EIA-914 Survey and its Natural Gas Monthly Report.

Key takeaways for August include:

Offshore production in the Federal Offshore Gulf of Mexico (GoM) plunged 5.3%. Average rig counts in the Gulf dropped by a fifth in August; from an average of 37 in July to 30 one month later. Rig counts a year ago averaged 64 in August 2008.

Onshore production in the Lower 48 increased by 1.6%. Thanks in large part to a 5.1% rebound in Wyoming (following extensive shut-ins related to gas plant maintenance), overall production rose to 56.13 Bcf/d.

Year-to-date, delivered volumes to industrial customers have fallen by about 12%, from an average of 18.5 Bcf/d through the first seven months of 2008 to an average of 16.4 Bcf/d through the first seven months of this year.

Bottom line, we are still waiting for that much talked about, yet to be seen, knock-on to production from the cut in rig counts. Precisely, the year-on-year deficit in gas rigs has been greater than 50% since May; yet onshore production is down only 0.5% through August.

No doubt, the proliferation of non-conventional drilling and a rebound in LNG has been enough to offset a large portion of shut-in conventional output. Furthermore, as the EIA noted in its October STEO, “Forecast Henry Hub natural gas spot prices in this Outlook are about $1 per MMBtu lower than the NYMEX futures prices. While considerable uncertainty in the market persists, this difference reflects EIA’s expectation that a significant volume of natural gas production remains economic at prices below the current NYMEX 2010 futures prices.” [Emphasis The Schork Report]

As such, after a brief rebound, key cross-seasonal spreads (Mar’10/Apr’10 and the Winter/Summer spreads) corrected lower in October, i.e. the nearby contracts weakened against the deferred contracts. That typically happens when the market’s concern regarding seasonal supplies eases… and this is a bearish fundamental.

_________________________

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.

Topics:Oil | OPEC
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