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Schork Oil Outlook: Some New Hope For Nat Gas Bulls

Stephen Schork, Editor, The Schork Report

Yesterday the EIA reported that working gas in underground storage increased by 20 Bcf or 0.5% to a record 3.833 Tcf for the week ended November 13th. It is sufficient to say that this is a huge injection, given extant storage and transportation constraints. As a result, underground storage rose to an eighth consecutive record.

Key takeaways from yesterday’s EIA report:

  • The average pre-report consensus was an injection of 19 Bcf; the five-year average movement is a 1 Bcf delivery with a seasonal error of in between a 7 Bcf delivery and a 5 Bcf injection. Consequently, underground storage edged to within 1½% of EIA estimated capacity.
  • The countercyclical injection is glaring when juxtaposed with shut-in production related to Ida. According to the Minerals Management Service (MMS), the amount of gas production offline in the GoM peaked on Tuesday, November 10th at 29% or 1.957 Bcf/d. For the four days (November 09th to 12th) over the EIA reference week for which the MMS provided updates, a total of 4.6 Bcf of production was shut-in.
  • The market is now in a transition from whence builds segue into deliveries. By all accounts, November is as bearish as October was bullish, hence gas is still getting into the ground. For instance, heating degree days (HDDs) in Chicago were 26% below normal through the EIA reference week; in New York City HDDs were 36% below.

Through the first five days of this EIA week, as of Wednesday, HDDs were running 32% below normal in Chicago and 30% below in New York. What’s more, as of November 18th Chicago temperatures averaged 47.7°F month-to-date, a whopping 14% above normal.

Natural Gas

As such, odds are short we will see another injection in next week’s report.

Beyond that, the latest outlook provides some hope for bulls. NOAA is forecasting below normal temps towards the end of this month and into the beginning of December in the Mid-Atlantic market. Normal temps are expected in the New England and Midwest markets. It’s not much, but that is all the bulls really have to go on at this time.

To wit, on Tuesday the Federal Reserve released another month of rising, but lackluster industrial production and capacity utilization figures. October’s of real output in a base year, currently 2002) was up a paltry 0.1% from September to 98.6%, much lower than the 0.3% prediction of the crowd. In comparison, October 2008 saw IP at 106.2% while the average for the 2003-07 timestep was 107.00%.

The breakdown provides some optimism, with chemical production up to 105.85%, its highest level all year and only around 2% below the 2003-07 timestep. Another potent indicator for the American economy, Primary Metal production, was more mixed, rising for the fifth straight month to 75.7% but still 18.8% lower year-on-year. Worse, it is 25.1% lower than its 2002 value.

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It’s no surprise that we’re behind the boom years, but should IP really be behind 2002, when the economy was slowly recovering from the dot com bubble?

What does that say about the current recovery, or lack thereof?

Capacity utilization followed a similar trend, with total utilization up a paltry 0.2% to 70.65, its lowest October value since records began in 1986. Metal CU has never been this low and chemicals CU were lower only in 2001.

When last examined the IP figures in mid October we also looked at rising commercial paper issued, stating that “[An increase in IP and CP] coupled with a skyrocketing equities market may technically signal that the recession is over. However, analysts predicting the worst is over may be ignoring the threat of deflation.”

Since then, IP and CU continued to rise, and unemployment continued to rise, but the amount of commercial paper has dropped for two consecutive weeks, last week seeing its largest percentage drop since May to settle at $1.24 trillion from a peak of $1.38 in October. The good news is that this will parlay deflationary tendencies, the bad news is a lack of borrowing could be behind the weak industrial production numbers, implying significant failure in the stimulus policies.

The bottom line is that industrial production and commercial paper were weaker than they should have been in a recovery, and yet the NYMEX complex moved higher at the start of this week.

Underground storage of working gas is within 17 Bcf or 0.4% of the EIA’s end-of-season estimate and within 56 Bcf or 1.5% of estimated peak design capacity. As such, the inn is full. Therefore, a significant draw this winter is required. However, the prospects of such an event occurring appears remote.

Industrial demand is what is and since everyone is now waiting for “… the other shoe to drop…” in the commercial real estate market, we then have to assume demand from that sector will lag as well. That leaves residential space heating demand as the primary driver to expunge excess molecules from the market this winter.

In this vein, the NYMEX end-of-winter Mar’10/Apr’10 spread closed last night at a life-of-contract low; the ratio is now 0.992. In other words, traders on the NYMEX doubt the market’s ability to burn through the current glut this season.

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

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