The biggest tell from last Thursday’s EIA report was a 75 Bcf delivery in the Producing Area. That was the third largest draw on record. An 89 Bcf draw in January 2008 and a 93 Bcf delivery in January 1997 are the only reports when the Gulf has seen larger deliveries.
In this light, we are likely seeing the residue of the 15-month purge in vertical rigs in combination with above normal heating demand and improving year-on-year demand from the industrial sector. Furthermore, per the EIA’s latest updates (914-survey and Natural Gas Monthly or NGM), gross gas production in the lower 48 U.S. states decreased by 2.2% in September to an eleven month low of 61.83 Bcf/d.
As such, the 3.4 Bcf/d of supply that has gone missing over the last two EIA reports (actual vs. consensus) is a potential signal that the lack of demand up through September was greater than previously thought. The extant blast of heating demand is now pushing the demand curve to the right.
Three caveats for the bulls to consider:
1) Spare capacity in the form of deferred production.
Estimates vary, but industry sources are in agreement that there is a significant number of nonconventional wells that have been drilled this year but not completed, either because of a lack of takeaway capacity or because operators are simply waiting for an opportunistic rally, such as the one we are currently in, to bring non-completed wells on-line.
a) On this note, one of our clients, a major service company specializing in well completion and hydraulic fracturing, dropped us a note over the weekend... “Relative to the discussion of when a lot of the “non-completed wells” are being brought on line. One thing is for sure, some of it is happening now. There is a huge surge in completion activity occurring right now. Most services are sold out through the end of year and early January.”
b) Furthermore, other clients suggest that a considerable amount of forward production was sold back in September and October. If accurate, then we expect to see a commensurate knock-on to onshore production in the Lower 48 per next Tuesday’s release of the EIA-914 Survey for October.
2) It's not all that it appears: Apropos yesterday’s downward revision to third quarter GDP growth (from 2.8% to 2.2%), the initial economic recovery (financed by a lot of government borrowing) is not as sharp as the second-derivative crowd had hoped for. Keep in mind, a derivative measures the rate of change of a function (the slope of the tangent to the function’s curve). The second derivative (the derivative of the derivative) measures the rate of change of the rate of change.
We will not argue the economy is improving, i.e. we are at a point on the curve that is indeed, concave upward (see Chart of the Day in today’s issue of ). However, instead of a “smile”, the concavity looks more like a nervous grin. In other words, the insipient recovery is less good.
3) Nearby weather forecasts (into the first week of 2010) remain bullish, i.e. much below normal temperatures throughout key gas markets in the Midwest and East.
a) Be that as it may, according to the latest seasonal outlook for North American heating demand in the first quarter (released last week), the IRI (International Research Institute) forecasts a 40% probability that temperatures will fall into the coldest third of years throughout market areas in the Gulf, Southeast and Mid-Atlantic. That’s bullish.
Conversely, there is a 40% probability that temps in the largest residential natural gas market in the U.S., Chicago, will fall into the warmest tercile. That is indeed, bearish.
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.