Energy prices were mixed yesterday. The liquids maintained Monday’s gains, but could not parlay them any higher. With a lack of macro releases this week, traders will be looking very closely at today’s DOE numbers. The crowd is looking for a 1.4 MMbbl build in crude oil, while last night the API reported a 1.1 MMbbl build. Meanwhile, natural gas gave up almost all of Monday’s gains — so much for the comeback…
Despite Monday’s strength in natural gas, traders remain skeptical.
Analysts at concur, as the EIA’s monthly storage figures, which provide a detailed breakdown of natural gas disposition, are going through several game-changing revisions, making comparisons and analysis difficult.
Firstly, January sees the EIA carry out its annual revision. For 2010, this includes increasing the number of companies sampled; tweaking the ratio used to align reported production to total production for the Other States group; and moving the timestep used for the estimation model. According to the EIA, these changes lead to a net error in estimated production of <1%, a small error — but enough to make December to January comparisons unreliable for short-term trading.
What’s more, starting with this month’s release (data for February), more fundamental changes will take place in how the EIA collects data. The company sample will be revised monthly instead of annually; estimation of non-sampled companies will use data that is 6-18 months old (currently the data used is 2 to 7 years old); and ratio calibration will be updated monthly.
The Wall Street Journal reports that these changes will lead to lower reported production levels. Currently the EIA samples around 225 large, public companies (which account for roughly 90% of total production), and assumes the smaller firms move their production in line with the majors. In reality, this is often not the case as smaller production reacts to the market at a quicker rate. Thus the recent drop in prices will encourage smaller, cash flow driven producers to reduce output in an attempt to reduce fixed costs.
There are other corollary effects such as the take-over of a small producer by a large company potentially leading to double counting. February’s numbers (and a revised set for January) will come out at the end of this month; can we expect prices to trade sideways until then? According to the EIA’s latest Short Term Energy Outlook (STEO), May is expected to settle at $3.99, just 3.3% below last night’s settle.
Further out, the STEO expects natty to average $4.44 in 2010, bottoming out at $3.91 in August before rising in line with winter demand to $5.19 by December. The EIA revised the annual average down from $5.17 in last month’s outlook due to a 2 Bcf/d in domestic natural gas production for the year.
At this point, analysts at are closely watching whether the market is going to have a Beatles “twist and shout” reaction to the EIA revisions, or give in to the band Alabama, “[we] feel changes comin’ on.”
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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.