Schork Oil Outlook: Behind That Freefall

Nobody goes there anymore. It’s too crowded.

Before we get into the details, keep in mind that year-on-year comparisons over the next several EIA and DOE reports will be skewed owing to shut-ins related to last year’s hurricanes Gustav and Ike.

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According to the Minerals Management Service, for the corresponding week from a year ago, 46.6% of the 717 manned platforms and 28.1% of the 121 rigs operating offshore in the Gulf were evacuated. As a result, 79.8% or 5.9 Bcf/d of gas production and 90½% or 1.2 MMbbl/d of oil production was shut-in.

Yesterday the EIA reported that working gas in underground storage increased by 69 Bcf or 2.1% to 3.39 Tcf for the week ended September 04th. This report ushered in the third and final phase of this refill season (see below). Injections this month tend to range in between 75 and 100 Bcf. This particular report incorporates the Labor Day holiday. Therefore, it tends to be the largest since the 04th of July holiday. To wit, demand from the Grid plunged 6% last week to 83,129 GWhrs. Therefore, in this light, yesterday’s reported injection was very low. But, was it bullish? Of course it wasn’t.

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As noted in yesterday’s issue of The Schork Report, several Northeast pipelines started issuing operational flow orders (OFOs) in an apparent attempt to limit shippers exceeding their contractual limits.

In addition to the Labor Day holiday, last week’s report also comprised the ratchet clause rollover. Injection ratchet clauses in the East require shippers to inject working gas through scheduled stages in order to preserve operational integrity. By September 01st no more than 80% of storage can be filled.

According to the latest estimate from the EIA, maximum storage capacity in the East is 2.178 Tcf. As of two reports ago, week ended August 28th, estimated storage was 1.78 Tcf. That calculation was already 81½% of capacity or 1½ points above the ratchet. In other words, storage in the East over the last two reports was at operational capacity. Thus, the OFOs were a likely means to hold storage below the 80% threshold.

What’s so bullish about that?

Absolutely nothing.

Thus, yesterday’s rational for buying gas post EIA brings to mind Yogi Berra’s reason for why he stopped going to Ruggeri’s, a St. Louis restaurant: “Nobody goes there anymore. It’s too crowded.” I.e., nobody is putting gas into the ground. It’s too crowded.

Anyway, in the East inventories through September 04th rose by 55 Bcf. It was the twenty-third injection of the season, the sum of which is 1.19 Tcf. The seasonal disposition in refills is still in deficit, i.e. injections are running around 3% lower as of last Friday. Nevertheless, injections between now and the end of October need only average 68% of the five-year average to take out the old record, 2.04 Tcf; injections have to average 113% of the five-year average to hit capacity.

On now:

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  • In the Producing Area storage rose by a smallish 13 Bcf (+1.2%) to 1.099 Tcf. The report was the twenty-sixth straight injection of the season. In that time, storage has risen by 409 Bcf or 11% below the seasonal norm. Nevertheless, supplies are currently 26 Bcf above the previous all-time high and are within 9% of capacity (1.202 Tcf).

    Thus, it is the opinion of the analysts and editors at The Schork Reportthat the freefall in Henry Hub prices at the end of last month and beginning of this month was a manifestation of east-bound shippers contractually prevented from pushing gas up the pipe at the end of August, along with sparse GoM storage capacity.


    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.