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Schork Oil Outlook: We're Still Waiting

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.

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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.