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Schork Oil Outlook: What a Difference a Month Makes!

Recently released monthly figures from the EIA (914-Survey last Friday and Tuesday’s NGM) underscore how fast the landscape in the natural gas market can change.

First, according to the EIA’s 914-Survey, natural gas withdrawals (gross) in the Lower 48 U.S. dropped by 0.7% in December to 62.82 Bcf/d; November 2009 production was revised up by 0.2% to 63.28 Bcf/d.

Next, per the EIA’s Natural Gas Monthly (NGM), total U.S. (incl. Alaska) gross withdrawals of gas from wells in December narrowed by 1.2% to 71.94 Bcf/d, November’s figures were revised up to 72.85 Bcf/d.

The pullback in production was attributed to a combination of unscheduled maintenance (due to cold weather) at El Paso’s Pecos River Compressor which shut-in upwards of 0.385 Bcf/d (out of 1.206 Bcf/d) of capacity as well as a spike in implied gas furnace demand. To wit, production in New Mexico posted the largest month-on-month decline (6.1%) from 3.96 Bcf/d to 3.72 Bcf/d. At the same time December 2009 temperatures for the contiguous United States averaged 30.2°F, which is 3.2°F below average.

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The EIA reports for December were in stark contrast to what we saw for the month before. Then, a jump in November production, plus very mild weather allowed for more gas to go into storage (underground and LNG tankage) than come out, 1.05 Bcf/d. That was only the second such occurrence on record (a/o 1973). Then, in December 22.54 Bcf of gas was withdrawn. That was the highest draw for the month since 2000 and the third highest since 1973.

However, the large draw in December cannot be blamed solely on the weather. The monthly figures break down demand by end user, which can be useful for detecting seasonal and economic trends.

For instance, deliveries to industrial consumers are less sensitive to seasonality due to fixed manufacturing costs, while deliveries to electrical power generating consumers and residential consumers react sharply to colder (or warmer) weather. 2009 until November seemed to show a recovering economy in seasonal trends. Residential demand in the summer was 2% higher year-on-year and October saw a 16% y-o-y increase. As expected, November was slightly lower due to milder weather.

The industrial sector was weaker but still encouraging — demand in July saw a 10% deficit to 2008 and 11% to the 2004-07 average, but this gap was closing and by November demand had recovered to just 2.2% lower y-o-y. Given December’s cold, we expected strong residential demand and middling industrial demand. But according to the DOE, residential demand for December was actually 0.96% lower than 2008 while industrial demand was 7.4% higher.

The reaction at The Schork Reportis mixed — it is always encouraging to see higher industrial demand but keep in mind December 2009 was much colder than 2008, so why did residential demand drop? The obvious answer would blame cost cutting measures forced by lower discretionary income. But the real answer is, we believe, not so gloomy.

When forecasters first called for an especially harsh winter, we said that the key point of contention would be not if the snow fell, but where the snow fell. The East Coast saw heating degree days in December 5.0% higher y-o-y, while New England and the South Atlantic saw 6.3% and 20.3% increases respectively. However, keep in mind, the bulk of residential demand hales from the North Central states — Illinois, Michigan, Indiana etc. and these states saw 6.07% fewer heating days.

Even though a state blanketed by snow like New Jersey saw a 6.4% increase in demand, this was masked by the 8.3% average decrease in demand from the North East Central, which accounts for a much larger proportion of the natural gas market.

The bottom line is that natural gas may yet be more bullish than the market seems to suggest, consumers can still respond to the weather when necessary. Meanwhile positive manufacturing orders and non-farm payrolls for January suggest demand (industrial) will remain strong even after the winter ends.

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