Schork Oil Outlook: NatGas Finds More Support

An article in Gulf News on Friday reported that Qatar will now join Russia in cutting back natgas output this year. The country’s two largest LNG producers, RasGas and QatarGas, are expected to idle two thirds or 41 million tons per year (?2.0 Tcf) of Qatar’s export capacity of 61.5 million tons per year (?3.0 Tcf).

Closer to home North American producers are attempting, to little effect thus far, to do the same. Per the latest Baker Hughes report the ratio between gas-to-oil rigs in the U.S. (1.701 as of last Friday) has dropped to four nonconsecutive 13-year lows over the last five reports. Up in Canada the rebound from the spring break up has been tame.

Similar to the situation in the Lower 48, the rigs that have returned in Canada have been geared towards oil. To wit, over the last six weeks oil rigs have increased by 98 while gas rigs are net down 1 rig. As such, over the last four weeks the ratio between gas-to-oil rigs averaged 33.6/66.4. For the corresponding timestep from a year ago the ratio was 43.3/56.7 and for the preceding five years it was 60.7/39.3.

However, despite these efforts in North America that began in earnest in September 2008, gas is still being held hostage by the shales. To wit, gas is currently getting injected into underground reserves at a comfortable 10.01 Bcf/d pace and the latest monthly production figures from the DOE dispelled the notion that producers are ready, willing and able to scale back output below $4. For example, Lower 48 production at the end of the winter rose 1.3% to a record 64.7 Bcf/d.

In this vein, over the last month-and-a-half, producers, merchants and processors have taken their position in NYMEX Henry Hub gas futures from a small net length of 348 contracts to 24,828 shorts (a three month high). As analyzed in The Schork Report , this gas will eventually have to be produced to offset those shorts. In the meantime the short position held by managed money accounts has been cut in half since Deepwater Horizon, from 181,406 contracts at the beginning of May to 95,265 last week. Thus the table is set for further short covering in gas.


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.