As of last Friday, July 23, the US Bureau of Ocean Energy Management reported that a total of 11 production platforms, equivalent to 1.74% of the 634 manned platforms in the Gulf of Mexico had been evacuated as a result of TS Bonnie. In addition, two rigs, equivalent to 5.13% of the 39 rigs currently operating in the Gulf were also evacuated.
It is thus estimated that approximately 10.4% or 667 MMcf/d of the natural gas production in the Gulf was shut-in. As of the following day from the operators’ reports, it is estimated that approximately 23½% or 1.5 Bcf/d of the natural gas production in the Gulf was shut-in.
As such, it is reasonable to assume that this morning’s natural gas storage report from the EIA, as well as next weeks’, will be bullishly construed, hence the current bid on the Nymex market. Thus, we will not stand in front of the current strength.
According to yesterday’s release of the U.S. Fed’s Beige Book, rig counts increased during the reporting period (June 09 to July 28), despite a drop of 39 rigs in the Gulf of Mexico. The share of oil-directed drilling continued to rise and natural-gas directed drilling “was surprisingly steady despite high inventories and low prices” [emphasis ours] because “shale activity was stronger than prices justify due to urgency to secure leases in new basins and to an influx of foreign capital attracted by new shale technology”.
In other words, time is not on the bull’s side. Eventually cooling demand will fade and commercial and industrial demand will not be able to pick up the slack. To wit, according to the Fed commercial and industrial real estate markets continued to struggle in all twelve Federal Reserve Districts. As such, vacancy rates were flat and continued to exert downward pressure on rents.
Meantime, per Baker Hughes horizontal gas rigs (those associated with shale production, i.e., onshore production) now account for two out of three of all the gas rigs employed. Therefore, analysts at The Schork Reportpropose that even if the bulls do luck into a hurricane this September, it just might not be enough to scare markets higher. Thus, the future is now for $5 gas.
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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.