Will the Cold Spell Persist?

11/14/2019 1:14 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The recent cold spell has caused natural gas to rally, but will it be followed by a mild December like last year, asks Phil Flynn.

I am not sure if Bamwx Meteorologist Bret Walts makes the weather or just predicts it but yesterday he sure seemed to move the natural gas market! If you have been following the natural gas market lately, you know it has been moving on the weather. Natural gas prices started to rally before Halloween but really spiked as weather forecasters predicted the arctic blast that blanked large parts of the country for the last couple of days. Yet despite that cold, natural gas had been selling off with warmer temperatures ahead.

Not so fast. Just when you thought you could put the winter coat away and get short the natural gas market, an update from BAMWX seemed to turn the market around.

Right before that natural gas rally, Bret Walts BAMWX Meteorologist put out a special update. Bret said, “You can't really get much colder than we are today, but I am seeing more signs of cooler risks returning in the extended range. Following several days of demand closer to normal mid-late next week, we think colder risks can return with more notable above normal heating demand. High latitude blocking will likely help keep the northeastern US consistently colder than normal, with the potential of a more widespread cooler risk developing in the 10-15-day period. This certainly does not look to be a repeat of last year where we warmed up and never looked back. Colder pattern drivers are definitely more at play in 2019 into December.”

If you remember last year’s natural gas market, a November cold blast caused a massive spike in natural gas only to crash as record production and a warm December eased concerns about any impact on supply. Yet if Bret is right and so far, he has been, then December may give us a natural gas rally to remember. Or at the very least fill some of the gaps in the chart above and at least give the $3.00 area a test.

Crude Oil  

Oil prices continue the recent slow, choppy uptrend on OPEC optimism as well as a reported crude draw according to the American Petroleum Institute. In yesterday’s action we saw a crude rally on comments by OPEC Secretary-General Mohammed Barkindo who once again suggested that oil demand next year looks very strong. The comments reflect our contention that oil demand will exceed expectations on the upside because the talk of recession in the U.S. and now Germany is missing and that will lead us to more and more upside demand surprises.

Yet the rally midday stalled as crude gave back part of the day’s gains on a Wall Street Journal report that U.S.-China trade talks hit a snag. The snag report came from an unnamed source that suggested the size and scope of Chinese agriculture purchases were in question. Of course, economic data overnight would seem to suggest that China could really use a trade deal about now, not to mention some of our record supplies of pork. Inflation in China is rising, led by pork that has been impacted by Asian Swine Fever. On top of that, China’s industrial production rose 4.7% year-on-year in October, data from the National Bureau of Statistics reported, well below the median forecast of 5.4% growth.

The crude oil market got a bid on a reported 541,00-barrel crude oil draw as reported by API. The draw was led by a 1.2 million barrel drop in Cushing, Oklahoma. On the other side gasoline saw a bigger than expected 2.3 million barrel increase along with an 887,00-barrel increase in the distillate.

The Energy Information Administration (EIA) releases data today for petroleum and natural gas but it was the EIA longer-term forecasts that generated a lot of interest from traders. Not only from the supply and demand side but from a lot of people who still believe that the EIA is estimating the future of shale oil production. The EIA reported, “The United States remains on course to set new crude oil production records this year and next. In fact, EIA’s November outlook expects that U.S. crude oil production will average more than 13 million barrels per day this month, the most U.S. oil production in one month on record.” Yet there are some that think that is wrong.

Nick Cunningham at Oil Price dot com wrote that, “A new report from the Post Carbon Institute asserts that the EIA’s reference case for production forecasts through 2050 is extremely optimistic for the most part, and therefore highly unlikely to be realized.” Cunningham adds, "The U.S. has more than doubled oil production over the past decade, and at roughly 12.5 million barrels per day (mb/d), the U.S is the largest producer in the world. That is largely the result of a massive scaling-up of output in places like the Bakken, the Permian and the Eagle Ford. Conventional wisdom suggests the output will steadily rise for years to come.

It is worth reiterating that after an initial burst of production, shale wells decline rapidly, often 75% to 90% within just a few years. Growing output requires constant drilling. Also, the quality of shale reserves varies widely, with the “sweet spots” typically comprising only 20% or less of an overall shale play, J. David Hughes writes in the Post Carbon Institute report. After oil prices collapsed in 2014, shale companies rushed to take advantage of the sweet spots. That allowed the industry to focus on the most profitable wells first, cut costs and scale up production. But it also pushed off a problem for another day. “Sweet spots will inevitably become saturated with wells and drilling outside of sweet spots will require higher rates of drilling and capital investment to maintain production, along with higher commodity prices to justify them,” Hughes says in his PCI report.

There have been fears that in recent days that shale pioneer Chesapeake energy night be headed for bankruptcy. Yet a report by Forbes suggests that maybe Cowboy’s owner, Jerry Jones, might save them from that fate. The reports says, "Reuters reported that Chesapeake management and Comstock have agreed to the outline of a deal that would transfer Chesapeake’s assets in the Haynesville to Comstock for a reported valuation of $1 billion.

The EIA reported, “The United States remains on course to set new crude oil production records this year and next. The EIA also pointed out that, “Global oil market risks have moderated over the past month. Saudi Arabian oil production appears to have recovered from the attacks of September 14. Some of the demand side risks stemming from concerns over economic growth also seem to be diminishing, as Americans set a new record for the month of October by consuming nearly 9.4 million barrels of gasoline.” “In our November outlook, EIA forecasts that the average spot price for Brent crude oil in 2019 will be almost $64 per barrel, a year-over-year decrease of $8 per barrel. In 2020, EIA expects the average crude oil price to continue decreasing, albeit at a slower pace than the change from 2018 to 2019.”

Still, the great news for our country and pocketbook is that the, “EIA estimates that the United States is now exporting more crude oil and petroleum products than it imports and will publish more exact data later this month. We also expect total U.S. net exports of crude oil and petroleum products to average 750,000 barrels per day next year.” Yahoo!!

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