Recommend this Post - This post has 18 recommendations
The October bull
by: denintex 10/11/05 01:07 pm
Msg: 129424 of 129443
The appearance and quick disappearance of the bear this time of year seems to have transpired once again. The bear normally appears, pointing joyfully to the drop in oil/gas/gasoline demand, not raising the fact that between summer and winter, one should expect a demand decline to occur. His “sky is falling” antics predictably ignite a nice sized drop in our sector, allowing those who have not abandoned common sense to buy back at lower prices. The bear then bows, goes back into his cave, to make his reappearance some time in the 1st quarter.
This October, the bear focused on demand destruction even though supply loss was not only far greater than demand loss, but also because it was supply loss that led to most of demand loss. 28bcfd of Gulf ng production was lost, so those who wanted ng to run their plants couldn't get it, resulting in their involuntary loss of demand. One chemical analyst stated: "The overwhelming, vast majority (of lost demand) is due to production capacity being shut in, not because gas prices are high. About 44 percent of U.S. ethylene cracking capacity was off line on Sept. 30. The loss in gas demand caused by the shutdowns would be about 4 bcfd, or roughly 28 bcf a week.”
And it is this overwhelming Gulf supply loss that has now set up the “perfect storm” for pricing: 1) over 60% of ng production remains shut down and some of that may take months to restore; 2) per well production decline rates in shallow offshore Gulf are at 30%, the highest in the petro-producing world; 3) Gulf rig supply is now the lowest in 15 years, with many damaged rigs incapacitated, and out for months; 4) gas inventory is 5% below last year; 5) industrial users with plants shut down are now thirsty for the ng they need to resume operation. The result: The competition for supply between industrial users and those trying to fill gas inventory for winter supply will drive prices up, as each wants more, from production providing significantly less. The key is not how much is in inventory on Nov. 1, but how much was paid to get it "full." "Inventory purists” have failed to understand this for years, as they rejoiced about "full inventory" at $3; $5; $8, and now, $13. Pricing tells us that inventory is getting more difficult to fill, due to: 1) Gulf production devastation; 2) rig supply devastation; 3) less reliable imports; and, 4) hurricane fears for '06. Moreover, even if we reach 3.2tcf, record inventory was set in 11/04 at 3.327tcf. Look how long that lasted! Will it last longer in '06 with less inventory, less rigs, and less production? Also, I remain fascinated that: 1) with production devastated; 2) rig supply devastated; 3) rig rates soaring; 4) rig capacity tapped out; and, 5) the Saudis hiring away our rigs, the market concludes now is the time to sell the drillers! As I have said many times, the institutional investors leading the charge of these shoulder season selloffs may be good at reading their charts, but they are lousy at understanding the fundamentals of oil and gas supply and demand. I don’t care how many seminars they go to, or how many impressive degrees they hold, they need a lesson in common sense down at the local cafe in the small town of your choice.
Meanwhile, the oil situation looks incredibly bullish. The IEA said today w/w demand is set to increase by 1.75 mmbd in ‘06. Just last month, OPEC predicted that increase to be at 1.5mmbd, and demand is increasing in the face of non-OPEC production growth the lowest in 6 years, and OPEC production that hasn't increased a barrel since April. The bull has been unleashed -- not that he was ever gone in the first place. JMHO. |
