Gartman on oil and gas...
CRUDE OIL STRONG AGAIN, and this
time it cannot be “blamed” upon the weak US dollar for
as noted above the dollar is actually rebounding very
modestly. Rather, we can blame it upon problems in
Nigeria; we can blame it upon the rather interesting
comments made earlier by a Kuwaiti oil official that
OPEC will likely not increase production until such time
as crude is trading closer to $100/barrel; we can blame
it upon hopes that the global recession is ending… but
most specifically we can blame it upon the fact that the
weekly DOE figures were demonstrably bullish.
According to the DOE, crude inventories fell 4.4 million
barrels, and that was well above pre-report
expectations, which were closer to unchanged.
Product inventories too were down with distillate
inventories falling 0.3 million barrels, while gasoline
inventories were down 1.6 million barrels. In aggregate
then inventories of “energy” in the form of petroleum
were down a rather material 6.3 million barrels.
We note, however… and just to offer a bit of bearish
news to mitigate the seeming over bullishness of the
reports thus far… that inventories of crude are still
historically high, with just over 60 days of current
usage on hand. This has been trending upward all
year, for we began ’09 with just over 50 days worth of
crude on hand; now we’ve 60. 45-52 is historically
“normal.”
Regarding Nigeria and the attack that MEND said it
had launched against Chevron’s Otunana flow station
in the Niger River Delta, it now appears that the facility
in question has been shuttered in for weeks and that
little if any damage has really taken place. MEND
issued a statement two days ago stating that
“devastating effects [have been inflicted upon] the
heavily fortified Chevron Otunana flow station, which is
currently engulfed in fire after being overwhelmed by
our fighters.” The Nigeria government, along with
Chevron’s officials there, denies that anything material
has happened. The truth lies somewhere between
them:
Finally, it seems that everywhere we go these days the
traders on the periphery of the energy markets
continue to tell us of the enormous relative
“cheapness” of nat-gas to crude oil. We have sent a
chart noting that the price ratio between crude and nat-
gas has reached the historically wide 18:1 level, along
with comments that this is unprecedented; that it
cannot be sustained over time and that it must narrow
materially sooner rather than later. We cannot argue
with the first two comments, for indeed the ratio is at
unprecedentedly wide levels and that it probably
cannot nor will not be sustained over longer periods of
time. As the great economist Herb Stein once said,
“Something that cannot be sustained, won’t.” We
suspect that the 18:1 price ratio, or the equally wide
relationship when expressed in terms of BTU’s is one
of those things that cannot be sustained, and we
further suspect that it won’t be. However, between the
time it is unsustainable and the time it is moved toward
levels that are sustainable can be… and often are…
separated by days, weeks and months, and are further
separated by huge margin calls that weigh heavily
upon the investor/trader taking the other side of the
position.
We note this for we thought the ration was over-
extended and unsustainable when it was 12:1, and
when it was 14:1 and when it was 16”1. Indeed, we
actually tried the trade several months back, had a
small profit in its, and then watched as crude rallied
and nat-gas fell, turning the trade against us and
forcing us… because of our antipathy toward losses…
to move swiftly to the sidelines. Some of our clients
wrote to tell us that we needed the courage of our
convictions, and that we were wrong to exit the trade.
We wrote back to tell them that we were indeed fearful;
that the market has told us we were wrong, and that
we’d remained in business over these many years and
had proven ourselves as managers of money by
running for the exits screaming, asking questions later.
So what is driving nat-gas lower and crude oil higher,
taking the ratio out the levels that would have seemed
utterly impossible a year ago? New and huge supplies
of nat-gas, that is what. Nat-gas supplies are coming
to the market in size, and although there are new
“finds” of crude oil in places such as Gabon, and
Cabinda off shore of Angola, and of course in the
massive Tupi reservoirs that are being exploited off
shore by Petrobras in Brazil, the new sums of nat-gas
being found quite literally dwarf them. These new
sources, found in shale gas
deposits, coal bed methane
deposits and other more
conventional gas deposits
are far more readily
available to end users than
are these crude oil
reservoirs. We have them here in the US, and the
Russians are finding more and more new gas every
day. Russia, to this end, is looking to add a large
number of new LNG tankers to its fleet that will get this
gas to the markets in Europe and N. America. Yes, it
may take a while before that gas is actually available to
the markets, but the market knows they are there and
the market fears their advent.
A comment in yesterday’s FT by Mr. Nikos Tsafos, the
senior analysts for “upstream nat gas” for PFC Energy
Group caught our attention. When noting how large
these new sources of nat-gas were but how difficult it
may be to get them to market, Mr. Tsafos said
You are talking about massive new resources,
[and] even if you only got 10 per cent of that,
given the need for economic viability at each
formation, you would increase the reserve
base globally by 50 per cent.
That is an attention grabbing statement. If 20 per cent
were viable, then the world’s reserve doubles!
Certainly it has our attention, and it should have the
attention of those who keep trying to find a top to the
crude:nat-gas ratio. |
