Ray; good post - logical.
of 14112
Lower o/g prices, our ace in the hole
by: denintex 11/11/05 03:28 pm
Msg: 139188 of 139190
November often presents a false sense of security regarding oil and gas supply. Bears focus on mild weather, falling prices and lower demand, and draw cycle-ending conclusions for o/g. As usual, this analysis is completely devoid of common sense. It gets cold in winter. It is not winter. Oil and gas demand goes down in the period between summer and winter and prices follow. This is not unusual, but usual. This year, oil inventories have built, not only because of seasonal demand decline, but because oil has been sitting in inventory, unable to be refined. Bears have a suicidal tendency to focus on inventory, ignoring production, drilling, and demand, but it is the latter that has been and is our ace in the hole.
‘06 w/w oil demand is forecast to increase by 1.9mmbd according to the EIA. Higher demand has to be met by higher supply but, in ‘06, less supply looks on tap, for: 1) Russian production is stagnant; 2) OPEC production is the same; and, 3) Gulf production, home to 1/4 of US supply, is in very bad shape. One analyst noted that “by December, if everything goes well, shut-in capacity is projected to average 33.1% for oil (10.4% of total U.S. production).” Finally, w/w production decline rates are accelerating. The current bout of lower pricing is stimulating the false sense that all is well, so consumption will go up, at the very time real supply from production is going down. In ‘05 surplus capacity was the lowest in 30 years. It will improve in ‘06 with: 1) higher demand; 2) less production, and; 3) a tapped out offshore rig count? And if w/w production is worse, how is that 1.9mmbd increase in w/w demand to be filled? Current pricing is weather focused, inventory focused, and completely out of touch.
WS continues to view the Gulf devastation as a wonderful event that has: 1) filled our inventory; 2) destroyed demand, and; 3) reduced pricing. But inventory does not fill itself. It is filled by production, coming from drilling. These days more drilling produces less production. But because of Katrina, we may be seeing less drilling, which will mean an even steeper '06 production loss. RIG recently stated: “Our industry is facing significant challenges as it copes with an unprecedented level of customer demand, the repair of mobile offshore drilling units damaged by hurricanes in the U.S. Gulf of Mexico, a growing shortage of qualified personnel and lengthening lead times associated with the delivery of critical rig components. In addition, industry costs, such as those for labor, rig maintenance and insurance, are escalating". All of this will make the return to normalized ‘05 production tougher and make the ability to provide for a 1.9mmb increase in supply for '06 an impossibility. Bearish focus on fat inventory will shift, as they discover that to keep inventory fat, it must be filled by more production, more drilling and a healthy service industry, the very components they now choose to ignore.
The same is true for ng. RJ noted that ng supply loss is so bad that an additional 1.8bcfd of demand destruction will be needed to balance the system. Lower ng pricing will be increasing demand, meaning even less supply availability this winter, requiring even greater price induced demand destruction to balance the system. HO constraints will make this situation even more dire. Finally, BHI reported today the Gulf rig count fell six to 77, compared with 93 last year. That is 16 less rigs available to drill for gas supply, a huge loss. To WS, this is a nonevent. To us, this is an augur of bullish things to come, for we understand what the loss of 16 rigs means. Lower pricing is not our dagger, but the propellant for even greater demand from an industry that can only provide less. This is our ace in the hole, and we will have this card in our hands this winter, regardless of how fat ng inventory may look now. JMHO.
Allan |
