Low Price of O/G: Will Drilling Continue?

Seriously, does anyone think that these smaller companies will be able to wait out the low oil and gas prices? How can they drill and then wait for prices to go up? There will probably be a lot of empty hotels in Cambridge. Does anyone think the prices will ever go back up?  Fortunately, I did not go out and buy a new pick up truck.

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Permalink Reply by Philip Brutz on January 24, 2015 at 6:52am

Paulo Santos, Think Finance (1,251 clicks)
Long/short equity, arbitrage, event-driven, research analyst
   
Natural Gas Fundamentals Are Now Compatible With Higher Prices
Jan. 23, 2015 9:30 AM ET  |  29 comments  |  Includes: BOIL, DCNG, DGAZ, GAZ, KOLD, UGAZ, UNG, UNL by: Paulo Santos

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I might go long natural gas futures within the next week (starting today) (More...)

Summary

  • My previous stance on natural gas was that it had not bottomed yet.
  • Now, natural gas fundamentals have changed enough for me to revise my stance.
  • Hence, I now believe fundamentals are supportive of higher natural gas pricing. This article explains why.

One month ago, I wrote my article "Still No Reason To Buy The Dip In Natural Gas." In it, I explained why I believed it was too early to buy the natural gas dip at $3.27/MMBtu. There were several unfavorable data points in production, inventories and weather, which led to that opinion.

Today, one month later and with natural gas (February contract) hovering around $2.92/MMBtu, I believe my opinion merits a revision. That is, from the present levels and with recent developments in natural gas fundamentals, I now believe the most likely path is for natural gas to head higher.

Fundamentals

Weather (looking back)

What changed between December 23, 2014, and today? Mostly, it was the weather. If you recall, for the seven days up to December 23, we had something along these lines (Source: EIA):

And for the 7 days up to January 15, this is what we got (Source: EIA):

A totally different picture. And one that produces effects that last beyond just the days where the cold hits. The effects last longer because these cold waves affect how much natural gas gets put into storage.

Inventories

Indeed, what was becoming a worrisome picture (for longs) in terms of natural gas inventories, has now turned much healthier. This is how inventories look right now:

Moreover, this picture is actually misleading. It looks as if while inventories regained their traditionally steep downside trajectory, they're still well within the 5-year average range. And they are. But remember, the lower bound of that 5-year range was established last year - and it was aggressively, historically, low. So not matching that low isn't really negative. Indeed, it's even surprising that 2015 can be so close to it at this point! So chalk another positive in what regards inventories.

Production

While back on December 23, we had to contend with unfavorable trends in production, inventories and weather, right now we're down mostly to production. Yes, production still shows rapid increases though the year-on-year comparisons will now turn less aggressive in short order. This means we can expect the 9-10% dry production increases, which have been reported over the last month to turn into something healthier.

Furthermore, both natural gas rigs and oilrigs continue to decrease. Oilrigs are down due to the oil shock. Natural gas rigs must be responding to the recent natural gas plunge as well as the fact that some areas in the Marcellus - the most prolific natural gas region - are seeing natural gas prices as low as $1.00-$1.15-$1.50/MMBtu!

In short, while production trends continue to be unfavorable, they:

  • Are likely to become optically less aggressive over the short term (by showing smaller year-on-year increases);
  • Are likely to soften as rigs (both oil and natural gas) get removed over time. This will lead to less drilling and less substitution of the legacy production losses - which are even more aggressive for natural gas than they are for crude.

Weather (looking forward)

Predicting the weather for more than 5 or so days ahead is naturally speculative. However, in terms of broad trends here's what AccuWeather has to say:

We can infer a couple of things from these trends:

  • First, the outlook during the week going forward is still rather poor for natural gas. This more or less establishes the optimal timing to go long natural gas during this week.
  • Second, going forward the outlook improves in two ways: 1) More zones will exhibit lower than normal temperatures; 2) The lower-than-normal temperatures will be concentrated in States with high natural gas consumption (except for California)!

Here's a map depicting where natural gas consumption by state is highest (Source: Targetmap.com)

(click to enlarge)

Conclusion

Most of the trends working against natural gas back in December have reversed already. Only production remains unfavorable, and even there we can find effects which should mitigate its impact over time (though slowly).

Given the evolution of natural gas fundamentals, I believe that fundamentals are now compatible with higher natural gas pricing going forward.

Permalink Reply by Jim Litwinowicz on January 25, 2015 at 5:17am

Man, if this guy thinks that ten days of cold weather will have a major affect on gas prices I hope he has a good pension and is not relying on his investing skills.  The problems with nat gas prices are way more than weather. Even a repeat of last year's cold weather would have had a limited affect.

Permalink Reply by Philip Brutz on January 25, 2015 at 5:59am

I agree.

Permalink Reply by Dexter Green on January 25, 2015 at 7:36am

Santos is kind of a joke over at SA.  He's a mega-contrarian, which is fine when you're actually getting it right.

Permalink Reply by Brian Powers on January 25, 2015 at 8:07am

Susan - when I began my Oil and Gas career in mid-1982, oil prices were in the low $30/bbl range, and a lot of our natural gas was locked into long term contracts at prices much lower than today. We saw some rise and fall in liquids prices, then a big crash in 1986 that forced staff cuts and divestitures. Most domestic onshore producers are quite price sensitive and move more nimbly than do the very big producers.

After 10 years working domestically, I moved overseas. In most of the foreign countries and projects that I was involved with; American and/or European and sometimes Asian partners coupled with national oil companies for long term oil and gas concessions. The foreign governments depended upon their foreign partners for education (scholarships and internships) and employment opportunities and other social programs  for their citizens, and thus, the operating companies did not and could not react as quickly to rapid fluctuations.

It's worth bearing in mid the seven to ten year cycle from data gathering to first oil/gas in many of the mega projects out there. In some cases, it took as long as two years to procure long lead material items such as pipe, wellheads and valves, etc. Our economic models were also run with a variety of liquid/gas price price assumptions to test the robustness of the projects in down pricing cycles.

A Saudi petroleum minister said in the mid 1970's that the Stone Age did not end because the world ran out of stones, and neither will the age of petroleum

Over my three decades in the O&G business, I saw prices as low as $9.00/bbl and as high as $150.00/bbl; The world didn't come to an end with oil over $100.00/bbl; although, as a consumer, I'm much happier with today's gasoline prices than I was a year ago. I further believe that most global warming theory is junk science; I am and will likely remain unconvinced that fracing or disposal of waste well fluid causes earthquakes, and that the New England Patriots will remain unrepentant and unpunished cheaters.

I didn't buy a new pick-up truck lately either, but I bought a used tractor last year that I've grown fond of

Brian

 

Permalink Reply by Tony Yurina on January 26, 2015 at 12:07pm

My last message was lost in the cloud.


I would have bought the tractor over the truck also.

I think OPEC is making their last stand to control oil prices.  The next round of price manipulation may be dictated by a country that is closer than ever to energy independence and less reliance  upon OPEC.

Permalink Reply by Billy Park Whyde on January 27, 2015 at 4:56pm

I bet you paid as much for that used tractor as it cost new. Depreciation on farm tractors only to the IRS shhhh.

Permalink Reply by Barb Smith on January 26, 2015 at 5:58am
Nat gas is down 3% this morn at $2.89 seems like it is stuck in a range between $2.75 on the low side to $3.00 on the high side maybe the Arctic blast will lend some support to a higher price
Permalink Reply by Tony Yurina on January 26, 2015 at 11:32am

Brian

Permalink Reply by Brian Powers on January 26, 2015 at 12:29pm

Tony

Permalink Reply by lance on January 27, 2015 at 12:35am

Due to our Presidents  failed foreign affairs policies in the Mid-East and elsewhere that region is ready to explode in an all out war between Arab nations. Syria, Iraq, Turkey, Egypt, Afghanistan, and now Yemen,  are all bubbling over with dissention. Sunnis' hate the Shiites, Shiites, and hate the Sunnis' ISIS continues to roll over them all and have declared an Islamic Caliphate, which they intend to extend over all of the Middle East and eventually the whole world. The main common denominator is the all hate Israel and the west, especially the United States... Iran is moving closer and closer to acquiring a nuclear  weapon with our help, and when they get it they will not hesitate to use it against Israel... I would bet Israel will take military action against Iran to prevent them from having a Nuke but sooner or later the shit will hit the fan over there... Iran would love to have control over Saudi oil and the Saudis' are very nervous about all the recent developments. Yemen, on the Saudi southern border is now controlled by Iran. The Saudis' are scrambling to build a large fence to keep ISIS out...... It's really a mess over there... It's just a matter of time to all hell breaks loose over there and Russia will be a key player in all of this... I believe this year will be the year when something big happens with Israel... Then watch how fast oil prices go up.... It will probably take a world war to get the prices back up to par for profits for these companies... Just hide and watch what this new year brings to the world...

Arabs are nuts! They are driven by false religion... Of 1.3 billion Muslims in the world about only 10% are radical Islamists. Do the math.. That's over 100 million people in this world that hate us and would like nothing less than our total destruction... These people are serious! Research this for your self... It's very interesting to know what the mainstream media is holding back from the citizens of this great nation. Under this current U.S. President these people smell weakness and 'Blood' and believe me they are a blood thirsty culture in their way of thinking. Islam is a religion of evil. Their actions prove this.... Oh, I don't mean to ramble but the facts speak for them selves....

Price of oil will go back up soon...  I'm sure I'm not the only one that knows all this... You can bet the major players in the oil and gas boom in this country know this too and I would guess they are on the same page. Some are not slowing down that much but others are playing it safe for now.... And that's all I have to say bout that....

Permalink Reply by Susan A Tippel on January 27, 2015 at 4:35am

That was a very informative opinion! Thank you, and I agree with you about Islam.

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