Baby's its cold outside.
It may not be cold yet, but the first real blast of winter is coming. How do I know that? I am looking at natural gas prices. Despite record supplies, natural gas has been keeping up as Middle America scrambles through our closets to find gloves and ear muffs. Natural gas prices are rebounding from its sharp selloff now testing the high for the month in anticipations of frosty future. Does this signal that the bottom in natural gas has arrived or is this just a great selling opportunity?
In a normal year in gas you might assume that prices would go higher but since the onslaught of new unconventional gas production from shale, now you cannot be too sure. You see, according to the Energy Information Agency, natural gas proven reserves (those volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions) rose enough not only to replace production, but also to grow by almost 3 percent over 2007. In contrast, the EIA says that even though discoveries of crude oil rose for the third year in a row, proved reserves of crude oil fell by more than 10 percent.
Under Securities and Exchange Commission (SEC) rules for determining reserves that have been in effect since 1982, operators assessed their 2008 reserves based on what they could produce with reasonable certainty at the market price on the last day of the year. Under updated SEC rules issued in 2008 that take effect in 2010, operators will instead use an average of first-day-of-the-month prices throughout the year, which is less sensitive to volatility in prices, in developing their reserves estimates. The SEC's new rules would have shown an increase in oil prices in 2008 compared to 2007, rather than the significant decline in the year-end 2008 price relative to the year-end 2007 price.
Under the new rules, there would likely have been a smaller drop (or possibly even an increase) in crude oil proved reserves. As of last week the EIA said that working gas in storage was 3,843 Bcf. This represents a net increase of 3 Bcf from the previous week. Stocks were 13 Bcf higher than last year at this time and 327 Bcf above the 5-year average of 3,516 Bcf. In the East Region, stocks were 70 Bcf above the 5-year average following net withdrawals of 8 Bcf. Stocks in the Producing Region were 215 Bcf above the 5-year average of 1,031 Bcf after a net injection of 13 Bcf. Stocks in the West Region were 41 Bcf above the 5-year average after a net drawdown of 2 Bcf. At 3,843 Bcf, total working gas is above the 5-year historical range. We saw a drop in rig counts and that has caused some worry.
Yet with plenty of supply, it is likely that this rally will be short lived. One way to look at this is to buy the rumor of cold and sell the actual cold. Ireland is going to take some money and the oil market is pleased. Of course the market priced in an Ireland bailout last week and The Wall Street Journal is reporting that, "The euro made modest gains across the board Monday as Ireland's formal request for financial help from the European Union and the International Monetary Fund fueled a broad-based rally for currencies perceived as risky. While final details on the package have yet to be spelled out, the news helped the euro firm against the dollar and the yen. It also boosted higher-yielding currencies, including the Australian dollar, offsetting the impact of China's move Friday to again tighten its reserve ratio requirements for banks." Dow Jones reports that Iraq has proposed a 2011 budget to be based on an oil price of $73 a barrel and exports of 2.3 million barrels a day from current 2 million barrels a day. That is an increase of 300,000 barrels a day.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.