Natural gas glut catching up to oil market

Here we go again!

The Fed gave oil a little ride after deciding to send a sign to the market that while they are not quite ready to act just yet, they are waiting in the wings. The crude oil market sold off as soon as traders read that the Fed said that economic activity has decelerated, raising hopes that perhaps the Fed is getting ready to act even though they held their fire. Or maybe they believe what Mr. Magic Mario Draghi said that he would do whatever it takes to provide the type of surprise that will keep the oil bulls rolling.

While the economy is slowing, car sales are up and gas demand is as well. Add to that a spate of refinery and pipeline issues and gas prices have seen the biggest July price jump since 2000. Add to that the surging cost of ethanol due to the drought which is adding close to another 5 cents a gallon to the national average. Plus reports of a refinery fire at Dallas-based HollyFrontier Corp. According to the company's website, the Tulsa refinery has a crude oil capacity of 125,000 barrels a day. And if that wasn’t enough of a threat, there is a tropical depression in the Atlantic.

Tropical Depression Number 5 looks like it is going south of Cuba but a slight change in direction could cause havoc in the Gulf of Mexico. The storm may slow imports of oil at the very least and comes after a dramatic drop in supply in the Gulf Coast of the United Sates just last week.  That drop helped support the price of crude and also helped drive gasoline prices.

Yet in the big picture the outlook for oil supply in the US looks better than it has in generations. The Energy Information Administration reported the biggest increase in US crude oil and natural gas reserves in history! In 2010 according EIA, US crude oil supply surged a whopping 13% driving US reserve levels hit the highest levels since 1991!

Yet that is child’s play compared to natural gas that for the first time in history has proven reserves topping 300 trillion cubic feet after posting a 12% increase last year. EIA Administrator Adam Sieminski says that, "The use of horizontal drilling and hydraulic fracturing in shale and other tight rock formations played an important role in the increase of oil and natural gas reserves for both oil and natural gas, these reserves increases underscore the potential of a growing role for domestically-produced hydrocarbons in meeting current and projected U.S. energy demand."

The EIA says that, "Texas recorded the largest volumetric increase in proved oil reserves among individual states, largely because of ongoing development in the Permian and Western Gulf Basins, while North Dakota had the second largest increase, driven by development activity in the Bakken formation in the Williston Basin. Natural gas proved reserves, estimated as "wet" gas that includes natural gas plant liquids, increased by 12 percent in 2010 to 317.6 trillion cubic feet (Tcf), the twelfth consecutive annual increase and the first year U.S. reserves surpassed 300 Tcf.

Of course that production boom has led to a wet gas glut. Producers are cutting back on production after drilling for liquids like crazy. Bloomberg News reports that the shale boom that sent natural-gas prices to a 10-year low is being felt for the first time in the oil markets.  Williams Partners LP (WPZ) joined Marathon Oil Corp. (MRO) and Devon Energy Corp. (DVN) yesterday in blaming a glut of propane and related products for lower profits in the second quarter. Next week more companies are expected to show the effects of falling prices for so-called natural-gas liquids used in backyard barbecues and motor fuels as producer Chesapeake Energy Corp. (CHK) and Targa Resources Partners LP (NGLS), a pipeline and storage company, release earnings.  The “NGL bloodbath,” as it was dubbed by Tudor, Pickering, Holt & Co. last month, is rippling across the oil and gas industry as explorers cut production and reduce cash flow projections, service companies forecast lower demand for drilling rigs, and pipeline partnerships suffer falling revenue for their gas liquids processing plants. The price of an ethane- propane NGL mix is down 58 percent from a high in January, outpacing the 19 percent drop in crude from a February peak.  “The same thing is now happening to liquids that happened to natural gas itself,” said James Williams, an energy economist at WTRG Economics in London, Arkansas. “We now have too much. We have an oversupply, so it’s depressing the price.”

BOE holds rates at 0.5 so now we will see what happens next. As of this moment Mario Draghi is the key!

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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