While manufacturing reported weakness caused a drop in oil, heating oil led a product comeback. Yet it was natural gas that quietly closed above $4.00 that was perhaps the most interesting move of the day.
Oil prices faltered! First it was the weak data in China and then the ISM manufacturing number in the U.S. The Institute for Supply Management's factory index fell to 51.3 in March from 54.2 last month. The market was looking for 54. Not the type of report that gets one hyped up on energy demand. On top of that you had the leaking Pegasus oil pipeline that led traders to unwind the short Brent WTI spread. The reason is that the shutdown of Exxon's Pegausus pipeline, which carries more than 90,000 barrels per day from Pakota Illinois to Nederland, Texas and is located near the Beaumont and Port Arthur refineries, could slow production adding to a glut of U.S. crude.
Yet at the same time it may take a toll on product production — a fact that seemed to dawn on the market late in the session. The rebound was led by heating oil, or should I call it by its new name Ultra Low Sulfur Diesel?
Yet it was the natural gas market that once again defied bearish expectations, the calendar and manufacturing data as lingering cold and near record demand is changing the bearish perception of this market. It seems that, as I have been saying, the fundamental picture of this market is getting more bullish every day not just in the front end of the curve but in the back end as well. In fact just Friday it was reported by Reuters that the number of rigs drilling for natural gas in the United States fell this week to the lowest since May 1999. Reuters says that producers continue to pull back from dry gas drilling despite strong price gains over the last five weeks. They reported that the gas-directed rig count slid last week by 29 to 389, which they say easily eclipsed the previous 14-year low of 407 posted three weeks ago.
What I think this is saying is that we still need higher prices to keep natural gas supply from falling below the five-year average. Yet there was also new news in the back end of the curve. Reuters reported yesterday that Japanese trading house Sumitomo Corp has agreed to take 2.3 million tons per year of liquefied natural gas (LNG) from the Cove Point project in the United States and sell the purchased fuel to two users in Japan. They say that the agreement depends on the terminal getting export approval from the U.S. government because Tokyo and Washington don't have a free trade agreement.
As you remember, and as reported by Reuters, "Japanese Prime Minister Shinzo Abe in February lobbied U.S. President Barack Obama for access to American shale gas, which is cheaper than LNG sold into Asia at prices linked to oil. Japan, the world's biggest LNG importer, has increased use of the fuel after the Fukushima nuclear crisis in 2011 shut down most of the nation's nuclear power plants.”
I believe that this is just another step of the obvious march toward the United States becoming a major natural gas exporter. The pressure to export is rising and it would not look good to our allies if it looked like we were hoarding our natural gas, like say the OPEC cartel, leaving our allies vulnerable from both an economic and a national security front. President Barack Obama's nominee to head the Energy Department, Ernest Moniz, is a sign that the administration is open to larger exports. Not only did the Massachusetts Institute of Technology physicist Ernest Moniz co-author a report that favored a global natural gas market and hence U.S. exports, he also worked in the real world of energy as a consultant for BP and General Electric. At the same time Railroads are making the switch toward using more natural gas.
As the Wall Street Journal recently pointed out " There are compelling reasons for railroads to ponder the switch[to natural gas], including new Environmental Protection Agency air-pollution standards for railroads that will likely require railroads to add expensive emissions-control equipment to new diesel locomotives in 2015.” The switch may impact the consumption of billions of gallons of diesel in the coming years. The Energy Information administration reported last Friday that natural gas consumption rose 4.1% in January from a year earlier, hitting a two-year high of 92.4 billion cubic feet per day.
As for that other kind of gas that we put in our car, it seems that AAA is agreeing with me that the top may be in. Gas prices fell for the first time in 10 years in the month of March.