Natural gas pulled back but it is obvious that this market is starting to attract a lot of interest! Reuter's and the CME Group reported that the natural gas futures open interest on the New York Mercantile Exchange (NYMEX) climbed to a record high on Monday for the 11th straight day. The total futures open interest, or the number of longs and shorts outstanding, climbed 18,496 contracts on Monday to a record 1,455,630. Futures open interest increased by more than 260,000 contracts, or a whopping 22%, on this recent run. Hedge funds have increased their net-long position in natural gas futures, options and swaps for the sixth straight week. That puts the hedge funds long about 387,686 contracts their largest net long position in three years.
Why all this interest in the long side of natural gas? Because the hedge funds realize that we are crossing that historic turning point in this market where demand growth expectations will start to outstrip production increases. This is usually a sign that a market has established a long term bottom. Demand growth is what is really driving this bottom and if there was a straight demand indicator, it would be wildly bullish.
Power generators obviously are seeing the tremendous benefits both economically and environmentally of sticking with natural gas instead of coal and in some cases, even nuclear. Factories have benefited from a stable cheap and clean source of energy. The industry is gearing up for even more demand in the future and almost a day does not go by that we don't hear another bullish demand story and the industry getting ready to take advantage of it.
In fact just yesterday Reuter's News reported that Phillips 66 plans to set up a 100,000-barrel-per-day natural gas liquids fractionator near its Sweeny refinery in Old Ocean, Texas to cater to the booming petro-chemical industry. They say that construction is expected to begin in the first half of 2014, with startup projected by the second half of 2015. Abundant supplies of shale gas have resulted in resurgence in the U.S. chemical industry, and several energy companies are building fractionators, or gas processing plants, to provide feedstock. The project will create more than 25 full-time jobs.
One of the keys for a lot of these bullish bets is the speculation that the U.S. will at some point allow the exports of not only our sudden abundance of natural gas but also our abundance of oil. In a must read in today's Wall Street Journal it is being reported that, "The U.S. energy industry is suddenly talking about something that was unthinkable a few years ago: Exporting crude oil. Congress largely barred such exports after the 1970s Arab oil embargo in a step to protect U.S. oil supplies. But with domestic production booming, energy-company executives are questioning whether the U.S. needs every drop of petroleum it extracts.”
The Journal says, "The U.S. does regularly grant permits to send some oil to Canadian refineries. The volumes — relatively small but growing — reached 21.9 million barrels in 2012, or an average of 60,000 barrels a day, up 27% from the year before and the highest level since 1999, according to the U.S. Energy Information Administration.
“The oil-exports debate could mirror the one the energy industry has had over the export of liquefied natural gas. Producers have been clamoring for U.S. government permission to sell such gas overseas, where prices are much higher than in the U.S.”
Of course all of my reports on natural gas have garnered some attention from the diesel industry that wants to remind me that diesel, as a fuel source, is far from dead. Steve Hansen who is Director of Media Relations for the "Diesel Technology Forum” wanted me to point out a few things. He says that, "Natural gas, propane, diesel, gasoline and other sources will all play important roles in our effort for a diverse energy policy. But there's a reason diesel moves over 80% of America's freight and 90% of the world's freight – it's power, efficiency and dependability.”
Steve Hansen also points to the Exxon Mobil report that says, "Diesel will surpass gasoline as the number one transportation fuel worldwide by 2020 and continue to increase its share through 2040, according to ExxonMobil's recently published Outlook For Energy: A View To 2040. The relative shift away from motor gasoline to diesel is driven by improving light-duty vehicle fuel economy and the growth in commercial transportation activity. Diesel demand accounts for 70% of the growth in demand for all transportation fuels through the forecast period to 2040. Although natural gas will play a greater role as a transportation fuel by 2040, it remains only a small share of the global transportation fuel mix, at 4% by 2040, up from today's 1%.”
He also points to the "The World Energy Outlook” finds that diesel fuel will remain the "dominant” growth fuel between now and 2035, according to the International Energy Agency (IEA), the author of a November 2012 report. Even with assumed growth in natural gas and biofuel substitutes, diesel fuel continues to be the dominant fuel for well into the future, according to the IEA report. Globally, the report suggests the possibility of only a two percent share of natural gas in the heavy duty transport market by 2035.
The National Petroleum Council in its 2012 report "Advancing Technology for America's Transportation Future” for the U.S. Department of Energy stated: "Diesel engines will remain the power-train of choice for HD vehicles for decades to come because of their power and efficiency. There are, however, opportunities to improve the technology. Significant fuel economy improvements in diesel powered trucks are possible. Indeed, the fuel economy (mpg) for new Class 7 & 8 HD vehicles, which consume more than 70% of the fuel in the trucking fleet, could be doubled.”
These are interesting points, but what it also shows is that between natural gas and diesel, the competitive juices are flowing. Natural gas is up and coming and diesel will have to be smart to hold its lead. Obviously clean, cheap diesel is what is going to be needed to thwart this upstart natural gas!
Gasoline, the kind we power our cars with, is also causing some surprise. Strong refining runs and an abundance of crude is making gasoline the weakest of the petroleum sector. Of course, as I have reported before, the pain that we experienced during the historic run up in February in gasoline prices probably is the reason that gas is falling today. Early forced maintenance and weak demand and an abundance of crude should mean that we will be in much better shape as we head into this summer driving season. Seasonal traders have been warned that this market is out of whack, so do not be surprised to see RBOB fall a lot further.
Despite the fact, the American Petroleum Institute reported a much larger than expected draw down of 5 million barrels of gasoline. The thought is that reflecting the removal of the winter blend will soon be replaced with ample summer blends. Dow Jones reported that, "Reformulated gasoline blendstock for May delivery settled 6.07 cents, or 2%, lower at $3.0408 a gallon, the lowest finish for the front-month contract since February 25."
Heating oil stocks fell 1.9 million barrels in another unseasonal draw that is another reason the spread won't work. Trading the calendar now is a losing proposition. Crude stocks fell in Cushing Oklahoma.