A rebound in the stock market on hopes of a deal in the U.S. and political turmoil in Libya is reversing the recent negative action in the markets. It seems that just when you think the political risk in oil has calmed down it comes back once again. Oil (NYMEX:CLX13) is holding key support as it seems that this market just does not want to fall below the $100 a barrel area, just yet.
Oil got hit hard after the EIA inventories showed a big surge in supply, yet rallied on hopes that a short term deal on the debt ceiling can be reached. Overnight a report that Libyan Prime Minister Ali Zidan was abducted caused a spike in oil yet now it is being reported that he has been freed.
Oil production is falling in OPEC led by Iraq as the cartel is warning of waning demand in Asia. That may be offsetting what was a bearish stocks report. The EIA reported that crude stocks increased by 6.81 million barrels. A 3% drop in refinery runs helped top off the storage tanks. We also saw a big drop in distillate stocks as farmers get harvest underway.
Gas fell and Bloomberg reports Valero Energy Corp.’s Port Arthur, Texas, refinery is running the larger of two crude units and the coker at reduced rates because of repairs at a wet-gas compressor, two people familiar with plant operations said. Work on the compressor, which converts vapors to liquids, may take up to several weeks, said the people, who asked not to be identified because the information isn’t public. The approximately 250,000-barrel-a-day crude unit, known as AVU-146, and the coker will remain at lower rates during the repairs, one of the people said.
Valero reported flaring of wet gas during surges at its K-2300 wet-gas compressor at Port Arthur on Oct. 6, according to an emissions notice with the Texas Commission on Environmental Quality. Bill Day, a spokesman for Valero in San Antonio, said in an e-mail today that the issue with the compressor didn’t materially affect production. The Port Arthur refinery has a capacity of 310,000 barrels a day, according to data compiled by Bloomberg.
Natural gas continues to rally as it seems that demand is a lot stronger than anticipated. Hot and cold weather, take your pick, and huge flows of gas going to Mexico is providing support. The Energy Information Agency is reporting that the growth in natural gas production from the Marcellus region of Pennsylvania, West Virginia and Ohio have lowered the spot price of natural gas at the TCO Appalachia trading point in recent years. Forward market prices for natural gas indicate that this production growth will continue, driving the price in this region below the benchmark Henry Hub price early next year.
The benchmark price for natural gas in the United States is the Henry Hub price point located in Erath, Louisiana. A common way to express prices at different locations across North America is the difference (often called basis) between the price at a particular location and the price at Henry Hub. Natural gas prices in the Mid-Atlantic have traditionally been more expensive than Henry Hub, reflecting the cost of moving natural gas from the production in the Gulf region to consumers along the east coast. Increased production from the Marcellus region began changing that relationship in 2011.
Natural gas production in the Northeast has grown by about 3.2 billion cubic feet per day (Bcf/d) so far in 2013, a 30% increase from the same period last year. Total natural gas production in this region reached 12.2 Bcf/d in August, a 4.1-Bcf/d increase from August 2012 and a 2.5-Bcf/d increase from the end of last year.
Growth is mostly from dry gas production in northeastern Pennsylvania. This coincides with infrastructure improvements in the region, as gathering lines and pipeline capacity expansions have helped flow more gas to market. Production in West Virginia reached 2.4 Bcf/d in August, which is 0.8 Bcf/d above the August 2012 level, with 0.6 Bcf/d of that growth occurring in 2013. The liquids-rich areas of the state experienced the most growth as a result of the beginning of operations at two new natural gas processing facilities—the Mobley (Wetzel County, WV) and Atrium (Marshall County, WV) plants—and the expansion of several existing plants. The forward curve for TCO Appalachia was also negative relative to Henry Hub in the middle of 2012, but unusually cold winter weather in late 2012 and early 2013 changed the dynamic in the spot market. Forward markets give market participants financial tools, like the basis futures shown in the chart above, to exchange risk; but they can also reflect how expectations about supply and demand may affect prices in the future. Spot prices, on the other hand, principally reflect how current market conditions such as changes in weather affect actual production and consumption and, in turn, physical market prices on a given day.
Long term we still see natural gas as one of the best plays in the futures! We are recommending options and long term strips.