The oil market cheered GDP as it already was supported by old man winter. Led by heating oil and gas increases on refinery glitches and winter woes, WTI (NYMEX:CLH14) gained as the emerging market challenged the Brent crude contract. GDP came in better than expected as it appears energy exports overcame the government shutdown in giving the U.S. economy a boost. Thank you big oil!
On top of that you had a slew of refining issues. Bloomberg News reported that "Diesel futures jumped to an 11-month high on speculation supplies around New York Harbor, already the lowest since 2008, may tighten further on refinery shutdowns and as Chicago spot values climbed on supply concern. The largest refinery on the U.S. East Coast, Philadelphia Energy Solutions' Philadelphia complex, lost power yesterday and decided to accelerate a turnaround, keeping some units shut for weeks, according to a person familiar with operations. February diesel futures settled at an 18.95-cent premium to March. Supplies of diesel and heating oil in PADD 1B, which includes New York, the delivery point for futures contracts, slid 7.7 percent last week as frigid weather gripped the region. Temperatures from the Midwest to the East Coast will be below normal from Feb. 5 to Feb. 13, according to the National Weather Service's Climate Prediction Center."
Natural gas (NYMEX:NGH14) came back down to earth after its expiration desperation yet the fundamentals on natural gas still look solidly bullish. End of season storage could get close to the lowest in a decade. Should we be surprised? Readers of the Energy Report are not! We were bullish before bullish was cool and once again the bulls are now coming out of the wood work. It seems that a real winter was enough to get the rest of the investment world to focus on the fact that while production has increased, the infrastructure has not kept pace. As far back as 2013 we have been warning that many were taking the natural gas market for granted — they are not anymore.
Yet exports are also rising. As Bloomberg News wrote in February 2013 "Gas for delivery in three years may rise to between $5 and $8 per million British thermal units should LNG terminals from Texas to Oregon start moving cargoes, according to estimates from BNP Paribas, Price Futures Group and Barclays Plc. That's at least 14% higher than where markets are pricing 2016 gas today, based on Bloomberg Commodity Fair Values. As much as 10% of U.S. output is likely to be earmarked for export as LNG by 2016, according to Goldman Sachs Group Inc. estimates. Gas for delivery in 2015 costs an average of $4.21 per million Btu and $4.40 for 2016.
“That may be underestimating the potential price if more export projects are approved, according to Phil Flynn, a senior market analyst at Price Futures Group in Chicago. “The LNG thing is going to happen," said Flynn, who sees gas rising to $7 per million Btu in 2015 before trading in a range of $6 to $8. The market isn't pricing in the LNG export potential yet because "there is a little bit of a denial on how quickly natural gas exports can get done," he said. "We've had this bearish outlook on gas a long time."
I also warned about the increasing risk of using coal and assuming that fuel switching was a forgone conclusion... Science News writes, "The cost of complying with tougher EPA air-quality standards could spur an increased shift away from coal and toward natural gas for electricity generation, according to a new Duke University study. The stricter regulations on sulfur dioxide, particulate matter, nitrogen oxide and mercury may make nearly two-thirds of the nation's coal-fired power plants as expensive to run as plants powered by natural gas, the study finds. "Because of the cost of upgrading plan increased to meet the EPA's pending emissions regulations and its stricter enforcement of current regulations, natural gas plants would become cost-competitive with a majority of coal plants -- even if natural gas becomes more than four times as expensive as coal."
We are starting to realize that the switching back to coal will be less and less. Andrew Weissmann said that last year the ability to switch back to coal was more flexible. This year all the switching that could be done pretty much has been done.