Natural gas market ready for spike?

Nat Gas Challenge

The Energy Information Administration in its eagerly expected Short Term Energy Outlook laid out a case for natural gas (NYMEX:HPM14) that leaves absolutely no room for error. The challenge to rebuild Natural gas inventories to adequate levels ahead of next winter means that U.S. natural gas producers are going to have to produce natural gas like never before. While it is possible that producers will rise to the occasion the Energy information Administration's own numbers show that if we have normal or warmer than normal summer or a hurricane that disrupts production in the Gulf Of Mexico that disrupts natural gas production, let's just say this market is a price spike that is waiting to happen.

The hopeful and optimistic EIA reports that "Following a slow start to the natural gas injection season, the amount of gas in underground storage remains well below year-ago and 5-year average levels." Stocks were 790 Bcf less than last year at this time and 984 Bcf below the 5-year average of 1,965 Bcf.

Yet despite that deficit the "EIA expects strong injections over the summer and fall, with projected storage levels at close to 3.4 trillion cubic feet by the end of October." Yet to reach the expected record build in U.S. natural gas storage during the current refill season, weekly natural gas injections have to average about 90 billion cubic feet, which is 30% more than the 5-year average injection. To get to that level storage must be refilled at a record pace and add to 2.6 trillion cubic feet added in the next six months.

And after last winter one might start to wonder whether that storage level is going to be enough to get us through next winter. Rising demand for natural gas with coal plant conversions would challenge the status quo. While the EIA hopeful forecasts for production are indeed possible we may need to see a higher price to keep the incentive high for producers and almost nothing can go wrong.

Oil (NYMEX:CLM14) prices reversed as word that US oil supply surprisingly fell last week. The API reported a surprise drop in crude supply. The API says that crude inventories fell by 1.8 million barrels in the week to May 2 to 389.8 million barrels, compared with analysts' expectations for an increase of 1.4 million barrels. Crude stocks at the Cushing, Oklahoma, fell by 1.5 million barrels. Refinery crude runs rose by 146,000 barrels per day, API data showed. Gasoline stocks rose by 2.4 million barrels, compared with analysts' expectations in a Reuter's poll for stocks to be unchanged. Distillate fuel stockpiles, which include diesel and heating oil, rose by 763,000 barrels, compared with expectations for a 900,000-barrel gain, the API data showed.

Yet in the big picture things are looking great. Bloomberg reported that the  Energy Information Administration projected that U.S. crude production in 2015 will climb to the highest level in 43 years!  

Crude output rose to an average 8.3 million barrels a day in April, the most since March 1988, the EIA, the Energy Department's statistical unit, said today in its monthly Short- Term Energy Outlook. The agency forecast output of 8.46 million this year and 9.24 million in 2015, up from 7.45 million last year. Next year's projection would be the highest annual average since 1972!

Horizontal drilling and hydraulic fracturing, or fracking, have unlocked supplies in shale formations in North Dakota, Texas and other states. The EIA forecast that offshore Gulf of Mexico crude production will climb by 150,000 barrels a day this year and by an additional 240,000 barrels in 2015, following four consecutive years of declines.

Total net crude-oil imports will average 7.01 million barrels a day this year, down from 7.6 million in 2013, according to the report. They will drop to 6.27 million in 2015, down 32 percent from 9.17 million in 2010.

Next Page: What will Yellen say?; and Gold.

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