The front month natural gas contract hit a new high for the year just as the summer solstice was about to begin. Record high temperatures in southern California and the American southwest are already raising fears about natural gas shortages. California is warning about emergency measures and talking about rolling blackouts--and we have not even gotten through the first full day of summer!
Even in other parts of the country predictions of above normal temperatures this summer are raising concerns that natural gas demand will be met. Injections into storage will continue to be below the five-year average and it is even possible with the way things are going, we might see an actually withdrawal from supply. That should not be too comforting for next winter as our so called natural gas glut starts dwindling. This is the first summer ever that natural gas is the main fuel for electricity generation and we may have been too complacent about meeting demand because we have not had a real hot summer in some time. Year-end storage may even fall below 4 trillion cubic feet which would present problems next winter.
We called natural gas a sleeper and now this market is waking up and if we continue to see the summer sizzle, this market still has a way to go. Not only can you trade futures but there are some attractive option strategies to take advantage of the summer spike. Call me to open your account.
While crude oil prices focus on Brexit there were other reasons for oil to rally. A Nigerian union known as the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) are threatening to go on strike, which would lead to a shutdown of the oil and gas industry activity in the country. In Norway the Norwegian Oil and Gas Association and the Norwegian Union of Industry and Energy Workers avoided a strike but the leader of Norwegian offshore worker's union SAFE is still threating to strike.
On the supply side a report by Genscape reported a drop of 686,700 barrels of oil at the Cushing, Okla., delivery point. That gave oil a boost as traders are still trying to gauge how quickly U.S. shale producers will come back on line. There has been a lot of talk about drilled but uncompleted wells saving U.S. oil output but the reality is far from clear.
The Financial Times reports that, “In recent weeks there have been signs that is happening. Several shale producers -- including Continental Resources, EOG Resources and Oasis Petroleum -- have started to complete some of their DUCs (drilled but uncompleted wells.) Others, including Whiting Petroleum, have said they can follow suit if oil stays near $50.” The Financial Times reports that two firms, Wood Mackenzie and Rystad, have similar views on what that will mean for U.S. production. Woods MacKenzie expects about 250,000 barrels per day from completed DUCs in December, while Rystad expects about 300,000 barrels per day. To put that into context, that would represent about 4 to 5% of total onshore crude production from the “lower 48” states of the United States.
The Financial Times says that, “While DUCs can slow the decline in U.S. oil output that has been under way since April 2015, they cannot prevent it. For that to happen, the U.S. oil industry will have to start drilling again and putting rigs back to work. The Baker Hughes count of rigs drilling onshore oil wells in the U.S. has now risen for three weeks in succession, but is still only back to its level in April.
Gas prices surged on the futures markets with RBOB up 5%. But that comes as AAA says that gas prices have fallen for nine consecutive days, reaching today’s average of $2.33 per gallon. Gasoline demand remains on track to set a new all-time high for the 2016 summer driving season, however, crude oil remains relatively less expensive than recent years, which is contributing to direct savings at the pump.
We continue to like the long side of oil and gas.