The Risk Of A Warm Late Dec Is Likely To Move Some Capital To The Sidelines Until Jan

We won’t be surprised if some natural gas capital moves to the sidelines until the new year.  If so, it will be in the face of strong demand trends (exports to Mexico, LNG exports, industrial demand) for non-weather related natural gas in 2017 to 2020.  Rather it will be done because winter natural gas prices are primarily weather and weather sentiment driven, and the math for winter storage withdraws starts to play an even bigger role as we move thru the peak Dec/Jan/Feb months for natural gas demand.   Dec is the first of the big winter peak demand months, so if gets warm for the last 7 to 10 days in Dec, it gets tougher for the remaining winter period to reduce storage to levels to support a ~$3.40 2017 HH price.

Natural gas has attracted capital with positive demand trends and the expectation of a near normal winter.  There were mixed winter calls going into the winter, but most seemed to be calling for a near normal winter.  Henry Hub (HH) gas prices have pulled back from last week’s high of ~$3.80, but are still strong at ~$3.40, which is up >60% since the ~$2.10 in early Nov.  Perhaps more important, the 2017 HH strips are still ~$3.40.  Switching back to coal is expected as it typically happens with >$3 gas prices.  Rather, investors are also being attracted to the strong demand trends for natural gas.  Readers of our Energy Tidbits and blogs [LINK] know of our view that natural gas is strong to 2020 from multiple positive demand trends impacting 2017 to 2020 demand that are not weather related.  These include increasing gas exports via pipeline to Mexico, increasing gas exports via LNG, and increasing industrial demand from projects using natural gas as feedstock.  Bentek Energy (one of the leading US energy analytics groups [LINK]) has recently estimated current YoY increases in demand of ~0.6 bcf/d for Mexico, ~1.3 bcf/d for LNG, and ~1.3 bcf/d for industrial.

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Is Saudi Arabia Signaling A Return To Being A Swing Producer, At Least For 2017?

Spot oil price has jumped up this morning.  As of 6:45am mountain time, WTI has pulled off its highs, but is still trading up sharply by $2.20 to $53.70 on the weekend news that (a) Non-OPEC will reduce 0.558 million b/d for 6 months, and (b) perhaps more importantly, Saudi Arabia says will be cutting “significantly” more than the Nov 30 OPEC deal commitment of 486,000 b/d.

It is a bigger price increase than we expected and a jump up like this always reminds me of analyst lessons that I first learned in the late 90’s.  First, the market tells you what capital believes and not what an analyst expected.  Second, speculators/traders live in the liquidity and volatility of the spot oil price.  Third, it reminds to see if you are missing a bigger picture interpretation of the events/facts/data ie. don’t miss the forest for the trees.  The reality is there were a lot more lessons, but they all come back to priority of an analyst – be objective, be analytical, be practical, be diligent, be hard working, and be honest in looking at events to help your clients.

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Non-OPEC 14 Should Reach A 0.6 mb/d “Reduction”, But It Isn’t Likely To Move Oil Prices

WTI drifted down this week, closing today below $50 ($49.90) today.  The key items this week were Bloomberg’s reporting that OPEC Nov oil production was up 0.2 mb/d to 34.16 mb/d and concerns that this Saturday’s Vienna meeting with Non-OPEC 14 isn’t going to result in a 0.6 mb/d reduction.  OPEC’s Nov 30 deal had driven WTI from $45.33 to over $52 by Friday.

The pull back in oil prices back to $50 makes sense with the higher OPEC oil production that makes it harder to get to the 32.5 mib/d target and increases the risk of cheating.  Bloomberg estimated Nov oil production increases were Angola +0.17 mb/d to 1.69 mb/d and Algeria +0.03 mb/d to 1.16 mb/d.  In theory, these shouldn’t be that big a deal as both countries agreed to reduce oil production levels. But it raises the risk of cheating as the Nov 30 deal agreement committed Algeria to get to 1.039 mb/d and Angola to 1.664 mb/d. Libya and Nigeria were excluded from any commitment to reduce production.  Bloomberg estimated that in Nov, Libya was +0.06 mb/d to 0.58 mb/d and Nigeria was +0.08 mb/d to 1.68 mb/d, and their increases make it tougher to get to the overall target.

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