Bitter Cold Weather Burning Up Oil, Gas and Coal Supplies

Jim Brown
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The northern hemisphere is in the grip of a massive wave of cold air that is circling the globe with a havoc causing freeze. Heating oil supplies are falling at local dealers and citrus growers in Florida are fighting a hard freeze. Gas consumption is rising sharply.

Global warming appears to have taken a vacation and invited his sister global freezing to globe sit while he is away. Temperatures in Orlando Florida were expected to hit 27 degrees on Tuesday night and citrus growers are in panic mode trying to protect their crops. That is a 40-year record low. Orange juice traded limit up on Tuesday.

Crude oil traded up to $82 per barrel on expectations the super cold weather will cause an even bigger draw on crude supplies. It has been a decade since we had a really cold winter and people forget how cold it cn get and how long it can stay cold.

In the USA this is not a serious event other than costly for those still using heating oil to heat their homes and businesses. Temperatures close to zero in many parts of the country were taking the fun out of winter sports. predicted the worst U.S. winter in 25 years.

The northeastern U.S. accounts for 80% of the heating oil consumption in America. Forecasters are predicting lower than normal temperatures through at lease January 15th. Heating oil prices will be rising along with the consumption.

It is not only the U.S. that is suffering from the cold. China is seeing record cold temperatures nearing -25 below zero in Beijing as well as crippling snow. Coal shipments have been delayed by the snow and China is limiting electricity generation in the middle of the country because of lack of coal supplies. Coal is the number one fuel for electric generation in China.

Natural gas usage in China soared with the cold and the cut in electricity. China plans to curb gas use by industry until after the winter storm passes. Vegetable prices have risen 40% in China due to the lack of supply.

The U.K is experiencing the longest period of widespread winter conditions since 1981. Forecasters were predicting 12 more inches of snow on Wednesday.

The U.S. Midwest was bracing for another round of cold and snow for the rest of this week. The forecast for Denver was 5 to 10 below zero on Wednesday/Thursday along with blowing snow. Forecasters predict a reprieve within 7-10 days.

Personally my utility bill nearly doubled in December after weeks of super cold weather with no letup and very little sun. As if to tease us Denver temperatures rose unexpectedly to 54 degrees on Tuesday and prompted melting of snow to form rivers of slush. That of course refroze Tuesday night and with sub zero expected for the next two days the roads will be treacherous.

This should cause a significant draw in natural gas supplies for the week and will probably help keep gas prices over the $5.50 level. The cold pushed prices up from $4.60 to nearly $6 in mid December. Declines of natural gas in storage totaled nearly -500BCF over just the last three weeks. A prolonged cold spell could increase those draws but there is plenty of gas in storage at nearly 3,376 BCF as of last week.

Gas driller are going back to work in Colorado, Wyoming and Utah and the plains are beginning to sprout derricks once again. Colorado approved over 5,100 gas well permits in 2009 alone. While that may sound high it was significantly lower than the 8,027 drilling permits issued in 2008. That compares to 6,368 in 2007.

Ultra Petroleum (UPL) announced last week a $500 million debt offering to raise cash for a $400 million purchase of 80,000 net acres in the Marcellus Shale. Ultra said this will boost their recoverable reserves in the Marcellus region to more than 8.5 TCFe. That is an additional 3.5 TCFe over their current estimates. This will boost their net holdings in the area to more than 250,000 acres.

This sudden pickup in nat gas activity is offset by over 1,500 drilled wells in the Barnett Shale that have yet to be completed according to Halliburton. Companies are drilling and capping and waiting for the price of gas to rise before spending the additional money to complete the wells.

All this activity has not helped Chesapeake (CHK). Goldman cut Chesapeake to neutral on Monday saying the country was fairly valued because of the big joint venture with Total SA (TOT). Goldman said CHK would have to spend a fair amount of time deciding which acreage to sell to raise money to develop the rest and this would keep investors cautious in the near term. Goldman said they favored Ultra, Newfield (NFX) and Questar (STR) because of their low cost sources.

I am sure the gas drillers are praying for a long winter to burn up some of that extra production and push prices higher. Unfortunately it may take several long winters for consumption to catch up with production.

Jim Brown