Inventory Crazy

Jim Brown
 
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Natural gas inventory levels took a major hit last week with a decline of -285 Bcf. To put it bluntly gas inventories are falling off a cliff as a result of the back to back winter storms.

Gas storage fell to 3,249 Bcf according to the EIA. That is -488 Bcf (-13.1%) lower than the same period in 2012 and -261 Bcf (-7.4%) below the five-year average. The U.S. produces about 70 Bcf per day. That means a strong winter storm like we had the prior week forced consumption of 42 Bcf per day more than we produce.

The -285 Bcf draw from storage was a record drop in inventory levels according to the EIA. The prior record was -274 Bcf in January 2008. The average decline for the week of December 13th is -133 Bcf. About 49% of U.S. homes use natural gas for heating. This is not unusual. We have not produced enough gas in decades to accommodate the high demand periods during the winter. Because of this we inject surplus gas into storage during off periods in the spring and fall to build up a supply of gas to overcome those high demand periods.

Helping to push inventories lower were two unplanned pipeline shutdowns in the Marcellus area. Maintenance issues caused each outage. Also slowing injections into storage is the newer problems of "freeze outs." Some wells become unproductive in really cold weather when maintenance issues are expensive and time consuming. To combat this producers simply turn the wells off until warmer weather returns. With gas prices in the $4.50 range I doubt there are too many setting idle but this has been a growing problem.

The various shale plays have increased U.S. gas production overall but they are not growing that fast since exploration is primarily for oil. As of January the Bakken is expected to produce 1.12 bcf/d, Eagle Ford 6.09 Bcf/d, Haynesville 6.36, Marcellus 13.72, Niobrara 4.6 and Permian 5.05. Other production including conventional gas is roughly 33.21 Bcf/d.

If each shale field increase gas production in 2014 by 25% that would be about 9 Bcf/d by year-end but it is not going to happen. The Haynesville production fell -27% in 2013 or roughly -2.3 Bcf/d. The Niobrara was basically flat with an increase of .08 Bcf/d.

Gas has been out of favor since 2008 and only 369 wells are drilling for gas compared to 1,411 for oil. With gas wells depleting very fast over the first two years the lack of drilling is slowing production rather than increasing it. In 2013 U.S. gas production only increased +2.58 Bcf/d despite an average of 1,800 active well. Oil wells through off "associated gas" which can be a lot or a little depending on the well. Hopefully the surge in gas prices will have producers allocating some of their capex budget back to gas drilling in the spring


Crude inventories declined -2.9 million barrels for the third consecutive week of declines. We should see declines for the next two weeks and then a surge in inventories for the first week in January as a result of the December 31st property tax deadline. Production was flat at 8.06 mbpd and just under the prior week's record of 8.08 mbpd. Imports rebounded sharply from 6.9 to 7.7 mbpd. That is strange given the approaching tax deadline.

Inventories at Cushing declined for only the second time in nine weeks. With Transcanada now filling the Keystone pipeline there is oil flowing out in what will be a permanent move. Transcanada said it would take 4.0 million barrels to fill the pipeline and deliveries of 700,000 bpd will start the first week of January.

Distillates unexpectedly declined -2.1 mbpd compared to expectations for a 200,000 bpd gain. This might have been the result of airports and airlines moving jet fuel to local storage in preparation for the holiday travel. It could also be the result of increased heating oil usage during the abnormally cold weather.

Gasoline inventories rose +1.3 million barrels and the fourth week of gains. This is due to refiners trying to refine as much oil as possible by year-end. However, refinery utilization declined from 92.6% to 91.5%.

Gasoline demand also increased by a whopping 668,000 bpd. This could also be the result of retailers and distributors staging gasoline closer to the pumps ahead of the holidays. It is also due to the uptick in the number of shoppers going from store to store as the shopping season reached its frantic peak.

Refined products supplied to the market rose to a two month high at 20.99 mbpd.

I added the natural gas inventory numbers to the table beginning this week.





Market

Surprise, surprise! The post FOMC rebound continues but we are starting to see some slowing gains. The Nasdaq gained only +6 points today after adding +175 over the last week. The S&P added a respectable +5 points but was slightly lackluster. The Dow has added nearly 650 points since the post Fed dip and is clearly in overbought condition.

I expect the melt-up to continue for the next several days but then fade into year-end. I am looking for a decent dip in early January as portfolios are restructured and fund managers take some profits off the table to use in 2014.

Q4 earnings could be ugly as the 10:1 imbalance in guidance warnings over positive guidance suggests. Eventually fundamentals will matter again and not the amount of Fed purchases. For the time being those purchases are on track to total $650 billion in 2014 so plenty of fuel left in the tank.

Jim Brown

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