Higher Home Heating Costs Ahead

Jim Brown
 
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A House committee voted to raise your home heating costs and the cost of your electricity. The vote was 15-11 in favor.

This topic is not what you think. The House Energy and Commerce subcommittee voted to fast track approvals for exporting LNG. The press has been calling for faster LNG approvals so we can ship our cheap natural gas to Europe to help out our friends by providing gas that does not come from Russia.

The subcommittee also passed an amendment requiting LNG exporters to identify the countries buying our gas.

I have repeatedly discussed in these pages the erroneous assumptions that we are swimming in natural gas supplies. We are not but we have enough that the price for our gas is hovering in the $3.50-$4.50 range even though gas in storage is at 11 year lows and active gas rigs are at 19 year lows.

We produce about 70 Bcf of gas per day and consume about 70 Bcf. What do you think is going to happen when the 25+ LNG export terminals are completed and we begin removing 15-20 Bcf per day from our cheap supplies to send to Europe?

It does not take a rocket scientist to realize that our gas prices are going to rocket higher, possibly as much as 2-3 times higher and everything we do with gas will cost more. Natural gas in Asia sells for $15-$18 per Mcf compared to our $4.40 today.

If we develop our export capabilities to the point where we are competing with overseas prices for our own gas then our gas will sell for $10-$12 per Mcf. That is the price of gas overseas less the cost of liquefaction and transportation.

Are we ready to pay three times the current price of gas to heat our homes and produce electricity? Absolutely not. We would also lose our competitive edge for manufacturing. Companies that moved overseas back in the early 2000s because gas was so cheap over there are now dying because of the high prices. They are closing up shop and moving back to the U.S. to regain that competitive advantage.

Manufacturers of all types are able to produce products cheaper because of the low gas prices. This offsets the higher labor costs and taxes in the U.S. compared to overseas. If they are forced to begin paying $12 per Mcf then that advantage is negated and it is cheaper to manufacturer elsewhere like Latin America.

I am always for free enterprise but I am also for strategic thinking. We don't allow oil exports to preserve our strategic capability. We know from experience that oil supplies from overseas can be halted at any time. We need to restrict LNG exports to keep natural gas prices reasonable. For this reason I don't think we need to approve the 20+ export applications already pending. Three maybe four companies have already received approvals and their total exports will be in the 11-15 Bcf per day range. That is more than 20% of our current production and enough to force our gas prices to double.

Lawmakers are not known for their logical decisions but for reacting to the biggest headlines and the largest political contributions. Hopefully the full house will reject this fast track bill and keep our gas prices from rocketing higher.

Inventories

With the blockage of the Houston ship channel over the supply of oil returned. Crude inventories rose +4.0 million barrels for the weekend ended April 4th. The prior week saw a -2.4 million barrel decline simply because the ships could not get to the refiners. Imports for the week rose +481,000 bpd or roughly 3.5 million barrels.

Inventories at Cushing rose slightly by +300,000 barrels for the first gain in more than two months. Inventory levels are still at the lowest level since 2009.

U.S. crude production rose to another high at 8.23 mbpd a rise of +37,000 bpd. The end of the winter weather is allowing producers to put wells back into operation that were frozen out during the winter. Completions are also accelerating without the snow and cold to slow them down.

Distillate inventories were flat for the second week with only a +200,000 barrel gain. Distillate demand rose +132,000 bpd. Distillate inventories are at the same level they were this time in 2013.

Gasoline inventories fell -5.2 million barrels as the refiners try to empty their tanks of winter blends in anticipation of summer blend production. Gasoline inventories are -2.3% below year ago levels. Gasoline demand rose +283,000 bpd to an 8 week high as warmer weather allowed more outside activities. Demand is now 4.5% above year ago levels. The consumer groundhogs are emerging from their homes to shop and look for jobs. Outdoor construction activity is also accelerating.

11 year low in gas inventories. 19 year low in active gas rigs. 25 year high in active oil rigs.





Gasoline prices are expected to average $3.57 per gallon over the summer. However, if oil prices continue to climb we could easily see a return to the $4 level. Summer blend gasoline is more expensive to produce than winter blends and refiners will be adding that cost to the price. WTI is approaching $105 and a five-month high. If tensions overseas continue to support oil prices we will be paying more at the pump.


On the positive side the resolution of the militia problem in Libya will reopen 4 ports for export. Libyan exports had declined to 200,000 bpd and more an a million barrels below capacity. Returning that million barrels to the market will reduce Brent prices somewhat. However, we are moving into the summer season and Saudi Arabia burns more than a million barrels a day to generate electricity for cooling. The two factors will offset each other once the temperatures rise in the Middle East.

Market

One heck of a short squeeze. After several days of declining markets the shorts were treated to a surprise today thanks to the FOMC minutes. The minutes showed the Fed was concerned about headlines in the market suggesting an early end to QE and earlier than expected rate hikes. They explicitly recommended that investors pay attention to the official statement rather than listen to the headlines.

The Fed reiterated the long term view for a lack of rate hikes until late 2015 or even 2016 and restated that they would rise slowly. The Fed was happy with the progress in the economy but continued to worry about the slow pace of inflation. That means the Fed will remain accommodative longer.

The Dow gained +181, Nasdaq +71 and S&P +20.

Jim Brown

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