From glut to shortages. During downturns in major commodity markets there is a tendency to get all doomy and gloomy about the future and get locked into a lower than longer mentality. That kind of short term thinking has engineered a major bottom in petroleum and now that type of thinking may make an on impact natural gas.
In the U.S., we fear a market collapse on Henry Hub natural gas in the spring, as record production should refill storage and cause a U.S. glut. In the big picture, we are sowing the seed of a future shortage. Shell (NYSE:RDSa) is warning that despite the global glut of natural gas we are on the path to a major Liquified Natural Gas LNG shortage.
Royal Dutch Shell says the world could face a shortage of liquefied natural gas within a decade because of underinvestment in new projects and because of what should be a major demand surge during that time as users will increase their usage of natural gas because of the current cheap prices and the environmental benefits of natural gas. Shell warns in its annual LNG outlook, that because of low prices the demand for liquefied natural gas grew by 29M metric tons last year, 30% more than previously expected, to 293M tons.
Shell says that they expect LNG demand to grow by a explossive 500M metric tons/year by 2030. Supplies on the other hand will fall by 300M tons/year due to a lack of new projects and natural declines in existing production. LNG buyers should heed the warning as long term hedges at this point are relatively cheap but thinly traded. While this is a problem for down the line, it is not too early to be getting prepared. Speculators though can sell this market in the short term in the U.S. because we will see more production in the coming months and a bit of a pullback in demand.
Oil prices gain ground after early weakness as the U.S. stock market shot to the sky. This helped oil overcome worries about a potential large increase in weekly supply and more refineries going into maintenance. Saudi Arabia was making news overnight. Reuters reported that Saudi Arabia’s King Salman reshuffled some of the kingdom’s top military officers and several deputy ministers on Monday, in a broad shakeup seen as elevating younger officials in key economic and security areas. This comes as the war in Yemen is dragging on and has not gone well for the Saudis.
Yet, what may move oil today is the testimony by Fed Chair Jerome Powell. His job is to not rock the boat and if he comes off well, and not too hawkish, then stocks and oil will build on yesterday’s gains. If not, we’ll just be prepared for some volatility.
There was also a lot of talk about the future of fracking techniques that could make shale production much better in the future. The Financial Post reported shale drilling is about to take a gigantic leap forward with a new “3 dimensional” technique called cube development.
The Post writes that modern day shale drilling, which combines fracking with horizontal drilling, has largely been a 2-dimensional activity–drilling horizontally through a single shale layer to extract gas from tiny pockets within the shale. But there’s more than one shale layer commercially viable. Here in the northeast we have three layers actively drilled: the Marcellus, the Utica, and the Upper Devonian.
Until now, drillers have targeted a single layer. Sometimes they use the same vertical well bore to target a different layer–but that’s the exception rather than the rule. The rule is changing. In Texas and a few other locations, drillers are experimenting with drilling all the commercially viable shale layers at once–3D style. Encana has a “cube development” (3D) Texas well pad that sits on 16 acres. The pad hosts 19 shale wells and pumps 20,000 barrels of crude oil a day! Devon Energy (NYSE:DVN) has a 24-well pad project in Oklahoma. And others are giving it a try too. Of course while you can produce more you will also deplete formations faster but that too is a problem for another day.
RBOB futures are looking cheap as we get the lull before the summer time blend run-up. With U.S. gasoline demand on track to break records this summer we should get a very strong rally on RBOB soon. The summer switchover season is starting and as we start to see spring return, the RBOB futures should spike. Make sure you are hedged and look for opportunities to buy.
Truckers have also received a break in diesel prices after a sustained run-up but that too may be short lived. Since the beginning of February, fuel prices have dropped approximately 7 cents after rising about 11 cents over the first five weeks of the year. According to the Department of Energy’s weekly report, the U.S. average price for a gallon of on-highway diesel is now $3.007 as reported by CC news. Yet, with late winter demand from Europe and anticipated seasonal crop planting demand around the corner we should see those price rebound in a few weeks.
Grain prices are still being supported by the lack of rain in Argentina and that could support ethanol prices. DTN reports that President Donald Trump has invited federal lawmakers at the center of the Renewable Fuel Standard debate to a meeting at the White House today to discuss potential reform DTN has not been able to confirm such a meeting is scheduled, and representatives of biofuel groups contacted by DTN said they have not received an invitation to participate. Earlier this week, Sen. Ted Cruz, R-Texas, held a rally with employees at the now-bankrupt Philadelphia Energy Solutions refinery. He called for reform to the RFS, after PES alleged in a Chapter 11 bankruptcy filing that $832 million in costs to comply with the RFS was the reason for its demise. During that rally, Cruz said biofuels groups had "refused" to meet with him and other members of Congress to talk about potential changes to the RFS. Stay tuned.
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