Jump in rig count should be a positive for jobs

In another sign of improving momentum in the US economy, the active oil and gas rig count started rising in recent weeks. This is after a major decline in 2012 and a stagnant 2013.

Source: Baker Hughes

A big part of the drop in 2012 was due to the sharp decline in natural gas prices. Production in certain situations became unprofitable - particularly for some of the more leveraged projects.

Source: barchart

Now that gas prices have firmed up and likely to stay that way (see post), some of the extraction projects make sense again - especially as technology improves. Should conversion from gas to liquids become less expensive (see story), rig count will increase further.

Like it or not, oil and gas jobs tend to be high-paying - which should help with US wage stagnation. The industry also generates a decent job multiplier effect through the various peripheral sectors that support it (housing, manufacturing, transportation, etc.) If sustained, this jump in rig count could therefore provide a meaningful contribution to the US economic expansion.

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Natural gas storage surprise prompted massive short covering

This morning's EIA natural gas in storage report took everyone by surprise. We started out with this projection.

Bloomberg: The U.S. Energy Department’s natural-gas inventory report, scheduled for release at 10:30 a.m. in Washington, will show that supplies rose 2.6 percent last week, according to a survey of Bloomberg users.

The government’s report will show that inventories gained 74 billion cubic feet in the week ended June 8 to 2.951 trillion cubic feet, according to the survey.

At 10:30AM the EIA had this to say: "Working gas in storage was 2,944 Bcf as of Friday, June 8, 2012, according to EIA estimates. This represents a net increase of 67 Bcf from the previous week." This was visibly below the Bloomberg survey.

Working gas in underground storage compared with 5-year range (source EIA)

So what's the big deal? Again, we have a technical issue in the market. The nat gas market has been left for dead with the speculative part of the market piling into the short positions. A surprise in the inventory number sent the shorts covering. And in this market a shot covering is not a couple of percent. Natural gas futures spiked over 12% in a short period of time.

Natural gas active futures contract intraday

It remains to be seen whether this rally will carry over to next week. But this is a good lesson for other markets with overextended short exposures such as oil, euros, etc.

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US coal production declines as the industry faces further stress

Here is a follow-up to the post on the declining US coal demand. As natural gas hits a new low today, the pressure on US coal industry increases further.

Natural gas nearby futures contract (Bloomberg)

The impact is unmistakable. The latest data from EIA is showing 2012 coal production levels materially below the 5-year range for this time of the year.

Making things even worse for the coal industry is the new EPA proposal to reduce carbon emissions by electricity companies. This proposal would turn the new coal-fired power plants into money losing investments.

Reuters: The first-ever U.S. proposal to restrict carbon dioxide emissions would have once been a major shock to electricity companies by making it uneconomic to build new coal-fired power plants.

But the irony is that the essence of the EPA's proposal has effectively already been usurped by low natural gas prices, which also turn coal-fired plants uneconomic.

Reuters: But the discovery of abundant supplies of cheap natural gas means that many of those plants won't get built anyway - making the Obama administration's plan, while painful for the coal industry, much less relevant.

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US natural gas hits another all-time low

The super-early spring in the US is bringing with it two things: terrible allergies due to high pollen count and really low natural gas prices due to too much inventory. Natural gas hit another low today with a 4% drop.

Natural gas futures contract (Bloomberg)

It is important to note that this is a US-specific phenomena. Globally natural gas prices remain elevated and the spread between the US gas price and prices elsewhere has been rising rapidly. "Lake Charles" refers to the Lake Charles terminal (Louisiana pipeline).

Natural gas prices (Source: Barclays Capital)

The only real way to arbitrage this divergence is with Liquefied Natural Gas (LNG) that can be delivered to these offshore locations. And it will be a while before the capability is there to export LNG on any significant scale.

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Natural gas inventories still out of whack

As discussed here back in December, natural gas continues to be pressured by the extraordinarily warm winter. EIA just released the storage numbers for the week and we continue to have far more gas in storage than is typical for this time of the year.

Working gas in underground storage compared with 5-year historical range

Gas futures responded violently as the market was hoping to see a lower inventory number.

Natural gas futures contract (intraday)

The long-term trend of divergence between crude oil and gas is becoming even sharper. The US should be focused on deploying more natural gas across industries that currently rely on liquid fuels as well as accelerating gas liquification capabilities to develop gas export industries.

Oil vs nat gas (dollars per barrel)

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A sober look at US natural gas

Looking back at a two year old post on natural gas called "Natural gas prices below zero?", it feels as though we are back to the same price dynamics. Price for the "nearby" Henry Hub contract hit new lows today at $3.317/mmBtu.

What is driving this price collapse? As before it is the usual suspects: limited storage, strong production (particularly in US shale), increasing reserves, and warm weather.  Let's take a quick look at the first three.

1. Storage: The chart below compares current storage usage versus the historical range based on where we in the seasonal cycle (inventory drops off in the winter and increases the rest of the year).  Just as in 2010 and 2009 we are at the top of the range and may go even higher if the weather in the NE & Midwest stays warm.

Source (EIA)

2. Production continues at rates significantly above historical levels. 

Source: EIA

This growth is driven by a rapid increase in shale gas production.  According to EIA, the US shale production increased 14-fold since 2000 and is now 22% of total US production.

Source: EIA

3. And estimated reserves in the US continue to increase.

Source: EIA

It is almost as though the US is becoming the Saudi Arabia of natural gas but with limited export capabilities. No real support for natural gas prices is expected to come until 2013. According to a Goldman report this support will come from moderation in production growth and environmental restrictions that will force conversion from coal burning to natural gas.

Goldman: 2013 shaping up as a transition year to a more balanced market We expect 2013 to be a transition year, with the market’s reliance on priceinduced responses (e.g. need for coal-to-gas substitution) diminishing as US shale gas production growth moderates, economic growth improves and looming increased environmental restrictions – notably, CSAPR Phase 2 and Maximum Achievable Control Technology (MACT) – further boost gas-fired generation at the expense of coal. On net, we expect less priceinduced coal-to-gas switching will be needed than in 2012, allowing prices to move higher, and are introducing a 2013 NYMEX natural gas price forecast of $4.25/mmBtu

Until then if the weather stays warm, there is no telling how low natural prices could drop.

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Some recent facts on the US auto industry

Based on the comments made by the judge overseeing GM’s bankruptcy process, the “New GM” is expected to exit bankruptcy on June 10 with $48 billion in liabilities (part of which is $17 billion of debt and and $9 billion of 9% perpetual preferred stock). The New GM has a pipe dream of maintaining 19% of US market share (good luck with that). Saab, Hummer, Saturn, and Pontiac were approximately 3.6% of the market share, and are now gone from GM's portfolio. Remaining brands, Chevrolet, Cadillac, Buick, and GMC would need to recapture the market share lost from the "discarded" brands.



Here are some other recent events in the US auto space (source: Goldman):



Below are the numbers for monthly US light vehicle sales (millions of units) including the seasonally adjusted chart (SAAR). Sales in the US have dropped off the cliff according to Autodata and Goldman is predicting some recovery, mostly from the "cash for clunkers" program.



In therms of market share changes year over year, Ford has made some inroads grabbing share from GM and Chrysler.



With plant shutdowns the Detroit-3 are bringing inventories under control after having a huge backlog. GM still has ways to go to get back to historical average, while Ford has dealt with the slowdown quite well by adjusting down the inventory.

Detroit-3 Inventories:



The Detroit-3 have been reducing incentives to customers simply because they can't afford it.

Incentives:


The non-Detroit (foreign owned) US manufacturers however have been increasing incentives to move inventory (as they too struggle with collapsing sales) and grab market share. That's why Honda margins for example have been dropping significantly.

Incentives:


The recession is having a strange effect on used car pricing. As people are avoiding new car purchases in order to reduce their leverage and monthly outflows, or are just unable to get financing, used car sales have picked up. With fewer people leasing and more consumers trying to buy a used car, the Manheim index of used car prices has spiked.



Tough times for the industry will continue, impacting the rest of the economy (including the dealers). Until the credit markets pick up and TALF type ABS financing returns to the private sector, we will see a slow painful grind out of the most severe auto sector recession we've had since the industry's beginnings.

Don't bet on natural gas recovery just yet

Crude oil and natural gas have posted a spectacular divergence in 09. This is the biggest divergence in the history of the two products in the US in a single year.



There are a couple of explanations. From the Calgary Herald:

Shale gas production in the Unites States, due to higher prices and new technology, caused U.S. domestic supply to grow rapidly, to all-time record levels.

At the same time, the capacity to import liquefied natural gas (LNG) into the United States was expanded to fill the expected gap from the decline in U.S. production. Now LNG has become a significant supply threat to North American producers during the summer months.

With regard to Shale gas production, here is a quote from Schlumberger:

The challenge is to release it from rock as impermeable as concrete. The prolific Barnett Shale in the Fort Worth basin covers much of North Central Texas, but organically rich shales are also present in the mature Illinois, Michigan, and Appalachian basins. Recent advances in drilling and completions (coiled tubing,
perforating, and hydraulic fracturing), along with higher gas prices, are making shale gas production economical.

Well, "higher gas prices" no more. Natural gas supplies in the US are now at record levels. There are numerous highly levered firms that bet heavily on natural gas recovery that are now struggling.

From the WSJ: natural gas supply in the US


The futures curve is quite steep, indicating a near term recovery.

US Natural Gas Futures Curve (NYMEX Henry Hub)


However, while crude oil depends to some extent on the emerging markets growth, the US natural gas price in large part depends on the economic recovery in the US - and that may take a while.