Possible shift in gas fundamentals

Analysts at Pritchard Capital Partners in New Orleans reported a pending shift in the bearish fundamentals of the natural gas market with US production expected to drop because of a 57% decline in the US rig count.

Sam Fletcher
OGJ Senior Writer

Analysts at Pritchard Capital Partners LLC in New Orleans reported a pending shift in the bearish fundamentals of the natural gas market with US production expected to drop because of a 57% decline in the US rig count and sizeable production shut-ins so far this year.

The US rig count was down to 955 rigs as of May 1. "The net declines have decelerated from 38 rigs 4 weeks ago to 30, 20, and 10 rigs over the past 3 weeks," Raymond James analysts said on May 4. "Since the 2,031 rig peak in early September, the rig count has been cut by 53%, or 1,086 rigs. The 53% rig count decline after the first 33 weeks since the peak in the 2008-09 cycle compares to a 42% drop in the 1983 cycle, a 15% fall in the 1997-98 cycle, and a 40% retracement in the 2001-02 cycle."

The June gas contract jumped 5.1% to $3.55/MMbtu on May 1 on the New York Mercantile Exchange, far outstripping combined losses from the previous two sessions. The price increase was stimulated by the Institute for Supply Management, a trade group of purchasing executives, whose manufacturing index rose to 40.1 in April from 36.3 in March. A reading below 50 indicates a contraction, and this marked the 15th consecutive month of contractions in manufacturing. However, the pace in April was slower than expected due to a rise in new orders. The private trade group's figures suggested the economic decline may be moderating, analysts said.

Crude outlook
Meanwhile, US crude inventories were at all-time highs while oil demand remained depressed, down 5.4% from year-ago levels in February. In Houston, analysts at Raymond James & Associates Inc. said oil production among members of the Organization of Petroleum Exporting Countries apparently peaked in the first quarter of 2008, with non-OPEC production having topped out in 2007.

"Of course, we cannot definitively prove that this marks the all-time peak (that is, that global oil production will never again surpass the 79.3 million b/d mark)," the analysts conceded. "That is something that will only become clear with the benefit of years of hindsight as was the case with the US in the 1970s. However, it is entirely intuitive to conclude that if both OPEC and non-OPEC production posted declines against the backdrop of $100/bbl oil—when the obvious economic incentive was to pump at full blast—those declines had to have come for involuntary reasons such as the inherent geological limits of oil fields. To summarize, we believe that the oil market has already crossed over to the downward-sloping side of Hubbert's Peak [based on the production curve model developed by geophysicist M. King Hubbert]."

Raymond James analysts said, "With demand as weak as it is now, of course, inadequate future supply is hardly what the oil market is worrying about these days. Nonetheless, reaching peak oil still represents a transformative moment in the history of the oil market, and, if we're right that this moment is already behind us, it is only a matter of time before prices begin to reflect the reality that oil scarcity may become a fact of life in the not-too-distant future."

Pritchard Capital Partners said total crude production from all OPEC members slipped 75,000 b/d, or 0.3%, to 27.58 million b/d in April, compared with March. The 11 OPEC members under quota restrictions—all except Iraq—produced 25.25 million b/d, 410,000 b/d more than their official target of 24.84 million b/d. Nevertheless, OPEC members generally are "staying tight and abiding by their quotas," said Pritchard Capital analysts.

They reported Saudi Arabia reduced its production by 25,000 b/d to 7.92 million b/d, under its official target of 8 million b/d. UAE cut production 40,000 b/d to 2.16 million b/d in April, 63,000 b/d lower than its target. According to industry reports, Abu Dhabi's export allocation of its Murban, Lower Zakum, and Umm Shaif crudes to customers in Asia will stay 15% below contract volumes through May—10% less of Upper Zakum crude than contracted this month and 18% less in June of Umm Shaif, Lower Zakum, and Murban crude.

Kuwaiti production fell 20,000 b/d to 2.09 million b/d, the lowest production level since August 2003, and 127,000 b/d lower than its quota, said Pritchard Capital Partners. On the other hand, they reported Nigeria raised production 50,000 b/d to 1.84 million b/d. Angola increased its output by 10,000 b/d to 1.63 million b/d Algeria and Iran also increased crude production an unspecified amount last month, analysts said.

(Online May 4, 2009; author's e-mail: samf@ogjonline.com)

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