Crude oil has been the center of energy-related headlines since 2H14 when it started its dramatic ‘normalizatin’ process while everybody (us included) seems to have forgotten about natural gas.  So we thought we should give an update on natural gas as well.

Market Watch reported that May natural gas NGK15 settled at $2.49 per million British thermal units (MMBtu) on Monday, ahead of the May contract expiration on Tuesday. Prices, based on the front-active contracts, haven’t settled at levels this low since June 15, 2012. 

Chart Source: Market Watch, April 27, 9 pm US CST

According to EIA inventory report, total domestic natural gas storage has been trending in the same direction as crude inventories –up, way up.  As of April 17, total lower-48 working gas underground stockpile stood at 1,629 Bcf (Billion Cubic Feet), up 82.6% from a year ago.  However, unlike crude oil inventories which have reached unprecedented ‘no-man’s land’ by any historical record, natural gas inventory is at least still within it 5-year range. 

Source: EIA, week ending April 17, 2015

Despite the export ban on crude oil, domestic oil may still find ways to move some of the glut to international markets via petroleum products like gasoline and diesel.  U.S. already beat Russia and achieved the status as the top natural gas producer in the world.  But while LNG seems to offer some promising prospect for gas globalization, natural gas in the U.S. remains land-locked and a distant poor little brother to the tall, dark, crude oil.

Based on an energy equivalent basis, crude oil and natural gas prices should have a theoretical ratio of 6 to 1.  The geographical constraint of domestic gas was part of the reason when Henry Hub price dipped below $2 about two years ago, the oil to natural gas ratio exploded to 52:1 (WTI at the time was at ~$102/bbl) surpassing the previous record-breaking 25 to 1 in 2009.  That ratio right now is about 23 to 1.

For now, natural gas is in the ‘shoulder season’, neither too cold nor too hot to spur any seasonal demand spike, while also suffering from the same overall demand slow-down as oil with limited capability to move the over-supply outside the U.S. and Henry Hub.

Market Watch also noted that one analyst see the $2.50 level as “a psychological support number,” while T. Boone Pickens said prices will reach above $3 this winter.  We believe the $3 or $4 price level is certainly attainable with a couple of cold snaps, and/or hurricanes, but the oil to gas ratio most likely would not revert back to its historical pattern of 8-12x (prior to 2007) any time soon, even with the new normal of $50 oil.  

EconMatters

Last Friday we finally got confirmation of where all the natural gas supply has been coming from as Cabot (COG) reported its earnings. Just like Chesapeake (CHK), they reduced natural gas output, but on a much grander scale. CHK has yet to report and will do so on May 6th providing even more color on the subject.

Last month they announced a 2% reduction in NGAS volumes to 1-3% for 2015 vs. 3-5%. But the ramp up of supply from Marcellus, and to a lesser extent Utica, and a corresponding flat to up rig count in natural gas rigs in those areas appears to be the reason why NGAS has crashed some 30% despite a relatively cold winter in the mid-west and East especially. The magnitude of the supply increase is simply stunning, begging the question: what was Cabot’s management thinking by increasing NGAS production in Marcellus by some 40% to 162 BCF in 1Q15 and up 12.5% sequentially from 4Q14? And, to boot, 4Q14 was up over 13% sequentially from 3Q14! 

Related: How Much Does OPEC Really Earn?

Source: Company Data

The Marcellus region began ramping up in 2010 which has resulted in a surge in production which has probably peaked 1Q15 in terms of rate of growth. It has by far contributed to the largest increases in output and has signal handily resulted in the crash in prices.

Related: What Is Triggering Recent M&A Activity In The Energy Sector?

With spot prices hovering around $2.45/MMBTU and within 10% of the most bearish estimate targets this quarter, it seems the worst of the oversupply is behind the market especially with EPA rules forcing coal to NGAS switching in volume this summer. Coal still represents the majority of fuel used to generate electricity despite this trend.

The cut backs in production growth and higher demand will eventually balance the market which, mind you, is not that out of balance. We are still 6% or so below the 5 year storage average, but the short sightedness of traders, as was the case in oil markets, appears to have repeated again in the NGAS markets as both react to short term signals vs. discounting the fundamentals to come.

Related: Putin Betting On An Argentinian Shale Boom

We are not forecasting a bull market in natural gas by any means but on top of what was already mentioned, LNG and gas exports are rising; especially Mexican NGAS which will further tighten the market. Since traders work on what is incremental, with supply waning and demand increasing sentiment should soon reverse and prices should rise over $3.00 in 2H15. Just like in oil, NGAS prices have overshot and practically all incremental new wells ex NE are not profitable at current spot or, if they are IRRs, are under 20%.

Producers are no longer receiving NGL subsidies from high prices in areas like Eagle Ford to justify new drilling as NGL prices hover in mid-teens. One thing to watch for is the rise of oil above $60 which will open the threat to more oil coming, thus reopening the potential for more NGAS supply as a byproduct. However with futures markets net short in terms of open contracts it won’t be long that short term traders will sense the tide is turning.

By Leonard Brecken of Oilprice.com

More Top Reads From Oilprice.com:

• Big Hit For U.S. Oil Production In January
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• How The Majors Are Playing The Oil Price Slump

If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality. 

Put simply, a false “floor” was put under asset prices via fraud and funny money.

Consider the case of Coal.

In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet. 

With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased virtually ALL of the bull market’s gains (the green line represents the pre-bull market low).

Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy. 

What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.

We get confirmation of this from Oil.

For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).

That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.

And then Oil fell nearly 60% from top to bottom in less than six months.

As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.

Moreover, the damage to Oil was extreme. Not only did it collapse 60% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.

This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.

In short, the era the phony recovery narrative has come unhinged.  We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.

Best Regards

Graham Summers for Phoenix Capital Research

Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.

Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.

Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

….for larger Charts & more commentary go HERE

New $1 Billion Funding Source For Mining Projects

Finding project funds is becoming a bigger and bigger issue in the resource space. But developers in the mining sector just got some good news on an innovative new source of capital.

That’s the Capital Mines Hydrocarbures fund. A C$1 billion purse being put forward by the government of one of the world’s top mining jurisdictions—the Canadian province of Quebec.

Quebec’s Economy Minister said last week that the fund is now close to being ready to launch. With C$200 million already put aside—and another C$800 million in follow-on funding being prepared.

The fund will reportedly invest directly in projects within the province. No details have been given yet on what sort of specs the government will be looking for.

Preliminary indications however, are that managers here will look to deploy larger investments into a few different vehicles. With the Minister saying that the fund has “many things in the pipeline” and may be able to support as many as ten projects.

Such direct investments from the government are obviously a novel strategy in the resource space. But in Quebec’s case, buying into resource projects may turn out to be a sound move.

That’s because some of the most important development projects in the minerals space have come within the province the last few years.

The Eleonore gold mine, for example, was commissioned by Goldcorp last year—and represents one of the few projects to go from grassroots discovery all the way to functioning mine during the current resource cycle.

All of which has proven Quebec to be an attractive destination for exploration and development. A reality that will be further enhanced by financial support coming from the new fund.

Add that to existing benefits in the province such as tax-friendly “super flow-through” rules for mining investors, and it appears that Quebec is a place all minerals developers should have on their radar screen.

Watch for specific investments deployed by the fund over the coming months to see if your project might qualify for this unique finance source.

Here’s to putting up the money,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook