The Energy Report for Monday, August 23, 2010

All the news that did not happen.

I guess before we start to talk about all news that might drive energy trading, let’s talk about the factors that many of you thought might drive the market this week but did not. I heard from some that they thought that this weekend Israel would bomb Iran’s nuclear sites. Did not happen. Others were worried that the market would be impacted by what is now tropical storm Danielle. Well it looks like Danielle will miss the Gulf of Mexico and go up the East Coast. Of course oil bulls have been hoping for some event to help them out as the shoulder season approaches us with supplies near multi decade highs and gasoline futures near 6 month lows.

As more questions arise about the strength of the economy, the weight upon the market is getting larger. It is getting harder to justify long positions especially as the economic recovery is locked in a quagmire. Weak jobs data and manifesting data and a sense that the economy is going nowhere really is making the market look heavier and heavier with each passing day.  In fact even in China crude inventories are rising.

Dow Jones reported that China's commercial crude oil stockpiles as of the end of July rose 1.3% from a month earlier to a fresh high this year of 29.2 million metric tons, or around 214 million barrels sourcing the state-controlled Xinhua News Agency reported Monday. The rise was due partly to an increase in domestic crude output and partly to a dip in refinery crude runs, Xinhua said, noting that the stocks figure excludes crude oil held in the country's strategic oil reserves. 

Oil product stocks on the other hand fell 6.1% one month to 16.21 million tons at the end of July, the lowest level this year, due partly to the decline in refinery output, it said. Crude runs eased 3% from a record high the previous month to 8.35 million barrels a day in July, according to data issued by the National Bureau of Statistics earlier this month. Two refineries at the northeastern port of Dalian had trimmed output in the wake of a pipeline blast, and other plants went offline for maintenance. Crude output rose 340,000 tons in July to 17.22 million barrels, the bureau said. 

Gasoline stocks fell 3.8% last month to 6.3 million tons as the Shanghai World Expo helped fuel rising demand in the peak summer tourism season, Xinhua said. Diesel inventories dropped 7.2% to 8.26 million tons, the lowest level this year, as the summer harvest season in northern China and rescue activities related to a string of natural disasters across the country pushed up demand, the news agency said. China also exported 519,656 tons of diesels last month, almost double the June level, amid firm regional demand, according to customs data released Monday.

Natural gas is pressured as the refill season will end with record high supply. Last week the EIA showed that working gas in storage was 3,012 Bcf as of Friday, August 13, 2010, according to EIA estimates. This represents a net increase of 27 Bcf from the previous week. Stocks were 185 Bcf less than last year at this time and 196 Bcf above the 5-year average of 2,816 Bcf. In the East Region, stocks were 15 Bcf above the 5-year average following net injections of 40 Bcf. Stocks in the Producing Region were 94 Bcf above the 5-year average of 860 Bcf after a net withdrawal of 16 Bcf. Stocks in the West Region were 86 Bcf above the 5-year average after a net addition of 3 Bcf. At 3,012 Bcf, total working gas is within the 5-year historical range.

According to a Penn Energy article by Phaedra Friend Troy a report from Baker Hughes, the number of drilling rigs  working in the US has risen this week. The number of drilling rigs contracted for work in the US increased by 11 this week, to 1,651. This is a substantial jump from the number of rigs working at this time last year, which were only 985 drilling rigs. Phedra says that most likely, ramped up activity in various US Shale plays has helped to boost drilling rig numbers, as well as more steady and higher commodity prices for both crude oil and natural gas.

Requiring a higher investment to bring to market, developing shale plays necessitates special technologies, such as horizontal or directional drilling and hydraulic fracturing. While most of the shale plays are natural gas bearing, which commands a much lower price, many operators are forced to drill and produce from leases to keep their contracts on land on the land.

Furthermore, some shale plays, such as the Eagle Ford and Bakken also produce oil, which at the current price-point allows for profitable drilling and production.  On the other hand, the number of land rigs drilling in Canada dropped this week by 16 rigs. While less rigs at 379 this week, the number is still up 215 from this time last year. Offshore, the number of rigs increased by one this week to 21 offshore rigs working in US waters. That number is down 32 percent from last year, when the US Gulf of Mexico boasted 31 rigs working at this time.

The decrease is most likely caused by the current administration’s deepwater moratorium, which has restricted the rigs that can drill in waters offshore the US. Operators have been forced to declare force majeure on the rigs, and many have been moved to other areas of the world.

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