Transcript March 2015 - Lipstick Off the Pig for Oil & Natural Gas

Lipstick Off the Pig Series
Oil & Natural Gas Markets
Revisited
Daryl Montgomery
March 10, 2015
Copyright 2015, All Rights Reserved
What Happened During the Last Big Drop in Oil
in 2008/09
The New York Investing meetup said now is the best
time to buy oil at our Technical Analysis class on the
evening of Feb 17, 2009.
Oil bottomed the next day.
NO mainstream media outlet made this prediction.
Instead they repeatedly told you to avoid oil, keeping
you away from big profits.
Media Reports Versus the Truth
• ‘News’ articles consist mostly of opinion and
have little relevant or actual factual content.
• People quoted are biased and even though
consistently wrong are continually used as
sources.
• Much important information is left out.
• Cited ‘facts’ are highly misleading (and
sometimes out and out wrong).
Checklist for Analyzing Financial News
• Is a key FACT left out? If so, you are reading propaganda.
Bad if it’s de-emphasized too. If there is any truth in the
article it’s at the bottom.
• Is only one side of story told? ex. supply without demand
• Is important information left out that is needed to check on
the conclusions?
• Watch out for use of emotionally charged words and
phrases (this a big tip off) or indisputable statements.
• Are difficult, absurd, impossible or unnecessary conditions
cited as the key to something happening?
• If predictions are made, how were they arrived at?
• Are the numbers cited accurate or even possible?
U.S. Media Oil Coverage in Late March/Early April 2009
(6 weeks AFTER the Bottom)
"We are swimming in oil," analyst Stephen Schork said.
Energy prices have been surging despite xxxx oil inventories
are bloated with surplus crude.
Oil inventories are at 15-year highs suggesting an extraordinary
lack of appetite for energy.
Oil stockpiles have not been this high since July 1993 and are
15.5 percent above year-ago levels!
Phil Flynn of Alaron Trading Corp. said that, for now, optimism
about xxxx has trumped concerns of oversupply.
Schork, in his daily oil report Thursday, called the gains "an
aberration" given the state of global xxxx.
US Running Out of Room to Store Oil, Price
Collapse Next? AP-March 4, 2015
• The U.S. has so much crude that it is running out of places to put it
• storage tanks could approach their operational limits, known in the
industry as "tank tops," by mid-April and send the price of crude and
probably gasoline, too — plummeting.
• Ed Morse, head of commodities research at Citibank, is predicting oil
could dip $20 a barrel before the industry cuts its production levels
----------------------------------------------------------------------------------• Oil investors are making money buying and storing oil because of the
difference between the current price of oil and the price for delivery in
far-off months [oh?]
• Cushing, Oklahoma with 85 million barrels storage tanks could fill up
• [Last weeks storage report indicated] inventories of gasoline did not
rise and diesel fuel inventories have fallen [oh?]
What is Missing from the Article?
•
•
•
•
Specifics on amount of storage in US and % used.
Daily consumption rates of oil in US (20 million)
Reasoning for why oil would fall to $20 a barrel.
That there is a major refinery strike taking place
and this is causing increase in storage (explains
gasoline and diesel storage anomaly). Red Flag
• Support for claim that oil companies have NOT
cut production.
• Large futures buyers can take delivery and store
oil in Cushing, OK for $1 a month per barrel..
U.S. Oil in Storage Since 1990
U.S. Oil Production vs # of Rigs
30 History of Oil Price Drops
Saudi Oil Production
Barron’s Natural Gas Article – 3-6-15
• The title that went out over the wires:
“Natural-Gas Rally Fades as Stockpile Grows”
Fact: The week before, Storage Dropped 12%!
• The title was changed to:
“Spring Saps Natural-Gas Rally” (on March 6th???)
-weather forecasts predict warmer-than-average
temperatures in mid-March. [Where?]
NOT true for Northeast, Midwest and much of South-the heavy users of natural gas.
• Natural gas had a big selloff based on this article.
Almost EVERY statement in it was misleading/false.
Natural Gas – (Govt) EIA Report Feb 18, 2015
• After a record injection season (April-October), weekly working
gas inventories reached a seasonal peak on Nov 7, 2014 of 3,611
Bcf, still 237 Bcf below the 5-year average. [oh?]
• Natural gas storage inventories have not exceeded 5-year avg
since Nov 22, 2013. Ended 2014 at 10-yr low. [oh?]
• Above-average temperatures experienced in the Western region
of the United States have offset the effects of colder weather in
the Eastern region.
• With closer-to-normal temperatures reducing residential and
commercial consumption, EIA forecasts that total natural gas
consumption in the United States will average 88.1 Bcf/d
compared to 90.9 in 2014.
• EIA projects that end-of-March 2015 inventories will total 1,699
Bcf, compared to 837 in March 2014.
What’s Wrong with This Article
• Production doesn’t seem to be keeping up with
demand [bullish].
• Eastern region accounts for much greater demand
than Western region (not mentioned).
• Assumes 2nd half of winter will be similar to 1st half
even though forecasts predicted it would be much
colder AND the cold had already started!
• By Feb 27th, storage was 1710 (down 228 in 1 week)
with 5 more weeks of falling storage likely, yet EIA
still had 1699 prediction.
Natural Gas 5 year Storage Range
5 Year Storage Peaks/Troughs in Natural Gas
Natural Gas Production from Fracking
Map of US Natural Gas Shale Plays
Summary in U.S.
• Big decline in rigs: Oil -36%, Nat Gas -22% yr/yr.
This is a leading indicator of production.
• Majority of US Nat Gas production from Fracking.
• One fracking rig closed, means many wells.
• Fracking boom financed by unlimited credit.
• Bankruptcies are beginning, credit will shrink.
• Sea change going on in natural gas production.
Fracking boom will be slowed and so will output
leading to more bullish picture next few years.