Thursday, July 30, 2009

Oil up, gas down, and Hurricane season is here

I had meant to include the weekly plot of gasoline demand in the last post, that began by talking about the hybrid, but somehow the post drifted into a different direction and I ended up not including it. The graph, from this week’s TWIP, showed that gasoline demand is really remaining fairly constant at a rate slightly above last year(and in about the same relatively flat condition), though you might want to recognize the significant difference in price. This time last year was about the time that price peaked.
Gas demand over the past year (EIA TWIP)
Gas prices over the last two years (EIA TWIP)

The question on where it goes from here does depend on the way the global economy goes, though as you gather, in the case of gasoline, with the spread between supply and demand now controlled by OPEC, I expect that there will be a slow but steady increase.

Natural gas, on the other hand is another story. The Natural Gas Weekly (NGW) report is out today, and shows the slow but apparently inexorable decline in prices is continuing.

Natural gas prices against oil prices (EIA Natural Gas Weekly)

This steady decline in gas prices, which may well continue if there is the influx of LNG at year end, has the potential to significantly hurt the developing production of natural gas from the gas shales. As I previously noted, Chesapeake may well be able to produce from these formations at less than$4 a tcf, but once the price gets down to $3 or so, then I suspect that those bets are off.

The NGW is not very comforting in that regard, noting that
At $3.41 per MMBtu on Wednesday, July 29, prices at Henry Hub were $9.17 per MMBtu, or 63 percent, below last year’s level at this time. Current spot prices at market locations in the lower 48 States average about 62 percent below year-ago levels.
As a result there has been a further increase in storage injection, significantly above the 5-year average figures. The NGW blames this on the unseasonably cool temperatures:
Relatively mild temperatures in each of the Census Divisions in the lower 48 States during the week ended July 23, 2009, likely contributed to the above-normal level of injections into storage. Based on the National Weather Service’s degree-day data, temperatures in the Lower 48 States during the week were, on average, more than 2 degrees cooler than normal and 4 degrees cooler than last year’s levels.
Whether this has anything to do with the lack of sunspots, and the consequent slight drop in received sunlight is a topic for another day. (If the colder weather continues into the winter, then the drop in demand for air conditioning may be compensated by the increased need for heat). Though the stubborn refusal of the global temperature to follow the steadily increasing curve that has been predicted by the AGW models is becoming remarkable.

That difference with prediction is also evident from the subject of the TWIP front page this week, which dealt with the amount of oil from the Gulf of Mexico (GOM) that gets shut in each season due to hurricanes.

Impact of Hurricanes on GOM production (EIA TWIP)

The slow decline in overall production is partly because of the loss of smaller and older producers following recent major hurricanes – production too small to justify the redrilling of wells, and also it is because the fields near the coast are well defined and exploited, and are in overall decline. But the risks from hurricanes are clear, when the platform locations are examined.

6357 oil platform locations in the GOM

The question that the TWIP asks relates to the likelihood of there being strong and frequent hurricanes through the platform-intense regions this season. So far, with the cooler relative sea temperatures there has not been the activity of more damaging years, but the TWIP quotes NOAA as predicting a slightly higher than normal season, with a consequent transient outage of 4.5 million barrels over the season. However the recent identification of this as being an “El Nino” year may change that prediction, though we won’t know until next week, August 6th to be precise.

Whether storms are increasing in severity has been a subject of debate, following such a prediction in “An Inconvenient Truth” , but the data apparently does not show that there has been an increase in storm energy but rather the reverse.

Historic trends in Cyclone Energy (Ryan Maue )

And, as far as oil and gas production from the Gulf is concerned it is only going to take one strong hurricane with the wrong path and, as historic experience has shown, production can be really impacted. (It took years to get the Thunder Horse platform back into commission after it was damaged by Hurricane Dennis in 2005, and the 250,000 bd of oil and 200 mcf of gas production temporarily lost).

The season is yet young, and we’ll just have to wait to see what transpires.

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