Gas over Oil, III

Independent Stock Analysis has long suggested world oil production oil appears to be on an undulating plateau, the shape of which will be determined by price.

And the oil price may be remarkably steady for the years ahead.  OPEC and the high cost of horizontal drilling will protect the downside.  High producer profits and price sensitive demand cap the upside.  In light of the large WTI-Brent spread, a range of $75 to $125 oil seems reasonable, as does stateside gasoline prices of $3.00 to $4.25.  Perhaps for many years.

ISA has well documented the twin forces of declining U.S oil demand and robust production.  “It wouldn’t take a lot of pushing for the US to import no oil.”  And sooner than generally understood.  (AOL Energy)  Note the OECD vs emerging market demand at Yardeni.

CRUDE OIL ABOUT TO PLUNGE?  (inveTRAC).  Actually, the technicals broke yesterday.  Crude Oil is completing a H&S top by Peter Brandt.

So oil producing equities seem to lack a catalyst to run them higher.  But what about natural gas and the gassers?

Natural gas?  Eew!  In my 20 years of active stock market speculating and investing, I have never seen something so disparaged.  ‘Investors’ who couldn’t explain the injection and withdrawal cycle are among the most vocal bears.  The price has almost doubled since the May bottom and is still at a depressed level and uneconomic for most producers.

Consider productivity:  Is a Haynesville well 2.5x more productive on a cost basis than a Bakken well?  (Oil Gas 360).  Does this mean a 15:1 oil to natural ration is economically correct?  Perhaps today’s 25:1 ratio will overshoot 15:1 on the downside.

The large fundamental natural gas bull argument is the baseline shift in demand.  First, the 100+ million tones of coal displaced this year will not be returning to market.  Second, the industrial renaissance is real (Mark Perry and Daniel Yergin).

Natural gas has not only taken share from coal, even a nuclear plant is closing (Reuters).

The Marcellus is a monster (Fuel Fix) and will continue to grow at the expense of other producing regions.  Associated gas production and the backlog of wells to complete have kept supply higher for longer.  Soon enough, however, the collapsed natural gas rig count rear consequences.

Ironically, weak oil prices would be positive for a natural gas cyclical run.  Currently E&P cashflows are dependent upon oil, not natural gas.

From Testosterone Pit:

“The EIA’s Monthly Supply and Disposition Balance for July, the latest available, shows that production of dry NG through July was still 6% higher than last year! From April through July, production was up 4.2% over prior year. For data since July, we have to look at the EIA’s weekly figures (available only in percentages), and they’re tapering off: the last week that production was over 3% higher than the same week in 2011 was the week of August 15, at 3.4%. Since then, the differential hovered been between 1% and 2%. Last week, it dropped to 0.6%. So production is still higher than it was at the same time last year (but barely), even as the rig count dropped to 427. Waiting for production to decline is like waiting for Godot.

But demand for dry gas is ballooning. From April through July, which excluded the effects of the warm winter, demand was up a stunning 9.6%. The EIA’s weekly year-over-year demand numbers are volatile, but since late August, the low point was the week of September 12 with a 6.2% increase in total demand over the same week last year; four weeks in that period saw double-digit increases, with the week of October 3 jumping by 18.7%.”

LNG markets are expected to remain ‘supply challenged’ over the long term (Interfax).  While a U.S. LNG group launched a campaign on Monday for natural gas exports (Reuters), remaining skeptical seems prudent.  Remember, if given the opportunity North American gas producers could flood the LNG market.

Independent Stock Analysis does not advise, but I do present ideas.  ISA’s favorite gasser reports Q3 results on November 1.  Encana (ECA) reported this morning.  Chesapeake (CHK) is a sleeping giant for those who overlook warts.

This will be the only post today.  I have a funeral to attend and quarterly conference calls enjoy.