Futures are in backwardation for first time in a decade

Gas for delivery this year and the next is trading at a steep premium to contracts further in the future, a condition known as backwardation. The last time the forward curve looked this way in the fall was a decade ago, when supply disruptions from hurricanes sent gas prices soaring in the era before the shale revolution unleashed a production boom.

… unusual volatility in the gas market for the next year as rising exports and diminishing output from shale basins stoke concern that output won’t be enough to prevent price shocks in the winter, the peak season for heating demand.  Backwardation emerged in June and has become more pronounced after government estimates showed U.S. gas supply will drop in 2016 for the first time in 11 years, according to Bloomberg.com.

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Chesapeake Energy Declares ‘Propageddon’ With Record Frack

Production boosted 70 percent as a result of the new method, according to Bloomberg.com.  Chesapeake said Thursday at an analyst conference that it set a record for fracking by pumping more than 25,000 tons of sand down one Louisiana natural gas well, a process the shale driller christened “propageddon.”

Halliburton confirmed it executed the record frack for Chesapeake … The price to frack a well is so low for explorers that the work is still unprofitable on the services’ side, Paal Kibsgaard, chief executive officer at Schlumberger Ltd., told analysts and investors Friday on a conference call.

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Of Energy companies, Venezuala’s Bond Oil Woes Limited to COP

Since the lawsuit has been announced between Conoco Phillips and Venezuala’s PDVSA, COP’s stock is down 5.68%.

Venezuelan President Nicolas Maduro and his energy minister Eulogio del Pino are going on a tour of the world’s crude producers to drum up support for a deal to limit output just as a critical deadline for investors to swap bonds in the state oil company nears at 5PM EST, today.

Two of the largest oil-field services companies beat Wall Street profit targets this week, renewing expectations of higher third-quarter earnings for energy companies amid stabilizing oil-futures prices.

Oil and gas giants Exxon Corp. and Chevron Corp. report next week, as do major refiners. Smaller energy companies will report in early November.

Small and medium exploration and production companies have snapped up assets and, in some cases, already increased capital spending plans this year (Apache Corp. which hiked its spending blueprint to develop an oil field in west Texas’ Permian region that it called “massive,” is the most notable example).  Crude Oil up $0.22 or 0.43%.  CHK shorts may be piling on, despite several brokerage houses upping their signals, thinking the Venezualan issues will affect the company, down $0.23 or 3.33%, another great entry point, since as explained below, turmoil in Venezuala will have a negative affect on supply.  COP, up $0.05 or 0.12%, signals the lawsuit is baked into the market and the probability of default or, perhaps, another extension, is highly likely, as detailed by Barron’s here.

If there’s any sign that Maduro will be kicked out of office, we suspect that he will take PDVSA down with him, which could point to more unexpected supply outages.

If the default does happen, and the political chaos continues, Venezuela is at further risk of seeing more production declines. The momentum of the decline would be too late to stop as fields continue to be neglected and result in more supply outages than the current consensus believes.

The issues in Venezuela is a serious one. And whatever comes next for Venezuela has very meaningful implications to the oil markets.   If you are interested in reading SeekingAlpha.com HFI Research’s outlook, please consider signing up here.

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The USA will Export more LNG in 2017 than at any other time in 60 years

  • A wave of USA LNG Exports hits the market.  Sometime in 2017, for the first time in 60 years, the U.S. will likely sell more natural gas to the world than it buys … Shipments to Asia are also set to rise as India increases LNG imports amid low prices.Europe could be in play, too, with the U.S. trying to compete with Russia, which supplies 40 percent of the European Union’s gas imports. Turkey, Russia’s third-biggest buyer, took its first LNG cargo from the U.S. in late September. “The fact that the U.S. is actually exporting, and particularly LNG to places where Russia has almost monopolistic power, is a huge development,” says Majed Limam, a senior consultant for LNG and natural gas at ship brokerage Poten & Partners.
    Since it opened in June, the newly expanded Panama Canal is now wide enough for most LNG tankers. CHK up $0.19 or 2.83% on 2X 3m moving average volume.  More significantly, it closed up 8.65% from the low of the day.

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Susquehanna’s Biju Perincheril and Andy Li raise their CHK price target …

to $6.50 from $4.50.  In the opinion of this author, this forms a new base for the stock.  On Oct. 20, Chesapeake Energy (CHK) will host its first Analyst Day in two years.  Investor confidence is building and the stock reached as high as $6.60 this morning.  Volume is muted at 34.6% of the 3 month average.  Crude oil dropped this morning, but recovered up $0.14 or 0.28%.

’17 and ’18 EPS decline to gains of $0.21 and $0.60, respectively (down from $0.26 and $0.68), primarily reflecting higher interest and share counts, offset by modest improvements in LOE and nat gas realizations.

Oil Prediction Most Bullish Since 2014

… the number of hedge funds that are bearish Oil have dropped aggressively after the OPEC deal per the CFTC’s Commitment of Trader’s report. The net positioning is now the most bullish since 2014 as the aggregate bearish WTI bets have fallen over 50% in the last three weeks. This drop in bearish positioning has removed a major headwind for Oil, and any strong move higher will likely have fewer participants fighting and more joining.

Oil Prediction Most Bullish Since 2014, class action lawsuits will probably go unfounded or one-time write-off and leads to a buying opportunity (CHK: down $0.21 or 3.20%). Other oil peers finished flat or were up fractionally (XOM, CVX, APA).

Super Spike Theory

Super Spike Theory

Brent crude reached a one-year high of $53.73 a barrel in London on Monday after Saudi Arabia and Russia, the world’s two largest crude producers, pledged a joint effort to limit output to counter a global glut and prop up prices.

“If OPEC sticks to its new target, the market’s rebalancing could come faster,” according to the agency, which last month said the surplus would persist into late 2017.

While the commodity fell on Tuesday, it was near the highest level in 15 months.

Crude Oil closed down $0.53 or 1.03% (profit taking from yesterday’s rally), CHK taking it on the chin (undeserved), down $0.16 or 2.48%, XOM down $0.70 or 0.79%.

Crude Oil Breakout Today