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Energy & Commodities

What the “Real” Oil:Gas Ratio Is Saying about Natural Gas Stocks

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Posted by Keith Schaefer

on Monday, 30 April 2012 08:25

Intermediate natural gas weighted stocks in Canada are valued higher—sometimes a LOT higher—than oil stocks, despite oil being worth 35 times more than gas.

And that could mean significant price weakness for already battered natural gas stocks, says Haywood Securities analyst Alan Knowles.

“People think (the stocks of) gas companies have corrected, but they’ve only partially corrected,” he told me in a phone interview.  “The correction hasn’t kept pace with how far it should have gone,” given how low natural gas prices have moved.

At first glance, Knowles’ says the gas companies are NOT valued more highly than the oils—but that’s comparing the two groups at the industry standard of 6:1; where 6 barrels of natural gas are considered equal to one barrel of oil.  See his chart below that shows this.  The green dots are the leading intermediate oil producers—Crescent Point, Legacy Oil and Gas, Baytex and Petrobakken, and the red triangles are the gas weighted companies.

The gas stocks are clearly cheaper on this chart, which measures them in terms of the value of their production — $50,000 per flowing barrel up to $250,000; again all based on the industry standard 6:1 ratio.

To Read More CLICK HERE

Operating netbacks 6to1 2



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Energy & Commodities

How to Invest in Record Low Natural Gas Prices

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Posted by David Fessler

on Saturday, 28 April 2012 09:48

There’s an old saying that goes something like this: “In the valley of the blind, the ‘one-eyed man’ is king.”

If you seriously consider what I’m about to show you, this old saying could well ring true for your investment portfolio at the end of this year. Perhaps even before. Let me explain…

At roughly $2.41 per million Btu, U.S. natural gas prices are in the dumpster. The truth is, they’ve been declining for years. But the recent shale gas boom accelerated their fall. Now they’re the lowest they’ve been in over a decade.

If it gets any cheaper, the companies that supply it will be paying you to take it. You see, they have a huge problem.

They have to keep producing in order to generate revenue, even in the face of declining prices. The problem here in the United States is that supply exceeds demand by a wide margin. And it’s getting wider all the time.

Why? Stores of natural gas at record levels… A mild winter… New wells coming online every month…

No wonder it’s eviscerating shares of explorers and producers. Take a look at the six-month chart for Chesapeake Energy Corporation (NYSE: CHK), for instance.

130 chart1

It looks like the first big drop on a roller-coaster. Shares are off 38% since last July.

To Read More CLICK HERE



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Energy & Commodities

Five Tips for Natural Gas Investors

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Posted by Marin Katusa

on Tuesday, 24 April 2012 13:07

By Marin Katusa, Chief Energy Investment Strategist

I recently gave an interview on Business News Network (BNN) about natural gas. BNN is Canada's largest news channel dedicated exclusively to business and financial news, so all kinds of market players rely on BNN to provide them with comprehensive coverage of global market activity from a Canadian perspective. Like similar news channels in the US, BNN intersperses real-time news coverage with economic forecasting and analysis, company profiles, and tips for personal finance.

I have been interviewed on BNN numerous times over the last five years, quizzed on the impacts of fracking, the forecast for uranium following Fukushima, the potential of new frontier oil regions, and the future for coal. This time, the topic was "Five Tips for Natural Gas Investors." You can watch the interview if you want; I highly recommend it – the education is worth the time.

On-air interviews are usually pretty speedy affairs, so my BNN interview didn't give me enough time to discuss each point in depth. The Dispatch gives me that opportunity, so here are my five tips for natural gas investors in a bit more detail.

1.  Watch for Looming Reserve Writedowns

A resource estimate is a geologic best guess of how much of a commodity exists within a particular deposit, be it ounces of gold, barrels of oil, or cubic feet of natural gas. A geologist gleans information about the deposit's size and grade from drilling results and then creates a statistical model of the deposit. From that model he or she can estimate the commodity count.

However, the amount in the ground is not the amount that can be produced. That's where the reserve estimate comes in. Reserves are an estimate of the amount of a commodity within a deposit that can be extracted economically, which means reserves are a whittled-down subset of total resources. That whittling down process has two steps. First, geologic and technologic factors determine a resource's recovery rate, reducing the resource to the parts that are "technically recoverable." Then, economic considerations further reduce the resource to only the bits that are "economically recoverable."

With natural gas, the advent of horizontal drilling and multi-stage fracturing altered the first parameter dramatically, ballooning North America's technically recoverable gas resources to many times their earlier volume. And while gas prices held, reserves counts ballooned too.

The key bit there was "while gas prices held" – that honeymoon is over. Natural gas prices in North America have declined roughly 35% this year and are down approximately 60% over the last 12 months. Compared to the unsustainable highs reached prior to the recession, gas prices have fallen more than 80%.

To Read More CLICK HERE

natgas



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Energy & Commodities

The Problem with Banning Oil Speculation

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Posted by James Hamilton

on Monday, 23 April 2012 13:03

By James Hamilton

Joseph P. Kennedy II, former Congressional Representative from Massachusetts, and founder, chairman, and president of Citizens Energy Corporation, has a proposal to make energy affordable for all. All we have to do, Kennedy claims, is "bar pure oil speculators entirely from commodity exchanges in the United States."

Writing in the New York Times last week, Joseph Kennedy (D-MA) explained why he believes that speculators are responsible for the high price that we currently have to pay for oil:

Today, speculators dominate the trading of oil futures. According to Congressional testimony by the commodities specialist Michael W. Masters in 2009, the oil futures markets routinely trade more than one billion barrels of oil per day. Given that the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators' exchanging "paper" barrels with one another.

It's true that most buyers of futures contracts don't actually want to take physical delivery of oil. If I buy the contract at some date, I usually plan on selling the contract back to somebody else at a later date, so that I leave the market with a cash profit or loss but no physical oil. But remember that for every buyer of a futures contract, there is a seller. The person who sold the initial contract to me also likely wants to buy out of the contract at some later date. I buy and he sells at the initial contract date, he buys and I sell at a later date. One of us leaves the market with a cash profit, the other with a cash loss, and neither of us ever obtains any physical oil.

Let's take a look, for example, at NYMEX trading in the May crude oil futures contract. A single contract, if held to maturity, would require the seller to deliver 1,000 barrels of oil in Cushing, OK some time in the month of May. Last Friday, 227,000 contracts were traded corresponding to 227 million barrels of oil, which is indeed a large multiple of daily production. But it is worth noting that at the end of Friday, total open interest-- the number of contracts people actually held as of the end of the day-- was only 128,000 contracts, much smaller than the total number of trades during the day, and not much changed from the total open interest as of the end of Thursday. Many of the traders who bought a contract on Friday turned around and sold that same contract later in the day. If the purchase in the morning is argued to have driven the price up, one would think that the sale in the afternoon would bring the price back down. It is unclear by what mechanism Representative Kennedy maintains that the combined effect of a purchase and subsequent sale produces any net effect on the price. But the only way he gets big numbers like this is to count the purchase and subsequent sale of the same contract by the same person as two different trades.

It's also worth noting that on that same day, there were 146,000 May natural gas contracts traded, which if held to maturity would call for delivery of natural gas at Henry Hub in Louisiana. A single contract represents about 10 million cubic feet, so Kennedy's calculations would invite us to compare the 1,146 billion cubic feet of "paper" natural gas traded on Friday with the total of 78 billion cubic feet of natural gas that the U.S. physically produced on an average each day in 2011. Once again, the vast majority of Friday's natural gas futures trades were matched by an offsetting trade during the same day so as to have little effect on end-of-day open interest.

By what mysterious process can all this within-day buying and selling of "paper" energy be the factor that is responsible for both a price of oil in excess of $100/barrel and a price of natural gas at record lows below $2 per thousand cubic feet? I suspect the reason that Kennedy does not explain the details to us is because he does not have a clue himself.

To Continue Reading CLICK HERE

oil-speculation-raise-gas-price-1



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Energy & Commodities

Crude Oil Report: Pipeline Reversal Moves Market As Brent Sinks While WTI Rises, But Trend May Fade

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Posted by Sumit Roy- Hard Asset Investor

on Saturday, 21 April 2012 09:52

By Sumit Roy

The volatile WTI-Brent spread fell to multimonth lows, but surging production in the U.S. makes further narrowing challenging.

The Department of Energy reported this morning that in the week ending April 13, U.S. crude oil inventories increased by 3.9 million barrels, gasoline inventories decreased by 3.7 million barrels, distillate inventories decreased by 2.9 million barrels and total petroleum inventories decreased by 2.2 million barrels.

As expected, Brent prices continued to drift lower over the past week after breaking below the key $121 support level amid economic concerns and receding Iranian tensions. But in an interesting twist, WTI prices actually rose in the period.

BRENT

brenttechnicalchart20120418

WTI

wtitechnicalchart20120418

The highly volatile spread between the two benchmarks narrowed to $14 from $17.50 last week and more than $20 at the beginning of the month. That puts it at the smallest level since Feb. 1.

wtibrentspread20120418

The catalyst for this latest move in the spread was news that the operators of the Seaway Pipeline plan to reverse its flows earlier than expected — at the end of May, rather than June 1. 

As we’ve written about in the past, the Seaway Pipeline was designed to send crude oil from the Gulf Coast to Cushing, Okla. But surging production in Canada and the U.S. Midwest has created a glut of crude in the region, depressing prices for local benchmarks such as WTI. 

To reduce the gap between crude such as WTI and global benchmarks such as Brent, transportation capacity out of the Midwest needs to be increased. The reversal of the Seaway Pipeline — after which crude will flow from Cushing to the Gulf Coast — satisfies that need.

About 150 Kbbl/d of the pipeline’s capacity is set to be reversed late next month, while another 250 Kbbl/d may be reversed by early 2013.

Yet while the reversal of Seaway is a step in the right direction, the market anticipates it alone will not alleviate the Cushing glut completely. Still-wide spreads between WTI and Brent across the futures curve is evidence of that. 

Rapidly increasing output in the Midwest and Canada necessitates steady increases in transportation capacity. Declining demand across the United States makes the supply and demand balance even more lopsided.

To Read More CLICK HERE



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