The December contract for crude expired for trading on Friday at $56. In the stalemate between oil prices and temperatures, oil lost. The decline in oil prices is nearly three months old and Friday's close was five month low. We have been patiently waiting for cold weather to appear to provide support for oil and gas prices and it has been a long wait. Maybe too long. I had expectations of a rebound for one more run into December but the three week delay in normal November weather has killed that concept. Inventory levels for natural gas have posted health builds for six consecutive weeks and levels now stand at 3,282 bcf. This is 179 bcf over the five-year average for this time of year. It would take a colder than normal winter to produce shortages with this level of inventory. While forecasters are still predicting that for this year it has failed to appear on schedule.
Oil inventory levels finally took a break from their weekly post hurricane build cycle and fell -2.2 mb in Wednesday's report. This provided a temporary bounce in prices to $58.50 but it was short lived and lackluster. There could have been some expiration week sellers but whatever the reason the drop was depressing. I believe we may not see a material bounce even if the northeast froze solid over the weekend. We are too far along in the cycle to expect a material bounce without some external event.
The U.S. Energy Secretary visited four OPEC countries this week and they assured him they could cover any shortfall in global production. Saudi gave him the dog and camel show and assured him they could produce 12.5 mbpd by 2009. While the secretary was impressed he should have been in serious fear. Depletion from existing global sources could be as much as 15mbpd at 5% or 7mbpd at a 2% depletion rate. If Saudi is going to cover production shortfalls they need to be adding a minimum of 2mbpd per year and it is not going to happen. Saudi and OPEC in general just want us to believe that they can cover growing demand until Hubbert's Peak has passed we can do nothing about the problem. Then prices will go out of sight and Saudi can claim some internal disaster at the Ghwar field as the reason they can't produce as much as they promised. They will be laughing all the way to the bank as prices double and triple before 2010. But, that is still in our future and we need to deal with prices into the close of 2005 rather than speculate about the dollar signs ahead. Our time as energy investors will come and we will all be able to buy hybrids for cash with the profits. Meanwhile enjoy the drop in gas prices as you or your relatives travel for Thanksgiving.
Conoco Phillips was the recipient of a valuation downgrade this week by JP Morgan but they were far from the only one. After nearly three months of a decline in oil prices the brokers have finally awakened and have been targeting the high flyers for a couple weeks now. We should not complain for in the long run they are helping to push stocks lower and hastening the next buying opportunity. It is still frustrating to see COP decline sharply because it has the most aggressive exploration program in place of any major oil. They are increasing their reserves far faster than the other majors but are painted with the same broad brush as the rest. Prudential started coverage of oils with a safe overweight on XOM and BP. Neutral ratings were given to CVX and COP and an underweight on MRO and Shell. I am going to take advantage of the overweight on BP and the low price of oil to add BP to the portfolio this weekend. BP is running a strong advertising program in TV and print and should find some buyers in the Santa Claus rally.
I am going to keep new picks light until we see if oil is going to rebound at $55 as some expect. Hugo Chavez, called on OPEC to slow production to firm up prices on Friday. I mentioned several times that the ideal entry point would be $51 but under $55 I believe OPEC will limit production and we may not see that $51 number. With crude closing at $56 on Friday we are right at that magic $55 number and cold weather is going to blanket the nation over the next week. Heck it was 9 degrees at my house in Colorado this week. With that front spreading east we should get a strong draw in natural gas this weekend and that would be the last chance for an uptick into year-end. If the normal winter demand trend does not start next week we will have to step aside and wait for the next cycle in the spring. Q4 is normally the highest demand of the year but this years cycle has been broken. Until "normal" demand returns we are going to be passive investors.
Natural Gas Chart - Daily
Crude Oil futures Chart - Daily