The Tale of the Taper By: Phil Flynn (from iv msg)

[par_putt]

The Energy Report: The Energy Report: The Tale of the Taper

By: Phil Flynn Published: May 24, 2013 Can You Taper Up? Oil Prices rebounded after a big fall in part because of a misunderstanding. Apparently you can taper up as well as taper down in what I guess you can call the tale of the taper. That seemed to be the message from at least two Fed official's that tried to calm the markets that feared that the term tapering meant that the Fed was ready reduce bond buying like a tapering worm. James Williams of the San Francisco Federal Reserve said that tapering was not on autopilot and they could reverse direction and I guess taper back up after tapering down. St Louis Fed President James Bullard also tried to assure the market that tapering was not going to happen right away. He said he wanted see inflation first. So unless he is looking at gas prices in the Midwest or food or health care he probably is not going to see it.

What we did see was an improvement in housing and employment. Perhaps we should credit President Obama's policies but we won't and neither will S&P. Fox Business Network Reporter Matthew Rocco writes "The rapid increase in U.S. shale oil production, which is expected to give the nation energy self-sufficiency by the end of this decade, is having a far-ranging impact that has spread to other industries. Oil production in the U.S. has soared amid successful shale plays in North Dakota, Texas and elsewhere. Earlier this year, the Energy Information Administration said production would soon exceed oil imports for the first time since February 1995. A report Tuesday from Standard & Poor's said the shale energy boom is an increasingly central part of economic growth, coupled with the housing recovery. The report noted that Bentek Energy, another unit of McGraw Hill Financial, projects U.S. energy independence — when exports are greater than imports — by 2017. S&P Managing Director David Wood said in an interview that energy self-sufficiency would be a direct result of the increase in oil and gas produced domestically from shale plays. But he explained that the ability to transport oil from shale plays to refineries in the Gulf Coast will be a key factor in seeing exports rise, in addition to the possibility of negative impacts from environmental-related incidents."Infrastructure is still underdeveloped to get oil and natural gas to Gulf refineries for export," Wood said, adding that Transocean's Keystone XL pipeline, if completed, could facilitate the process.In the meantime, oil exploration and advancements in drilling techniques have opened up reserves to give new life to the industry. Hydraulic fracturing has been around since the late 1940s, but its combination with horizontal drilling 15 years ago allowed for the recovery of oil that was previously unreachable. That combination, along with other advancements, led in recent years to a spike in oil production and surge in activity at the Eagle Ford shale play in Texas, North Dakota's Bakken formation and others. North Dakota production accounted for 10% of total domestic crude oil production in 2012 and trailed only Texas and the U.S. Federal Offshore region, according to the EIA.

Shale Oil's Widening Impact

According to S&P, oil and gas companies directly involved in the production and refining process aren't the only ones benefiting from a roaring energy sector. Steel piping producers, builders of rail tank cars and express package deliverers are some of the businesses impacted positively by the oil boom. Wood also noted that the need for rail cars that transport oil and sand used in the fracking process made leasing of those rail cars more popular. "This is beginning to impact not only companies in the oil and gas sector," Wood said of the shale oil boom. "Some industries have sales growth because they are selling into the sector." Falling natural gas prices have also given the economy a boost by bringing manufacturers and chemical companies back to the U.S., the report said.

Cheaper natural gas is also helpful to makers of vehicles powered by compressed natural gas and related components. The report noted that UPS currently uses 1,100 CNG vehicles in the U.S. "This has also played a supporting role in the remarkable recovery of the manufacturing sector, by helping to give it a competitive edge over overseas competitors," S&P said. "While energy makes up a relatively small amount of overall manufacturing costs, it still encourages more plant openings in the U.S. than otherwise would be the case." But lower natural gas prices are also putting pressure on other industries. Wood explained that prices have dropped significantly because natural gas isn't easily exportable and a glut in supply has exceeded demand. Prices have rebounded lately amid a cutback in production, but he said the economics of drilling for natural gas remain challenging. "We have downgraded companies that tend to have larger exposure to natural gas on 40 separate occasions" since January 2011, Wood said. Those downgrades include oil and gas exploration companies, as well as equipment and service companies. U.S. Oil Boom Weighs on Some Industries The surge in domestic oil supply also has created challenges for businesses like coal mines and freight railroads, and even the oil industry itself. Coal mining has suffered most from cheaper natural gas, the S&P report noted, since many electric utilities have switched to gas-fired plants. One miner rated by S&P, Patriot Coal Corp, declared bankruptcy last year. And coal is one of the chief materials transported by freight railroads, which only partially have been able to replace lost revenue related to coal with higher volume of other products like crude oil.

"Solar and wind power producers in the alternative energy sector, as well as manufacturers of solar panels and wind turbines, are other industries that lower natural gas prices have hurt, as they lead to cheaper wholesale electric prices and a reduction in these industries' competitiveness," the report added. Wood also explained that within the oil and gas sector, benefits gained from the explosion in production "are not uniform" since some companies have a higher proportion of their business in crude oil compared to others that are more reliant on natural gas.

As a whole, however, the industry and shale oil boom are carrying the U.S. to energy independence faster than previously imagined. "The surge in shale energy production across a broadening swath of the U.S. is not only spurring the growth of the oil and gas sector and the economy as a whole, but is also affecting the economics, financial performance, and credit metrics of over 20 other industries," the report said. "Barring any major environmental accidents related to onshore shale drilling, which could slow or reverse industry growth, we expect the U.S. to approach energy self-sufficiency toward the end of this decade."

We predicted that the EIA natural gas report would give us a boost and it did. Working gas in storage was 2,053 Bcf as of Friday, May 17, 2013, according to EIA estimates. This represents a net increase of 89 Bcf from the previous week. Stocks were 680 Bcf less than last year at this time and 84 Bcf below the 5-year average of 2,137 Bcf. In the East Region, stocks were 111 Bcf below the 5-year average following net injections of 46 Bcf. Stocks in the Producing Region were 22 Bcf below the 5-year average of 850 Bcf after a net injection of 32 Bcf. Stocks in the West Region were 49 Bcf above the 5-year average after a net addition of 11 Bcf. At 2,053 Bcf, total working gas is within the 5-year historical range.

Of Course back in January we called for a long term bottom on natural gas and now since the approval of the US export terminal natural gas has gone up with renewed vigor. Of course you might understand the risng pressure on the US to expand gas exports when you read a story out of the FT and something that we talked about at the time. The FT re[ported that "Britain came within six hours of running out of natural gas in March, according to a senior energy official, highlighting the risk of supply shortages amid declining domestic production and a growing reliance on imports."We really only had six hours' worth of gas left in storage as a buffer," said Rob Hastings, director of energy and infrastructure at the Crown Estate, the property portfolio managed on behalf of the Queen. "If it had run any lower it would have meant . . . interruptions to supply." Oil looks weak. RBOB seemed to get a bounce on good economic data and holiday demand hopes. Still despite the rebound we should start to continue to move lower across the petroleum complex. The push US planting of corn has subsided reducing Ultra Low Sulfur demand. Nat gas on the other hand with no shoulder season and risng demand expectations should continue its upward trek.

I hope everyone enjoys this Holliday weekend. Say a prayer and remember all the men and women of the military that have sacrificed so much to keep our freedom. While some think the war on terror is winding down brave men and women around the globe continue to give their full measure of devotion to our country and those that put their lives at risk each day. God Bless them and their families.

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[dan_s]

Just to clarify. The Keystone XL Pipeline (which will be approved this year) is being built by Trans Canada, not Transocean.

Also, there is no way the U.S. will be energy independent by 2017 and probably not ever. We consume 19 million bbls of liquid hydrocarbon fuels per day and produce less than 10 million bbls per day (about 7.5 MMBbls per day of crude oil with the rest being NGLs). All shale wells decline in production quickly, so we will reach a point were new wells cannot keep up with the declining old wells.

U.S. crude oil production will probably peak around 10.5 to 11.0 million bbls per day. BTW the best news is what this is doing for our trade deficit, which is shrinking rapidly.

Energy independence oil comes if we make a major shift to natural gas fueled cars and trucks.