a little fundamental support re:gas - from diablo newsletter today
DiabloFact to Ponder
In our February 23, 2001 DiabloFacts we discussed the seasonality of
Natural gas prices and the corresponding swings in Gas related stock
prices. We are in the weak ‘Springtime Selloff’ period now. We even
heard one TV commentator note that…contrary to popular belief, the Gas
shortage must be easing because inventories rose in the prior week. This
is not only to be expected (again, refer back to our 02-23 piece) but it
had better continue! In a hurry! We need to get 3.0+ TRILLION cubic feet
of Natural gas in storage by fall to even have a glimmer of hope that this
past winter’s amazing price spikes in Natural Gas do not occur again.
Our strong opinion is that we will not make those inventory levels.
Here’s why:
Many many gas producers have put compressors on their gas wells. The
effect of this compression is to lower the pressure on the wellhead (the
vacuum side of the compressor faces the well). In that way, the gas is
able to flow out of the ground faster, and against less resistance. The
producer can then sell more gas at a higher price…The unfortunate side
effect of all this compression is that it steepens the decline curve. By
this we mean that the wells which have compression show a faster and
greater drop-off in production rates than those which do not. Now,
granted, we are generalizing here, and way-oversimplifying the entire
process…but in the end, we simply do not believe that current Natural gas
production forecasts have included this little tidbit of information…and
are thus WAY too positive.
Add to this the fact that the highest drill rig count in 10 years has
failed to add even one net molecule of Natural gas to this country’s
reserves…and you get the picture.
The weather in this country in the springtime is historically not
extremely hot nor cold. Hey, why do you think everyone loves the Spring?
It makes sense that demand for Natural gas declines during this time…no
heating…no air conditioning. But wait until summer, when California goes
into peak demand…110 F in the Inland Empire for weeks on end…and the
plains are broiling…and demand will pick up again. This in our opinion,
will severely hamper the Utilities’ ability to get Gas into storage…as it
did last year. Oh…one more compounding problem…bunches of new Gas fired
turbine electricity generating stations have come on line this year…and
there are bunches more to come. GE’s turbine division, as best we can
tell from news announcements, has a 5 year backlog of gas fired turbine
work.
Are you getting the picture? We believe there is opportunity in natural
gas stocks during this spring selldown.
The US fiddles while Gas burns…this is a serious problem, and we do not
believe it will go away anytime soon. In fact, we believe it is worsening
at an alarming rate.
Ponder it!
