Backward logic: Demand sinks, production rises
Today's Financial News - Posted October 28, 2009
The energy markets are in for a massive correction. Due to huge levels of speculation and just plain bad logic, crude prices are out of balance and natural gas is about to plunge.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Whatever happened to that windfall taxes idea for the nation’s energy producers? I will tell you what happened. The natural forces of economics got in the way of politics.
This time last year, when President Obama was a mere junior senator and was busy spending his way to the Oval Office, ConocoPhillips (NYSE:COP) was sitting on a quarterly bottom line of $5.52 billion.
Anytime a company is making that kind of scratch and not dedicating much of it to a Democratic campaign, politicians cannot resist the idea of re-distributing the wealth.
But now that crude prices are significantly lower and energy demand has waned, there is not much left to tax. ConocoPhilips managed to record a third-quarter profit that was down more than 70% from a year ago.
The few hundred million bucks Washington would be able to swindle from new taxes wouldn’t last more than a few minutes with this spend-happy government.
After all, Washington is set to issue a record-breaking $123 billion in new debt this week. Somebody has to pay for all those games of gold. It might as well be the Chinese.
Back to the oil industry before TFN becomes the next Fox News.
Low demand, more production
Conoco’s earnings report filed this morning is interesting because it is perfectly indicative of the nation’s current energy industry.
Prices are up and demand is down. After today’s oil inventory report (a gain of 800,000 barrels of oil and 1.6 million barrels of gasoline), it is becoming obvious the only folks that want to buy oil are futures traders.
Demand is nowhere close to rising as fast as crude prices, yet companies like Conoco are working to pump even more of the stuff out of the ground while prices are high.
Need proof? Conoco tells us it managed to produce some 1.86 million barrels of oil per day during the most recent quarter, compared to 1.76 million barrels a year ago.
Less demand, more production? Makes no sense does it?
That is exactly why the energy markets are in for a nasty spill this winter. Once traders realize the winter heating season is not going to be anywhere strong enough of a catalyst to maintain current prices, bid prices are going to plunge.
But if you think the crude situation is bad, take a look at the natural gas markets.
It stinks, I tell you
With a much smaller exposure to the world’s growing economies, the domestic natural gas industry has even less upside potential.
All across the country, but especially in the East, gas drillers are working feverishly to tap new wells and improve their cash flow positions. Even though drill counts are down, production is on the rise.
It is the industry’s way of producing more with less.
It is going to cause nothing but trouble.
Tomorrow will be an important date for the industry. As we get the latest glimpse at the nation’s natural gas storage inventory at almost the exact time we get Q3 GDP figures, traders are going to realize demand is not rising nearly as fast as previously expected.
The country’s storage capacity is just about entirely utilized. Any big additions and the markets are in for a nasty ride south.
Over at TFN Strategic Trader, we are playing the system beautifully.
Just last Friday, I released my latest report on the nation’s natural gas industry. At the end, I recommended three ways to gain from the situation.
So far, we are up 114%, 89% and the third play remains at breakeven with a potential catalyst date of November 8.
The gains are only going to increase from here.
If you want to get in on these three simple plays, you don’t have too much longer to wait. This time next week, prices could very well be twice or even three times as high.
I encourage you to take five minutes and read the report. With good timing, you could be the next windfall profit target.
Next Article: TFN eNews 10/28/2008: Who’s profiting from the downturn? The answer may surprise you.
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