Greece will get its bailout. Spain will be rescued! So why the heck did we ever doubt it? Yesterday the doubts crept into the market place as the European politicians played a game of economic chicken trying to get a sense of who might blink. Today the market is coming back on yet another story that indeed it will just be a matter of time before Spain asks for help. In the mean time the oil market plays a game of risk on risk off as this economic mating ritual plays out. I feel so used!

Just when they wanted you to believe that all was just about lost, the Financial Times is reporting that the “Spanish government is prepared to make a rescue request that would allow the European Central Bank to begin buying its debt, but the issue is being delayed by the needs of other countries in the single currency.” Gee, now you tell us.

The Ft says that Madrid has now found a formula that it feels comfortable with to make a rescue request – a significant shift in position compared to before the summer – and is waiting for external factors, such as the way it would influence other countries such as Italy, to be resolved. They say that a senior official within the Spanish ministry of economy said Spain did not require any money from the European Stability Mechanism, the Eurozone’s state rescue fund, but would be comfortable making a request for a credit line only in order to satisfy the conditions of the ECB to begin buying bonds.

Despite the tough talk on Greek austerity and the realization that they will fall short of their agreed upon goals Reuters News reports that the Greek Prime Minister says that Antonis Samaras says that "Greece will soon get the next tranche. Its economy needs liquidity like a desert needs rain."  This also sounds like the Lyric’s to an “America” Song.  So Greece is getting cash and Spain is going to ask for help so sit back and get ready for a bailout bounce. The Euro is on its way up hitting the highest level since October 8th the last time bailout hopes were still in play. While demand expectations have taken a hit from most of the major energy reporting groups will it matter if the risk play comes back on! Add to that a seasonal low time could reinforce the markets bullish expectations will the expected drop in demand bring prices down?

Dow Jones reports that Khalid al-Falih said in a speech made to the Oxford Energy Institute late September released on Aramco's web site said that oil prices are unlikely to collapse even though demand is expected to slow and supplies of fossil fuels have risen significantly, the chief executive of state-owned oil giant Saudi Aramco said.  "Our industry now faces downward pressure on demand; supply abundance; a slow-down in the deployment of renewable; and reduced momentum on climate change legislation. "It doesn't mean our industry is in bad shape or that prices are going to collapse, but that's a profoundly altered world energy landscape from the one we faced a decade, or even just a few years, ago," he said. Demand this year, for example, is expected to increase by only a modest 850,000 barrels per day, or less than 1%, whereas growth averaged more than 2.3% between 1965 and 2010, he said.  The firm is adapting to the "paradigm shift" in the energy industry but will continue to invest in crude oil exploration and development in a bid to keep its oil production portfolio robust. Mr.al-Falih said the firm will invest $35 billion over the next five years on oil exploration and development, while it also plans to increase its conventional and unconventional gas supplies by almost 250% over the coming couple of decades. The company also hopes to diversify its energy portfolio and boost earnings from downstream activities by growing and integrating chemicals with its world-scale refining operations, he added.

Natural Gas came back down to earth as temperatures are rising and so too are the expectations of growing supply. Reuter’s news wrote an awesome piece by Eileen Houlihan and Edward McAllister on some of the historic changes that are coming in the gas market in the coming weeks. Tilted “Waking giant-Marcellus Shale bullies US gas market” and some  of dozens of new pipelines planned in Marcellus Shale that I have mentioned before.  Reuters says “U.S. natural gas prices escaped a rout this summer as record heat helped reduce towering inventory levels. This winter, fierce cold will be needed to help absorb the newest barrage of supply that will again test the limits of an over-supplied market.  Up to $3 billion worth of new pipelines connecting to the Marcellus Shale formation in the U.S. Northeast could unlock the equivalent of five percent of daily U.S. natural gas supply in the last months of this year and in 2013 that until now has been trapped without access to consuming markets.

The new lines are another sign of how prolific new production continues to transform the U.S. gas market nearly five years after drillers began to aggressively tap shale deposits, presenting a fresh challenge for a network whose demand is struggling to keep up with supply. 

 

New output, which will depend on how willing producers are to send more gas to market, will make the Northeast much less reliant on gas from the Gulf and Canada as well as the Rockies, potentially altering flows of gas and changing the spreads between next-day gas prices in different regions such as New York and the national benchmark Henry Hub in Louisiana. Output from the Marcellus - a rich seam of gas-bearing rock that straddles Pennsylvania, New York, Ohio and West Virginia - has jumped nearly ten fold since 2009, flooding pipelines and playing a central role in pushing futures prices to ten-year lows earlier this year.    But only now is the Marcellus beginning to realize its full potential. It's a bearish signal for both day- and month-ahead gas prices and could threaten the profitability of producing gas for companies like Chesapeake Energy , Statoil and Anadarko Petroleum Corp

About ten projects coming online in the next three months alone will add an extra 3 billion cubic feet per day (bcfd) of pipeline capacity, according to government data. Another 5 bcfd of projects are in the works for 2013, at least. Barclays analysts see an additional 1.8 bcfd flowing from the Marcellus by the end of 2012 and an additional 3.4 bcfd in 2013, together adding about 8 percent to the 65 bcfd of total U.S. output, according to a recent report.

"Historically, pipelines were built to move gas from West to East, but now the production increase is in the East. There will certainly be displacements of gas with these new pipelines," said Anthony Yuen, analyst with Citigroup in New York.   Rocketing output from Marcellus is forcing pipeline operators to rethink plans, as the Northeast, a high-paying market due to its cold winters and hot summers, becomes increasingly self-reliant.  Williams Cos , owner of the Transco pipeline which ships gas from the Gulf Coast to the Northeast, is expanding pipeline capacity out of the Marcellus to provide additional flows along its system to meet demand on the Eastern seaboard, the company's chief executive Alan Armstrong said in an interview.

This will involve reversing some infrastructure to allow for southbound flows.     Williams has plans for a network of pipes that by 2015 will ship gas from the Marcellus to New York City, Long Island and areas further south in Maryland and Virginia, according to a recent report on the company's website.    "The system is not designed to backflow and we are spending some money as part of that project that will allow us to flow gas back past that point," said Armstrong, referring to a processing unit on the Pennsylvania-Maryland border.    Kinder Morgan's Rockies Express (REX) pipeline, which came online in 2004, was seen as a much needed vein running from rich gas deposits in the West to needy markets in the East. But flows to Ohio along REX have shrunk over the past year, analysts said, a trend they expect to continue.

Gas prices across the country have converged as new production comes online, thinning the margins for parties transporting gas across the country. Pipeline operators and shippers already have to find more lucrative markets for their gas, such as California, where prices are currently the highest in the country due to late summer heat.

Northeast gas prices, historically prone to winter spikes, have seen some pressure from increased supply in the Marcellus. Last winter saw the tamest price leap in recent years, in part due to mild weather.   Prices between the New York citygate and Henry Hub, the nation's benchmark supply point, have run hand in hand over the past few months, with New York trading only 15 cents more than the Hub this summer, the smallest gap in more than a decade.  Price points closer to the Marcellus, which has been lower than Henry Hub due to supply constraints, have also showed signs of convergence.  

Phil Flynn, analyst with Price Futures Group in Chicago, expects gas futures prices to again fall to $2 per mmBtu and cash prices in the Northeast to "rival last year's lows", especially if we see another mild winter.   Henry Hub cash prices bottomed out at a 10-year low of $1.82 per mmBtu in late April, while New York citygate prices also fell below $2 in late April, their lowest level since 2001.  Flynn said the biggest contributing factors to the expected drop off in prices are the new pipelines and the currently non-producing wells these pipelines will make accessible for natural gas extraction.   Similarly, Canadian flows from the north could be restricted, given increased Northeast supply.

A recent Bentek Energy analyst report showed gas from Marcellus, particularly Northeast Pennsylvania, is poised to displace 0.4 bcf per day that has traditionally been imported from Dawn, a price point on the eastern Canada-U.S. border where gas traditionally has flowed from north to south.

More than 1,000 drilled wells are waiting to be hooked up to pipelines in the Marcellus - about 700 above the norm - thanks to a busy drilling program in the region since 2009 that ran ahead of the infrastructure needed to move the gas to market, including pipelines, processing facilities and compressor stations.  While most companies have cut the number of rigs drilling there since gas prices slumped to ten-year lows earlier this year, these existing wells are expected to keep production flows strong for some time.

However, the actual output along the new pipelines will depend on when, and how quickly, producers decide to bring the new wells online.    Statoil has about 400 wells that are waiting for new pipelines, the company said at the release of its second quarter financial results. Anadarko has about 200 and Range Resources and Penn Virginia about 50 each, according to recent company calls with analysts. 

Not all these wells will start producing at once and the prospects for the Marcellus depends on how willing producers are to bring new cheap gas to market. And they remain cautious, after tumbling gas prices crimped profits this year.     Anadarko said it plans to bring about 20 to 30 wells online per quarter, which could increase if the gas price rises.

"It is highly dependent on how many wells are ready to be completed and the operators' planned schedule for bringing those wells on line," said Randall Collum, analyst at Genscape in Houston, who estimates there will be between 0.5 bcfd and 1 bcfd of extra flows from the Marcellus this year and 1.5 bcfd next.   "I don't think producers will bring on those wells at once unless they want to see really low prices," said Collum.     Still, even more conservative estimates for supply growth show strong output. Citi analysts see up to 2.4 bcfd of additional production if all the 1,000-odd wells came online over the next 12 months. That alone is an additional 3.5 percent of daily supply.   "Some people are not expecting all of this capacity to come on line. The argument is just because they have a pipeline doesn’t mean they will produce it. But I tend to disagree and think it will be more like the movie, 'If they build it, it will come.' and we're going to be flooded by supply," said Flynn of Price Futures Group.

While there have been some reports of rising heating costs this year yesterday Consumers Energy's as reported by Dow Jones said that natural gas customers can expect to pay about 8 percent less for heating costs for this winter compared to last winter. The lower cost estimate is due to reduced fuel prices -- the lowest since 2003 -- and is based on normal weather patterns.   The utility provides natural gas service to 1.7 million customers in 45 counties in Michigan's Lower Peninsula. An average residential customer can expect to pay a typical monthly bill of about $130 this winter, down from $141 last winter. Make Sure you are getting the Power to Prosper! Tune into the Fox Business Network!  Also make sure that you sign up for a Trial to my daily trades covering all major commodities! Just call me at 800-935-7487 or email me at pflynn@pricegroup.com.  Plus you can open your account by hitting these links!  Here is the link to apply online: https://newaccount.admis.com/?office=269  Here is the PDF version: http://www.pricegroup.com/ADMIS/ADMIS%20Account%20Application.pdf  Also make sure you get Melissa Francis’s new book! Just hit this link and pre-order! Here is the link to apply online: https://newaccount.admis.com/?office=269

Thanks,
Phil Flynn
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to Fox Business News Network

141 West Jackson Blvd., Suite 1340A, Chicago, Illinois 60604
312 264 4364 (Direct)  |  888 264 5665 (Direct)  |  800 769 7021 (Main)  |  312 264 4399 (Fax)
www.pricegroup.com

Copyright Price Futures Group All rights reserved.