Outlook for US Natural Gas Supplies and Demand

For now natural gas supplies in the US are above average, and the Energy Information Administration is forecasting a slightly warmer winter than last year in the US Midwest, and slightly colder in the West. The Midwest is the primary consuming region for natural gas and propane, with heating oil in the northeast.

There is some speculation this week that Hurricane Ida may enter the Gulf of Mexico, the first to do so for this remarkably light storm season, and speculators have been given some cheer in the oil and nat gas markets because of this.

Oil may be justified, but barring a selectively devastating storm, natural gas looks to be well supplied. This is the time of year in which we will typically look to place bull positions in the natural gas markets. So far that does not seem to be justified, but perhaps later, just on seasonal variance.

The energy bulls should hope for an abnormally cold winter in the US midwest. Their government does not think that they will get it.

"EIA projects average household expenditures for space-heating fuels to be $960 this winter (October 1 to March 31), a decrease of $84, or 8 percent, from last winter. This forecast principally reflects lower fuel prices, although expected slightly milder weather than last winter will also contribute to lower fuel use in many areas. The largest expenditure decreases are in households using natural gas and propane, projected at 12 and 14 percent, respectively. Projected electricity and heating oil expenditures decline by 2 percent (see EIA Short Term and Winter Fuels Outlook slideshow).

According to the National Oceanic and Atmospheric Administration’s (NOAA) most recent projection of heating degree-days, the Lower-48 States are forecast to be 1 percent warmer this winter compared with last winter and 1 percent milder than the 30-year average (1971-2000). However, heating degree-day projections vary widely between regions. For example, the Midwest, a major market for propane and natural gas, is projected to be about 4 percent warmer than last winter, while the West is projected to be about 4 percent colder.

EIA expects the price of West Texas Intermediate (WTI) crude oil to average about $70 per barrel this winter (October-March), a $19 increase over last winter. The forecast for average WTI prices rises gradually to about $75 per barrel by December 2010 as U.S. and world economic conditions improve. EIA’s forecast assumes U.S. GDP grows by 1.8 percent in 2010 and world oil-consumption-weighted GDP grows by 2.6 percent.

Energy prices remain volatile, reflecting uncertainty, or risk, in the market. To measure this uncertainty, EIA is tracking futures prices and the market’s assessment of the range in which those futures prices might trade (see STEO Supplement: Energy Price Volatility and Forecast Uncertainty). The Outlook will now report confidence intervals around the New York Mercantile Exchange (NYMEX) crude oil and natural gas futures prices using a measure of risk derived from the NYMEX options markets known as “implied volatility.”

Natural gas inventories are expected to set a new record high at the end of this year’s injection season (October 31), reaching more than 3.8 trillion cubic feet (Tcf). The projected Henry Hub annual average spot price increases from $3.85 per thousand cubic feet (Mcf) in 2009 to $5.02 in 2010."

Source: US Energy Information Administration

This chart shows the divergence between the Natural Gas ETF and the Crude Oil ETF in the US. The reason for this is founded in the fundamentals.



This is merely a linear version of the first chart shown above, the annual build and depletion of natural gas inventories over time. This tends to illustrate the big swings that are possible, and over a longer timeframe.

Krugman Declares "Mission Accomplished," Maginot Line Completed

The triumph of financial engineering based on an analysis of the past.

Conscience of a Liberal
The story so far, in one picture
By Paul Krugman
November 3, 2009

World industrial production in the Great Depression and now:

Jesse here. This chart is a bit deceptive because it compares two periods of time based on the start of the crisis. It would be interesting to compare the two crises from the start of the Fed's expansion of the monetary base. As I recall, the early 20th century Fed did not react this way until 1931 and did so in two stages. Ok, Ben was quick out of the starting gate with a massive quantitative easing. Score one for the Fed. They are quick on the draw when it comes to monetization.

And there is little hazard that Ben will tighten prematurely out of fear of inflationary forces, having learned at least that lesson from what might prove to be a simplistic historical comparison.

It would be unjust not to note that the 1930's Fed struggled a bit with the difficulties of an entirely different type of commercial banking structure and regulatory structure, and the restraints of a gold standard.

But at the heart of it, the comparison may be irrelevant. The genuine challenge in this era of fiat currency will be to avoid the 'zombification' of the economy, the appearance of vitality with none of the self-sustaining growth.

It may be discovered that the key to coming out of a crisis permanently is not how quickly and dramatically one inflates the money supply, or even how long one maintains it, and how many stimulus programs one can create, but rather how quickly and capably a country can reform, can change the underlying structures that caused the problem in the first place.

Japan has been doing it slowly because of its embedded kereitsu structure and government bureaucracy supported by a de facto one party system under the LDP. In the 1930's the impetus for reform was overturned by a strict constructionist Supreme Court and an obstructionist Republican Congress. The story of our time might be the perils of regulatory and political capture.
Before this Administration declares "Mission Accomplished" and high fives its victorious recovery, they may wish to consider that they have done the obvious quickly in one dimension, but have done very little to change the dynamics which created the crisis in the first place, choosing instead to support the status quo to a fault, partly out of ignorance and to some extent because of a pervasive and endemic corruption of the political process.

There are three traits that make a nominal bounce in production fueled by a record expansion in the monetary base a success: sustainable growth without subsidy, sustainable growth without subsidy, and sustainable growth without subsidy. And this can only be achieved by changing the game, reforming what was wrong with the system in the first place, if this is what caused the crisis.

Our forecast is that Ben and Team Obama are failing badly because they are fighting the last war, in the almost classic style of incompetent generals who lost the early stages of the Second World War because they were using the game plan from the First. And plans for a Vichy-style government establishing l'état financière seem to be well underway, in a general surrender of the goverance of the nation to the econorati.

For all its flaws, at least the Clinton Administration used to conduct polls to see which way the public was leaning, and took its cues from that. The Obama Administration blatantly ignores public outrage, and takes its calls from Wall Street, literally, and forms its policy and laws around what they want, or at most, will grudgingly accept.

A Reader Asks "How Did 558,000 People Lose Their Jobs When Only 190,000 Jobs Were Lost?"

Here is an excerpt from today's Bureau of Labor Statistics Non-farm Payrolls report.

"The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm
payroll employment continued to decline (-190,000), the U.S. Bureau of Labor
Statistics reported today. The largest job losses over the month were in con-
struction, manufacturing, and retail trade.

Household Survey Data

In October, the number of unemployed persons increased by 558,000 to 15.7
million. The unemployment rate rose by 0.4 percentage point to 10.2 percent,
the highest rate since April 1983. Since the start of the recession in
December 2007, the number of unemployed persons has risen by 8.2 million,
and the unemployment rate has grown by 5.3 percentage points...

The civilian labor force participation rate was little changed over the month
at 65.1 percent. The employment-population ratio continued to decline in
October, falling to 58.5 percent."

An astute reader noticed that the BLS press release says that 190,000 jobs were lost from payroll employment, but the number of unemployed persons increased by 558,000. What's up with that?

The BLS report consists of two independent data samples. BLS has two monthly surveys that measure employment levels and trends: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey.

There is the "Establishment Survey" which is based on responses from a sample of about 400,000 business establishments, about one-third of total nonfarm payroll employment. The headline payroll number, the job loss of 190,000, is based on this data.

Then there is the "Household Survey" which is a statistical survey of more than 50,000 households with regard to the employment circumstances of their members, which is then applied to the estimates of the US population to obtain the unemployment number. This survey was started in the 1950's and is conducted by the Census Bureau with the data being provided to BLS. It is from the household survey that more detailed information is obtained about employment statistics within population groups like gender and age, wages, and hours worked. It is this study that is responsible for the unemployment rate of 10.2%.



So which survey is correct? Neither. The truth is somewhere in between.

The most obvious reason for the discrepancy is that job creation in the US seems to be centered in the smaller business and the self-employed areas in recent years. These sectors are not polled by the BLS and their impact would only be obtained by the Household Survey's interviews.

The BLS does have a way to account for this called the "Birth Death Model" which is supposed to estimate jobs created by smaller businesses. That model is a bit of a joke actually since it almost always follows the same pattern of adding jobs, with two big corrections in January and July of each year when it will do the least damage to the headline number. Any model that does not reflect the job declines that started in 2007 can most certainly be called a statistical joke. Small business is not immune to business cycles.



The payroll survey for October will be revised several times in the short term, with each release of monthly data, and even larger revisions will be done periodically, every year or so, to correct the whole series and sometimes dramatically.

The household survey is not revised per se, but the data against which it is statistically evaluated, the census data of the population, will be revised and this will change the representation of the monthly samples. Let's hope that lowering of the population is only done by revision of the numbers, and not the more draconian things practiced throughout the earlier part of the 20th century.

There was a famous joke that the Household Survey and the Establishment Survey were synchronized under George W. Bush by getting rid of people, by lowering the estimates of the population that is, which is something his pappy did when he was the president. In the states there will be a new Census conducted in 2010 as you yanks may already know, so we will have to see if the census bureau's population estimates are lowball or highball.

So what are we to conclude from this?

First, that Wall Street and the government use the monthly jobs data as tools to achieve their particular ends, to justify programs, to buy and sell, to promote certain ideas and behaviours in the public. Secondly, people will believe what they wish to believe to suit their biases if they are not fact-based in their thinking.

The truth is more clearly demonstrated in the long term trends, the averaging of the data over time. It does not seem that the long term data is as manipulated as the Consumer Price Index information which has become a statistical disgrace with its hedonic adjustments.

So what do we do, the average person with too little time and too many other priorities, at times seemingly held captive by the flows of information from the mainstream media? As always, we must sift what the government and business tell us, with a keen eye for deception which is an unfortunate part of human nature especially when things are not going well and it is easy to rationalize many things, and do what seems to be the right thing based on our own judgement and a broader analysis of all the news.

Perspective: SP 500 Rally From the First Bottom of the Financial Crisis

Here is a longer term chart of the SP 500 showing the decline with the unfolding financial crisis, and the rally from the first major market bottom in equities. The rally has been a nearly perfect 50 percent retracement.



Here is the same view of the SP 500 but deflated by the Euro. This puts the rally into a slightly different perspective, which is not nearly so dramatic, about a 38.2% retracement which is a decent bounce.



Again the same chart of the SP 500, this time deflated by gold. The rally is stripped of the monetary inflation supplied by the Fed, and appears to more accurately reflect the 'jobless recovery.'