5/9/2012
By David Urani, Research Analyst

Let's turn away from Greece for a minute and take a look at energy prices. One of the notable moves I saw today was in natural gas which is up 3.9% (August futures) ahead of an inventory report on Thursday. For the past few weeks, natgas prices have been on a run, rebounding from a long, protracted downturn led by a production boom. Finally it seems the supply/demand picture is starting to balance out, as producers cut back on the influx of supply; dry gas rig count is down 35% since October.

On the other side of the equation, of course, is higher demand as the low natgas prices have attracted customers, particularly power plants who have been making the switch from coal to natural gas as it became more affordable. On top of it all, there were some jitters yesterday as Homeland Security warned of hackers breaching gas pipelines, possibly in an effort to disrupt supplies.

With America's newfound supply of gas causing prices to dip and attracting jobs, there are also signs that the president has been increasingly tempted to look away from the potential environmental harm of fracking and to embrace it as a central component of our energy industry overhaul. Ahead of the election, this is one area where he can gain supporters as we have the supply here and now, and it is readily available for us to use. It is already making a difference by easing our dependence on coal. On Tuesday the Interior Department approved a $10 billion natural gas project in Utah proposed by Anadarko (APC).

Natural gas prices are up roughly 20% since mid-April.

On the other side of the spectrum there's oil, which has had a tough May so far.  The reports have kept rolling in to confirm that Europe is in recession, and the heat really got turned up when Eurozone manufacturing PMI readings came in even worse than anticipated at multi-year lows. And of course that poor US employment report last week suggested the European weakness is finally getting to us here at home. On top of that, Chinese manufacturing and corporate earnings have been less than stellar, indicating they are being affected as well.

Now that we are facing a Greek exit from the euro and more questions on the likes of Spain, the bear case for oil has continued. Consequentially, oil futures are down from just over $106 per barrel to just over $96 since the beginning of the month.

Recent oil inventory data confirms the idea that demand has pulled back, as supplies of crude were up 3.65 million barrels last week; that's 2.5% higher than at the same time last year. Gasoline inventories do continue to fall, as is customary for this time of year which doesn't really help us much at the pump (although prices are falling). Nevertheless, now that oil has pulled back, it's looking like gasoline prices will not be quite the crisis many of us thought it would be earlier this year. Then again, the drop in oil is indicative of a different kind of crisis.

David Urani
Wall Street Strategies