The Energy Report for Wednesday, September 1, 2010

Earl, the Grinch that Stole Labor Day. All of the Who’s down in Whoville may be safe but it seems Hurricane Earl is bent on washing out and stealing their Labor Day fun! The holiday weekend may wash away for many states up and down the East coast. As Hurricane Earl barrels down it will bring a crashing end to the summer gasoline demand season that was already not up to par with market expectations. The so called “Summer of Recovery” and the all of the gasoline and oil demand expectations that came along with it, now looks like it should be more appropriately titled “The Boulevard of Broken dreams”.

Up  and down the Easy Coast of the United States, vacations, tee times, picnics and frivolity of all kinds are being canceled as that heartless monster, Earl, is showing us he has not learned the true meaning of the Labor day holiday which is to relax and burn up a lot of gas. And Earl has his accomplices and no, it is not a dog dressed up as a reindeer. No, Earl's accomplice is a companion tropical storm named Fiona and a potential tropical wave behind that as well will, at the very least, assure us some very lousy weather for much of the East Coast from Florida with the worst in the Carolina’s all the way up potentially to New York.

This storm hit oil and gasoline hard as the two markets were already having their worst months since last May. Oil for the first time in the last 6 weeks decoupled from the stock market despite some an upbeat Case-Shiller home price index and a surprising increase in consumer confidence. The selling in oil gained more momentum on a report of dismal demand from MasterCard SpendingPulse that showed that U.S. gasoline fell 3.1 percent to a 12-week low and Fed minutes that were not that inspiring. Also not inspiring was data from the Energy Information Agency that showed that according to David Bird of Dow Jones the US in the first 6 months of this year became a net exporter of gasoline for the first time since 1961. In other words, it shows that the US is using less gasoline than it produces and is sending gas and other refined products to countries where economies are growing especially emerging markets in South America. According to MasterCard, gasoline demand fell in all seven geographic regions. Consumption slipped 4.6 percent in the Rocky Mountain area, 4.5 percent in New England, 4.1 percent in the Central Atlantic, 3.3 percent in the Lower Atlantic and Midwest, 2.5 percent on the West Coast and 1.5 percent on the Gulf Coast.

Now with the storms on East Coast it could become even more dismal. And while the Fed minutes confirmed its weakling economic outlook yet at the same time suggested that the commodity bulls' best friend, quantitative easing, might not be right around the corner. The bulls are faced with mounting supply and need the Fed to print money to keep their bullish dreams alive. Cao and trade me!

Natural gas may pull back from its recent spike. Despite high temperatures and a slew of lower than average injections, supply is at this point more than ample. Some are worried that a cold winter will cut into our surplus. Still winter is a way off. Hopefully temperatures will continue to drop. With cap and trade being put off until after the election, demand outlook for gas is not as strong. One loyal Energy Report reader writes that according to Tudor, Pickering, Holt & Co.  4/5ths of U.S. Natural gas producers require a natural gas price above $5 to make a 10% rate of return. If our economy is heading back into a recession and considering that shale gas reserves are booming, (measured in Quadrillions) we have a classic supply and demand perfect storm brewing. Meaning we have not seen a natural gas price bottom yet.

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