While the oil market grabbed the spotlight, considering the historic OPEC agreement and rightly so, we also must keep an eye on natural gas. The natural gas market has had an impressive move as of late and yesterday’s price spike got help not only from a slightly friendly supply report but a weather prediction that made news and was front and center on the “Drudge Report”. A headline today says that “KILLER FREEZE TO GRIP USA...COLD ANOMALY, Record cold coming to ‘almost entire USA’ – Low-temperature records set to be SHATTERED” caught traders attention who up until now, were really getting mixed signals about the weather.

Traders were talking about conflicting American and European weather models and are not quite sure if they should be positioning long or short based on the forecast. Now because of these shocking headlines they are giving in to the cold side. Sure, we had a 50bcf withdrawal from supply that was within 1 bcf of the average estimate but the decisive move higher had a lot to do with the press surrounding these ‘killer freeze” reports.

The main report came from climatologist Dr. Roger Pielke Sr. who said that, “'I cannot recall last time I have seen such a cold anomaly forecast across almost the entire USA.” Those thoughts were backed up with a map by Dr. Ryan Maue of WeatherBell showing that over 75% of the USA will be below freezing for overnight lows on December 8th. Dr. Pielke says that cold records will be shattered, “By the end of NEXT week, some states will be running 36 F BELOW NORMAL." These forecasts changed a lot of trader’s positions with this killer cold prediction even though many weather forecasters are skeptical about this prediction. Dave Tolleris of WXRISK feels the forecast is too general to be taken seriously and while he is predicting colder weather, it may not be the historic event some others are predicting. At the same time, it wouldn’t hurt to be pulling out the heavy coats, scarves and mittens just in case. Besides, the cold can make a person feel warm all over when they are long natural gas!

Oil is pulling back but while US producers are ready to go back on line, we may not see a major spike in US output right away. We will see smaller shale producers ramp-up on the perception that OPEC has cut production and US producers will then fill every barrel and this thinking is wrong. As reported by the IBD, “U.S. shale producers were the big winners of OPEC's decision Wednesday to cut production by 1.2 million barrels per day, but the deal won't immediately fix high debt loads, lack of skilled workers and other issues that shale producers need to resolve before ramping up production.”

As reported, “There were casualties on capital spending and future capital spending, so even though the war is over and welcomed by everyone, thinking the U.S. producers are going to ramp up production to where they were even a year ago is ill-conceived," said Phil Flynn, a senior market analyst at the Price Futures Group. Domestic crude production has edged up to the highest level in nearly six months, but Flynn thinks it will take a least a year before output really heats up in the U.S." Companies are going to need more capital from banks, and it will be more difficult to borrow money because they have been burned in the past." While rig counts have been rising in the Permian and Colorado's DJ Niobrara basin, Flynn said most of the recent rigs were added to replace rigs in decline or to hold leases. U.S. producers also could be hesitant to ramp up activity as the OPEC deal is contingent on Russia and other nonmembers scaling back output.”

The FT wrote an article that agrees with that outlook. The FT reports that “The agreement by Opec, the oil producers’ cartel, to cut output has been welcomed in the US industry as a godsend for hard-pressed production and service companies. But many groups are still expected to be cautious about stepping up production, as they seek to strengthen fragile balance sheets.”

Of course, I am hearing from some friends from the oil patch that are so happy that OPEC has made a deal. David Easley sent me a picture of an oil rig that was illuminated in holiday splendor saying, "The old oil derrick in Breckenridge, TX will shine a little brighter tonight”. Mr. Easley says that "So many marginal wells have been shut here in North Central Texas, it won't take a week to get them back up and running. This will get some small producers back in the game. I'm very happy to see it!" So am I David. So am I. Merry Christmas!