Has Natural Gas Hit Bottom? 23 comments
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The market recovery has helped out a lot of sectors. Leading commercial REITs have been raising cash. Funding for high-potential biotech stocks has resumed. Beaten up casino stocks have done exceptionally well.
It’s been a good two months for almost everything except for natural gas.
Throughout the first eight weeks of this rally, natural gas prices seemed to fall week after week. Inventory continued to set new highs practically each week. Every round of price declines brought a further decline in natural gas rigs in operation. Last week another 17 rigs were taken off line, according to Baker Hughes (NYSE:BHI).
Despite all the bad news for natural gas, it looked like natural gas prices were sitting a bit too low. In our article Natural Gas: 5 Reasons to Buy the Other Fossil Fuel Now we looked at a few reasons why natural gas prices were about to rebound.
The key catalysts we identified for a quick rebound over the short term were: new supplies are shrinking (rigs are getting shut down), near-term outlook is bleak (large short interest), and the energy value of natural gas relative to oil in dollar terms was getting way out of line.
That all changed last week and natural gas prices started to rebound. In all, natural gas prices rebounded sharply from a bit under $3.25 per Mcf to $4.52 as I write. That’s a 40% move in a little over a week.
So now the big question on investors’ minds is, “Was that the bottom?”
To answer it, we have to look at a couple of factors.
An Uptrend Forms
One of the most important factors is rig counts. The number of rigs exploring for new reserves and expanding old reserves is closely related to how quickly supplies will be able to be replenished if demand resurges.
If you look at the chart below the decline in operational rigs is starting to slow:
The leveling off of the number of rigs in operation is an important part of the bottoming process. But it’s not all of it though.
Prices are what we’re watching here (and where we’re going to make any money). The chart above also shows there are some signs of life for natural gas in the near term.
Now with the rig counts down – all the way to levels from five years ago – and natural gas prices rising, is the mix right for a long and steady rebound to $5 per Mcf, then $6, and beyond.
It’s 2004 all over again, right?
Well, not so fast.
A Bumpy Road Ahead
The first thing is that there is a lot of supply to get worked off. Current inventories are sitting at near record levels for this time of year. It will take a big rebound in demand to get the natural gas stockpiles back down to average levels. Right now, the two most variable demand drivers are very unpredictable.
On the industrial demand side of the natural gas equation, it’s not looking very strong. The U.S. Department of Energy recently said industrial consumption of natural gas will decline 8% this year.
The real variable here is actually the weather. Remember, natural gas-fired generators are very expensive to operate and make up most of the marginal electricity generation capacity. Demand from those generators is tied closely to marginal electricity demand which, in the summer months, is tied closely to air conditioner usage. As a result, a mild summer on the west and east coasts (where air conditioning usage has the greatest impact) could go a long way to keeping demand down.
Then after the summer, there’s another major hurdle which will keep a price cap on natural gas prices. In the fall, the U.S. will see a large influx of natural gas imports from all over the world.
In Liquefied Natural Gas (LNG): The Energy Boom Everyone Forgot About we looked at how a surge in additional LNG production capacity is coming on line soon:
An additional six liquefaction plants will come on line by the end of this year. These facilities will produce a lot more LNG. Together they will nearly double global LNG production over the next few years.
For instance, the massive Sakhalin II project off the coast of Eastern Russia just shipped its very first LNG shipment to Japan a few days ago.
An expansion of the liquefaction plant in Indonesia is expected to come on line by the end of the year.
And then there’s the big one. QatarGas’ liquefaction facilities are going through a major expansion. This project will bring an additional 24 million tonnes of LNG on the market this year. That’s nearly a 30% increase in LNG supply overnight.
The LNG boom is only going to grow from here. According to a recent LNG article at Bloomberg suggests:
The flow of LNG into the U.S. will be about 500 billion cubic feet compared with 350 billion cubic feet in 2008, according to the monthly report. The new estimate is a 4.2 percent increase over last month’s projection. Next year’s imports may rise to 650 billion cubic feet, the department said.
“Expected weak natural-gas demand in the liquefied natural gas-consuming countries of Asia and Europe, the startup of new liquefaction capacity, and limited natural-gas storage capacity in countries that typically rely on LNG are expected to increase the availability of LNG for the U.S.,” the [U.S. Department of Energy] department said.
There are billions of dollars being invested and the industry has years of growth ahead of it. The impact of LNG on natural gas prices in North America will only grow from here.
A Rangebound Future
It’s clear we’re at a midpoint in natural gas price range. They could easily go up or they could just as easily go down. There are many unpredictable factors at play. As a result, I recommend waiting for the extremes to go long or short.
The downside extreme would be under somewhere around $3.50 per Mcf. If a mild summer rolls through or industrial demand falls further, there would be little support for prices above $4 per Mcf.
The upside extreme would be around $5 or $6 per Mcf. It would take a strong surge to get prices comfortably above $5, but it’s not impossible.
Also, if that surge does happen, there will be plenty of LNG headed for North America to help supply any surge in demand at those prices. Remember, the cost of production and delivery of LNG is between $2.90 to $4.00. That range includes both variable and fixed costs. So, considering the high case scenario, there will be plenty of foreign natural gas coming into the U.S. when natural gas prices reach beyond $5.
In the end, it’s too early to tell if natural gas prices have hit the bottom. But if we wait for the extreme scenarios, there should be some easy money to be made playing the range with a covered call or covered put strategy on U.S. Natural Gas Fund (NYSE:UNG) or quicker trades in the Horizon’s Betapro Natural Gas Bull Fund [TSX:HNU] or its Bear equivalent [TSX:HND].
It’s tough to imagine a significant breakout beyond mid $5’s and low $3’s at this point so all bets at those points should be pretty safe and profitable.
Disclosure: Still long Horizon’s Betapro Natural Gas Bull Fund (TSX:HNU) from previous drop in natural gas prices.
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This article has 23 comments:
I absolutely agree that natural gas price has bottomed. I am actually even more optimistic than you are, in the natural gas price recovery. I started to load UNG at $15.50 on the way down, and then massively loaded up tons UNG in the $13 to $14 price range. They are more than 1/8 of my portfolio now.
A few points you have not touched on: The cost of natural gas production. Natural gas production in the USA boomed in recent two years due to the development of shale gas, which is expensive to produce and the production per well start to decline more quickly than conventional natural gas wells. Natural gas price needs to be at least $13 for the shale gas production to be profitable. The current price is too much lower than intrinsic cost for producers to have any incentive to drill replacement wells.
If there are any drill rigs left at all, they are only there because the producers predict the gas price will come back to double digits soon. If they don't see it that way, there won't be a single drilling rig.
Further, you should make the cost argument on LNG importation as well. Simply because you have build some LNG importation terminal does not mean LNG ships from all over the world will come to your port. It depends on price. US LNG importation has collapsed from the high just two years ago. The LNG ships are expensive to build and have limited shipping capacities. Other countries in the world are paying much higher prices for the LNG.
I look around and see nothing else that has as much a certainty as UNG, to go up quadruple from current level, in as short a time period as 9 months. It's time to massively load up UNG.
seekingalpha.com/autho...
It's like a beach ball being held underwater right now.
I agree on the price tripling part. I think it can actually quadruple from here within 12 months, not just triple.
On May 14 11:13 AM yellowhoard wrote:
> Funny you should say that you are 1/8th in on UNG. Me too, as of
> this AM. I"m looking for a three bagger by December.
Funny - a massive load on a position which lost 50%...
On May 14 10:44 AM Mark Anthony wrote:
> Andrew:
>
> I absolutely agree that natural gas price has bottomed. I am actually
> even more optimistic than you are, in the natural gas price recovery.
> I started to load UNG at $15.50 on the way down, and then massively
> loaded up tons UNG in the $13 to $14 price range. They are more than
> 1/8 of my portfolio now.
>
> A few points you have not touched on: The cost of natural gas production.
> Natural gas production in the USA boomed in recent two years due
> to the development of shale gas, which is expensive to produce and
> the production per well start to decline more quickly than conventional
> natural gas wells. Natural gas price needs to be at least $13 for
> the shale gas production to be profitable. The current price is too
> much lower than intrinsic cost for producers to have any incentive
> to drill replacement wells.
>
> If there are any drill rigs left at all, they are only there because
> the producers predict the gas price will come back to double digits
> soon. If they don't see it that way, there won't be a single drilling
> rig.
>
> Further, you should make the cost argument on LNG importation as
> well. Simply because you have build some LNG importation terminal
> does not mean LNG ships from all over the world will come to your
> port. It depends on price. US LNG importation has collapsed from
> the high just two years ago. The LNG ships are expensive to build
> and have limited shipping capacities. Other countries in the world
> are paying much higher prices for the LNG.
>
> I look around and see nothing else that has as much a certainty as
> UNG, to go up quadruple from current level, in as short a time period
> as 9 months. It's time to massively load up UNG.
>
> seekingalpha.com/autho...
>
Finding natural gas reserve is one thing. Producing them is another. I can also claim I found trillions of trillions of cubic feet of natural gas. It's on neptune and NASA claims the credit of discovery. But it's not going to bring natural gas price down.
The so called new natural gas discover has been known for a few decades now and is NOT news. They are shale gas. They are extremely difficult and uneconomical to produce, until recently technology progress made it possible and $15 natural gas price made it profitable. Current natural price is simply too low to allow the shale gas to be produced.
On May 14 12:22 PM Thomas J. Gordon wrote:
> What about that wsj article on all those new domestic (u..s) natural
> gas finds in lousiana? online.wsj.com/article...
> Some of the finds they had there were huge. And natural gas is less
> exportable than oil. I got out of domestic energy trusts because
> of that article. Plus without that Amarinth guy, the natural gas
> market has never been the same.
I remember you were saying some BS about commodity selling below cost of production. Funny - a massive load on a position which lost 50%. Good job, pal...
On May 14 10:44 AM Mark Anthony wrote:
> Andrew:
>
> I absolutely agree that natural gas price has bottomed. I am actually
> even more optimistic than you are, in the natural gas price recovery.
> I started to load UNG at $15.50 on the way down, and then massively
> loaded up tons UNG in the $13 to $14 price range. They are more than
> 1/8 of my portfolio now.
>
> A few points you have not touched on: The cost of natural gas production.
> Natural gas production in the USA boomed in recent two years due
> to the development of shale gas, which is expensive to produce and
> the production per well start to decline more quickly than conventional
> natural gas wells. Natural gas price needs to be at least $13 for
> the shale gas production to be profitable. The current price is too
> much lower than intrinsic cost for producers to have any incentive
> to drill replacement wells.
>
> If there are any drill rigs left at all, they are only there because
> the producers predict the gas price will come back to double digits
> soon. If they don't see it that way, there won't be a single drilling
> rig.
>
> Further, you should make the cost argument on LNG importation as
> well. Simply because you have build some LNG importation terminal
> does not mean LNG ships from all over the world will come to your
> port. It depends on price. US LNG importation has collapsed from
> the high just two years ago. The LNG ships are expensive to build
> and have limited shipping capacities. Other countries in the world
> are paying much higher prices for the LNG.
>
> I look around and see nothing else that has as much a certainty as
> UNG, to go up quadruple from current level, in as short a time period
> as 9 months. It's time to massively load up UNG.
>
> seekingalpha.com/autho...
>
I checked my trade record. I did twice buy a few hundred shares of UNG in early September, at about $33 per share. I sold them all in the second half of September, for about $35. I never got back in UNG until I bought 100 shares on March 17 for $15.50 per share. That was my entry. I now have almost a hundred times more shares than my initial timid purchase of 100 shares at $15.50.
If you want to see the detailed trade record of my account, pay me a reasonable fee and you can see it all.
On May 14 01:12 PM Wiskey wrote:
> You are the one recommended UNG when it was around $30.
> Funny - a massive load on a position which lost 50%...
>
> On May 14 10:44 AM Mark Anthony wrote:
and "andrew mickey" is just as bad. he implies that he bottom ticked nat gas by talking up his "article" "5 Reasons to Buy the Other Fossil Fuel Now" when in fact he squeezed that one out on march 28th. Nat gas was 4.15 on may 27. Today nat gas is -- 4.25. You've round-tripped (at best) if you followed this guy back in march. That sort of misrepresentation of trading calls is the exact thing everybody should be avoiding. Not only is he flat out incorrect, but its also blatantly dishonest.
Btw...Tuj is right about shale. I'll quote the above: "You forgot about shale. How you can discuss NG without discussing what's happened in Barnett, Haynesville, etc is beyond me."
Which leads to my conclusion (I'm not going to say buy or sell nat gas) But i will tell you that this guy, Andrew Mickey, is dangerous and has no clue what he is talking about.
The point is you can not talk about any supposed to be natural reserve, WITHOUT talking about it in the context of current price. At current natural gas price, you CAN pretty much FORGET all about Barnett and Hayesville, because it is far too costly to produce natural gas from these shale gas sources if the natural gas stay at current low level.
This is the beauty of commodities investment. You buy something below cost and you can just sit back, knowing for certainty that its price MUST recover and go to a level which is above cost.
On May 14 08:58 AM tuj wrote:
> You forgot about shale. How you can discuss NG without discussing
> what's happened in Barnett, Haynesville, etc is beyond me. LNG's
> last stop is the US if all other diversions are closed. The real
> story is the hedged positions of some of the majors.
This is b******.
Looking at the current cost environment in regards to rig and service costs, Barnett Shale and Haynesville shale can be profitably produced at around $6 dollars.
And in a lot of the fields completion technology and subsurface understanding is still improving, which should help get costs down.
$4-7 therefore will be the area where nat gas prices will be stuck for a very long time.
Don't understand me wrong, I would love a $12 nat gas price (considering that I work in the industry) but it's just not gonna happen.
On May 14 03:09 PM Mark Anthony wrote:
> I guess besides forgetting about Barnett, Haynesville etc., you also
> forget to mention there is a gigantic natural reserve on the planet
> of neptune and uranus, enough for humanity to consume for a hundred
> billion years. It may be a bit costly to ship them to earth though
> :-)
>
> The point is you can not talk about any supposed to be natural reserve,
> WITHOUT talking about it in the context of current price. At current
> natural gas price, you CAN pretty much FORGET all about Barnett and
> Hayesville, because it is far too costly to produce natural gas from
> these shale gas sources if the natural gas stay at current low level.
>
>
> This is the beauty of commodities investment. You buy something below
> cost and you can just sit back, knowing for certainty that its price
> MUST recover and go to a level which is above cost.
>
> On May 14 08:58 AM tuj wrote:
seekingalpha.com/artic...
----------------------...
I am seeing United States Natural Gas Fund (UNG), as an excellent buy here and I see it less affected by turbulence in the general market. I bought UNG at around $33 myself. I also suggest buying NGAS (NGAS) as it is an unconventional natural gas play, with a nice ticker name others are jealous for.
----------------------...
Reading your passages about Einstein style shaving as a basis to short consumer staples stocks, makes me just wonder: are you really that stupid, or it just you trying to look that way?
On May 14 10:44 AM Mark Anthony wrote:
> Andrew:
>
> I absolutely agree that natural gas price has bottomed. I am actually
> even more optimistic than you are, in the natural gas price recovery.
> I started to load UNG at $15.50 on the way down, and then massively
> loaded up tons UNG in the $13 to $14 price range. They are more than
> 1/8 of my portfolio now.
>
> A few points you have not touched on: The cost of natural gas production.
> Natural gas production in the USA boomed in recent two years due
> to the development of shale gas, which is expensive to produce and
> the production per well start to decline more quickly than conventional
> natural gas wells. Natural gas price needs to be at least $13 for
> the shale gas production to be profitable. The current price is too
> much lower than intrinsic cost for producers to have any incentive
> to drill replacement wells.
>
> If there are any drill rigs left at all, they are only there because
> the producers predict the gas price will come back to double digits
> soon. If they don't see it that way, there won't be a single drilling
> rig.
>
> Further, you should make the cost argument on LNG importation as
> well. Simply because you have build some LNG importation terminal
> does not mean LNG ships from all over the world will come to your
> port. It depends on price. US LNG importation has collapsed from
> the high just two years ago. The LNG ships are expensive to build
> and have limited shipping capacities. Other countries in the world
> are paying much higher prices for the LNG.
>
> I look around and see nothing else that has as much a certainty as
> UNG, to go up quadruple from current level, in as short a time period
> as 9 months. It's time to massively load up UNG.
>
> seekingalpha.com/autho...
>
Accusing me, a regular Seeking Alpha contributor, as lying publically, is a very serious matter. Seeking Alpha has a very strict full disclosure policy and they have the real name and address of contributing authors and they hold the authors up to the truth of their full disclosure statements at the end of each article.
Pay me a reasonable fee, and I can fax a copy of my trade records for you to see. I did entered a small UNG position in Sep., 2008 at $33.00. But I decided I did not like it and sold it at about $35 near the end of September. I had no UNG position until I started to purchase again in March, 09 at the $15.50 level. It's the truth.
I did mention shorting CL. I meant to stimulate some thoughts in that direction. I insist that CL is way over-priced and it should go down over long term. I never had any CL short position so far, because holding some of my favorite long positions are way much more attractive than shorting any stock at all. There are tons of good longs today, and not too many good shorts.
I twice mentioned CL as a potential long term short, on De. 26, 08 and Jan 25, 09. In hind sight, had some one shorted CL at these two dates, the end results would be flat, i.e., tasteless. Real long term it should go down when the weak fundamentals are reflected in its quarterly revenues.
On May 14 05:06 PM Wiskey wrote:
> I think you are lying pal. You started "loading up" when UNG was
> $33. Here is from your so called analytic article:
> seekingalpha.com/artic...
>
>
> ----------------------...
> I am seeing United States Natural Gas Fund (seekingalpha.com/symbo...),
> as an excellent buy here and I see it less affected by turbulence
> in the general market. I bought UNG at around $33 myself. I also
> suggest buying NGAS (seekingalpha.com/symbo...) as it is
> an unconventional natural gas play, with a nice ticker name others
> are jealous for.
> ----------------------...
>
> Reading your passages about Einstein style shaving as a basis to
> short consumer staples stocks, makes me just wonder: are you really
> that stupid, or it just you trying to look that way?
>
I know this because we have 1 completed well and they are starting there second drill in mid June. ( we as in my family/relatives).
The gas line was finished last October that runs through our property connecting to the main line in Searcy, AR.
Now they did try to renegoiate the lease with us (they being Chesapeake) but we stayed firm to the original contract :)
Exits left.
That is the just the normal price flow action over time. Either price "greed" will prompt reactive action(s) on the part of the product suppliers to artificially or naturally imlement projects to increase demand and alter the fundamental equation or the fundamentals will twarp speculative efforts of those market participants to buy low and sell at a much higher price than fundamentals can support.
Natural gas need to reach the vicinity of $6.28 in about 15 weeks including the last 3 weeks in order for it to attract enough attention. Minimum rally needed is $5.45 target assuming natgas goes into a few weeks of consolidation after the last 3 weeks of rally. Upper range is $7.63
Let's take it one step at a time this time around.
Nobody knows what will happen in the immediate future under this recessionary environment even if we know what the long-term future holds based on past experience.
That is so completely wrong its laughable. You should listen to the conference calls of the producers sometime.
On May 15 10:19 AM tuj wrote:
> " Natural gas price needs to be at least $13 for the shale gas production
> to be profitable."
>
> That is so completely wrong its laughable. You should listen to the
> conference calls of the producers sometime.