Natural Gas: Not Many Reasons to Own It

Energy markets on both sides of the Atlantic finished last week on a sour note. Crude oil markets in London and New York finished lower for the first time in three Fridays. On Tuesday the bulls in New York tried to bluff the market higher with some early morning electronic bids above the $60 critical point of reference, but the bears saw right through their charade.

Then on Wednesday they had another shot at $60 after the DOE reported, what was, for all intents and purposes, a bullish weekly storage report, but they failed again.

The fact that equities had a rare down week also weighed upon the energy complex. That is to say, even the equity market’s more enthusiastic Pollyannas had a hard time spinning last week’s headlines

Look Who’s (regretting) Buying Natty Now: Apropos our discussions regarding the shift in investor sentiment in the energies (see last Monday’s and Tuesday’s issues of The Schork Report), the number of shares outstanding in the United States Natural Gas (UNG) exchanged-traded fund (ETF) jumped 13½% last week to 111,300, while interest in the equivalent crude oil ETF, the USO, dropped 5.7% to 90,600. Thus, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin, today they prefer natty at 1.2… lousy fundamentals notwithstanding. Unless you are selling WTI against it, we see no other reason to own natural gas in the spot right now.

Weather related demand is dormant and industrial demand is virtually nonexistent. For example, per last week’s industrial production numbers from the Fed, capacity utilization at steel mills fell further in April, to a woeful 33.3 percent of capacity. As a result, iron and steel production declined 1.8% on the month and was 64.4% below its recent peak in December 2007. As we have noted before, U.S. Steel’s 2008 consumption of natural gas amounted to around 1.3% of the average open interest in the NYMEX Henry Hub futures contract.

Extrapolate that U.S. Steel is probably the tenth largest steel company in the world against the extant demand destruction for steel (and other prosaic commodities) and that is a lot of Btus that have not been burned… and that is not changing over the next few months.

Comments

[paulito:]

With natural gas so cheap why are not people being inticed into changing over their vehicles to natural gas? You can run a car, especially a fleet of them using natural gas and not worry about the price skyrocketing to the moon the way gasoline went last year.

May 19 08:37 AM

[pockyclips ...:]

Market forces only seem to work when prices go up. We've had our head in the sand (literally) for 30 years, and it appears like more of the same.
Heard on the news this a.m. that it costs the U.S. military $13/gallon
to get gas to Kabul. " Winning" the war on terror may bankrupt us; it
might be cheaper to neutron bomb SW Asia and take the resources.

May 19 08:56 AM

[ripskii:]

paulito: You pose a very good question that has been extensively discussed on SA. See the followings links for more detailed info.

seekingalpha.com/artic...

seekingalpha.com/artic...

seekingalpha.com/artic...

May 19 08:57 AM

[notrichrepu...:]

paulito I asked my local Ford dealer this question a few months ago. Fords response..."at this time we are not interested in building a cng vehicle"
I think this is dumb

hard to change human behavior!
an object in motion stays in motion
an object at rest stays at rest

I plan on converting my vehicle to natgas soon.

May 19 09:04 AM

[epeon:]

Ford makes natural gas powered cars in Europe. Perhaps Ford's Europeans are smarter then their American counterparts.

May 19 09:09 AM

[scfranklin94:]

For those wanting to time an investment in UNG, I wouldn't want to own it before the end of October. Way too much gas out there; storage will max out and we'll have well shut-ins being mandated to maintain pipeline integrity in late October, possibly as early as late September. If we don't have an active hurricane season and above normal summer temperatures, oversupply issues may start as early as Labor Day.

There's no way that the lack of new production will keep this from happening this fall; but by next summer the situation should swing from oversupplied to undersupplied, and there should be a multi-dollar increase in price.

May 19 09:29 AM

[scfranklin94:]

Freya, I don't agree, you're stats are according to conventional vertical gas well fields. Everyone in the business now knows that there is two to three times as much unconventional natural gas reserves as there are of conventional gas reserves.

I remember petroleum engineers from Conoco coming to my high school in the 1970's and telling us that the US would run out of natural gas in twenty five years. I remember looking a well logs for the Barnett Shale in the 1980's and being told by the older guys in the company how the gas in the shale was trapped and would never be recovered economically. Then I attended a conference in the 1990's saying how the US was running out of natural gas and LNG was the only way that we could meet US demand. Now they're saying that the new shale plays will 'only' last 50 to 100 years.... All I know is that on my death bed, there will be more gas production in the US than in anytime else during my lifetime.

May 19 09:59 AM

[Windsun33:]

Several reasons, one of the main one being that the price of NG is so volatile. A few years ago the City of Phoenix changed some vehicles over to NG - by the time the conversions were done, the price had risen 25%+. And it cost them over $4000 each to change.


On May 19 08:37 AM paulito wrote:

> With natural gas so cheap why are not people being inticed into changing
> over their vehicles to natural gas?

May 19 10:04 AM

[Shaggieman:]

Warning: Don't buy USO or UNG LLP's unless you like filing a bunch of extra tax forms and paying partnership FEES out of your holdings. I was shocked to have fees drawn right out of my brokerage account.

May 19 10:28 AM

[Rick Krementz:]

A couple of issues with CNG auto conversions:

Less vehicle range, unless you seriously change the amount of space in the vehicle.

Not legal in many tunnels because of explosion risk.

Very few fill stations if traveling.

Long fill up times to compress gas if refueling from home.

May 19 01:04 PM

[User 379550:]

There is over 400 trillion cubic feet of natural gas in British Columbia, Canada's Horn River and Montney basins. Encana has committed the first $400MM to build a new plant; TransCanada is building a new pipeline from Horn River to Edmonton. (www.hornrivernews.com). With more shale gas coming on stream there will be an abundant supply of natural gas in North America. More cars should be converted to CNG (AT&T committed to the largest CNG conversion in US corporate history a couple weeks back) and Obama should factor this in to his new clean-car plan.

May 19 01:26 PM

[HardwoodFlo...:]

NatGas won't move until industrial demand for energy (electricity) moves up. Oh yeah, and as long as ethanol plants are shutting down all over the country not much help there either.

Don't believe the "chaos" theories either. No doubt people will start to talk about hurricanes and other disruptions to try and move the market.

May 19 01:46 PM

[buyforeclos...:]

are you insane? The US ahd HUGE and I mean frikin HUGE nat gas reserves!!!


On May 19 09:20 AM Freya wrote:

> Convert to NG vehicles, but first check if you will Void the Warranties
> on your car and whether your Car Insurer will actually Cover the
> New Vehicle.
>
> The world is Not awash in Nat. Gas. Over 60% of it is controlled
> by 3 countries: Iran, Qatar and Russia. It is hard to move from Countries
> that have it to countries that do not. They will have a say on which
> country receives their product.
>
> Carmakers in the USA would have to create a market that is strictly
> Domestic. It isn't going to happen.
>

May 19 01:53 PM

[buyforeclos...:]

Im waiting for UNG to hit 11 before I buy.....nat gas at 2.75

May 19 01:54 PM

[Windsun33:]

NG would be much better used to curtail coal use than to spend trillions on auto conversions if emissions is the main problem.

May 19 11:39 PM

[NGadvocate:]

You're exactly correct. Natural gas should really be the fuel of choice, for the next 30 years, for electrical generation. We already generate about 20% of our electricity nationally with NG (coal around 50%, 20% nuclear, 10% hydro and "other"--less than 2% is wind and solar combined). This way, hybrid cars, which are already in first or second generation development can continue to improve and cut into our imported oil (the only thing we have to import, energy wise) by significantly cutting gasoline usage. CNG fueling units cost approximately $1mm and would not be economically feasible for independantly owned service stations. CNG does make sense for fleet vehicles (garbage trucks, school buses, city buses, delivery trucks) because they can be refueled at a central station with high speed refueling equipment. NG is much cleaner burning than oil products, is more efficient and is plentiful (huge new reserves are coming on line because of technology). Best of all, it's DOMESTIC! We don't have to import it and we already have an impressive national delivery sytem in place (the pipeline grid), which is being further developed by the pipeline industry without any government subsidy. We absolutely need to stop lumping NG in with coal and oil as a BAD, fossil fuel and start thinking of it as clean, green, plentiful and domestic.

On May 19 11:39 PM Windsun33 wrote:

> NG would be much better used to curtail coal use than to spend trillions
> on auto conversions if emissions is the main problem.

May 20 10:46 AM

[one eye:]

That's where Nat. Gas belongs, Cutting Emissions by the current Coal Fired electric Grid.

Forget about Canadian Nat. Gas, If this Garbage about Buying American excludes their Goods. Like The Idjits in California want to do.

If we stop our 24/7 pipeline inflows from Canada, We are screwed. Period. All of that OOOwie Nat Gas sitting in the Ground is just thumb twiddling. We can't get it out of the Ground fast enough.

Forget about $4.00 Nat Gas. It will be at $20 within a few months if Canada suspends pipeline shipments into the US Tommorow.

May 22 11:57 AM

[H. T. Love:]

On May 19 09:29 AM scfranklin94 wrote:

> <snip>
> There's no way that the lack of new production will keep this from
> happening this fall; but by next summer the situation should swing
> from oversupplied to undersupplied, and there should be a multi-dollar
> increase in price.

Hmm ...

One would think. But I keep seeing posts about huge amounts of LNG heading this way later (late this year, early next?). I don't have the knowledge to know if that's true. But here is my thinking.

Along the same lines you posit, well shutdowns continue to increase, demand stays low, the "stimulus plan" (*cough*, *cough*) fails to drive up any demand by industries that might use NG, prices continue to plummet with demand, ... for awhile.

That seems to me to make LNG importation less feasible as low-price restricts profits after all the costs of processing/shipping come into play, near-term.

Now step two. Dollar continues to weaken against all currencies that are commodity based. Under this scenario, all imports become more expensive. Since NG produced here and priced here would then be a *lot* cheaper than any imported product (especially after currency conversions), imports weaken or do not materialize and demand for locally produced NG begins to rise. Combined with other factors, like weather, natural disruptions of supply, delays in bringing wells back on-line, ... prices and profits to local producers improve.

There's also the outside chance that current fleet conversions to NG, already underway in various scenarios (various harbor authorities, UPS is testing conversions on-the-road already, airport shuttles, various municipal transportation already converted, municipal and commercial waste management systems converting/converted, taxi companies testing, etc.) gain additional traction as oil stabilizes somewhere between $50 - doubtful? - and $75 - also doubtful - will gain additional traction because of the (temporarily) distressed prices of NG. This makes the recovery time of conversion for business much shorter and, therefore, makes a stronger business case.

The impetous to "Go Green" is also an important factor. Not only is the Prez endorsing it, but many municipalities and states are regulating lower-carbon emissions in their areas of authority.

Add in the "Picken's Plan", which I believe will continue to raise awareness of the cost of imports to the country's future, and I think that NG is a long-term winner. For me, the trick is timing.

My SWAG (Scientific Wild-Assed Guess),
HardToLove

May 25 07:40 PM

[H. T. Love:]

On May 19 01:04 PM ricardoRI wrote:

> A couple of issues with CNG auto conversions:
>
> Less vehicle range, unless you seriously change the amount of space
> in the vehicle.
>
> Not legal in many tunnels because of explosion risk.
>
> Very few fill stations if traveling.
>
> Long fill up times to compress gas if refueling from home.

And, in summary of another discussion I had with a tunnel-visioned fanatic, individuals have a difficult time justifying the cost and inconvenience, especially when the future is so uncertain for so many. However, businesses use business-case justification and represent the path to conversion. This is already underway for various types of fleet vehicles.

HardToLove

May 25 07:48 PM