Natural Gas: The Next Big Thing

Why is Natural Gas so cheap (3.87 per mmBTU as of Friday) while Oil is moving ever higher? This is a significant disconnect that does not make long term sense. Historically, the average ratio between West Texas crude and Henry Hub natural gas has been 8.5 to 1. Currently, it is at a historic ratio of 19:1.

With oil at $72 per barrel, natural gas should be around $8.47. That represents a 125% potential pop in the price of natural gas if the price of oil stays constant. Many experts believe that oil is fairly priced right now, given the costs of exploration and extraction.

UNG is the easiest pure play on the price of natural gas. This ETF is based on natural gas futures and moves directly with that price. UNG trades for $14.50 as of today, but would be over $30 if natural gas normalized its pricing against oil. So, just on current relative value, natural gas is a value play with great upside potential in the intermediate term (12 months). But it is an even better play in the longer term (1-5 years).

President Obama and the Democrat controlled Congress will definitely pass some type of environmental legislation this year or early next. That legislation is aimed directly against carbon and its role in global warming (or the theory thereof, since it is not conclusively proven). In the next several months, either a "Cap and Trade" or a straight up carbon tax will be passed. The moderates in Congress and most of the heavy industrial world, faced with the reality of some type of legislation, are rallying behind a carbon tax for its simplicity and for the fact that the cost can be passed along to the consumer much more efficiently and without the distortion and potential fraud of cap and trade.

For natural gas, either scenario is very attractive. Natural gas per BTU of energy, is much cleaner than oil or coal, the two primary fossil fuel alternatives. So, if a carbon tax is passed by legislation this year, natural gas will immediately become more competitive. Its historical relationship to oil should decline even below 8.5. If it moves to 7.0, then the relative cost today should be $10 per mmBTU for natural gas.

Longer term, with or without a tax advantage over oil, natural gas promises to be used as a transitional fuel to alternative energies like solar, wind and geothermal. T Boone Pickens has proposed, and spent a considerable portion of his wealth, promoting the idea of natural gas powered vehicles. Once fuel cell powered vehicles become practical, within 10 years with government encouragement / subsidy, natural gas is likely to be the first fuel used by such vehicles. This reality will be encouraged if Pickens is successful in getting existing fuel stations in North America to add natural gas to their product offering at the pump.

Pure hydrogen vehicles are a better environmental option, since the byproduct of the chemical reaction is pure water. But the manufacture, storage and distribution of highly combustible hydrogen has many science, engineering and production problems yet to be solved.

So, how can we benefit from this megatrend?

The Canadian Canroys are one good way to anticipate this new trend. Much of North American natural gas is in the western provinces of Canada. I have owned and benefited from Pennwest (PWE), Pengrowth (PGH), Provident (PVX), Daylight (DAYYF.PK), Baytex and Harvest Energy for many years (until last July when the entire commodity complex hit the skids). U.S. based producers include Anadarko (APC), Chesapeake (CHK), XTO, Southwest Energy (SWN) and Lynn Energy. All the above offer decent dividends, though not nearly as attractive as a year ago, so there is somewhat less reason to buy and hold as there was in the past.

For extra leverage, sell "In the Money" UNG put options on the October $18 strike price (UNEVR) for around $4.50 premium per share of underlying stock (with the stock price at $14.50 as of today). This buys $1 of downside protection and provides over $3 of upside opportunity. If the price finishes above $18 on October 16, the puts will expire worthless and you will keep the $4.50 premium. The stock price of the UNG ETF will only need to move to about $5.00 from the current $4.00 for this to happen. But execute a "Buy to Close" order any where along the way, for example, when the premium falls to $2 for a double on your investment (times 5 for the inherent leverage of options) to lock in profits. This gives a 500% return in less than six months.

Because the market, especially commodity stocks, looks ready to correct, it may be prudent and profitable to wait on this until after a market correction. I am looking for a move back down to S&P 500 of 875 in the next couple of weeks. Once that move is done, it may be possible to sell the same puts for $5.50 (with the underlying UNG at $13).

Have fun making money.

Disclosure: No Positions

Comments

[logicalthought:]

>>With oil at $72 per barrel, natural gas should be around $8.47... Many experts believe that oil is fairly priced right now, given the costs of exploration and extraction<<

And other experts (and even "non-experts" such as myself) think that oil prices should currently be much lower due to still-falling demand, but that instead a new (and temporary) bubble has formed there. In that case, nat gas, too, will soon be falling again.(Please keep in mind that these are relatively short-term predictions; I have no doubt that five years from now could be a very different story.)

Jun 15 07:33 AM

[ari5000:]

unless of course oil corrects to $50/barrel.

Jun 15 07:33 AM

[Andy1234:]

I think the guys above are looking at the demand side....the supply side looks horrible when oil is $50/barrel.

I think people in the market are looking forward and saying....damn we won't have any new projects coming online if oil is under $70-60 a barrel.....we might not even have anything coming online at $80/barrel.

Then the look the other way and see this massive pile of cash being created.....I dunno.

Its all about demand/supply and the cost to replace the supply when used. The price cannot eclipse the majority of new oil coming online for a very long period....otherwise shortages occur. NG and oil are too low for new projects to come online in the mass....and if new projects are cut.....the natural decline of 7-9% of supply (new oil isn't coming online) will eclipse the demand pretty quickly if oil remains low.

I do see we significantly rose the production of NG when prices were high....so the relationship between oil and NG may change in the future if we find significant amounts and are able to produce them at a reasonable price (the shales).

Jun 15 08:05 AM

[htex:]

Could Oil/NG pricing ratio be related to the fact that oil is acting as a "safe harbor" commodity (reacting to devaluing of the dollar and possible inflation)? And, NG is behaving so poorly because supply is still being burned off from its peak pricing moment in the summer of 2008 that led to increased E&P. And demand for NG is down. Further, the folks from the mideast who invested billions in our banks (previously known as investment banks) have oil they would like to sell at a certain price...maybe?

Jun 15 08:15 AM

[Daniel Herkes:]

The folks who try to con residential customers into locking in at the current rate are back in my town, as they always are when the price goes lower. This time they rented a storefront and have uniforms and a professional spin to there sales pitch.

Jun 15 08:16 AM

[tdiaz:]

Blue gold is the future. Washington and Beijing know it. TAPI pipedream vs IPI, it will be interesting.

Jun 15 08:30 AM

[john s. gordon:]

in comparing oil price & gas price you are assuming that there is no speculation component in the oil price.
> jack

Jun 15 08:35 AM

[User 431447:]

Sorry but that oil/nat gas ratio for justifying higher nat gas prices has been around a long time and it's no longer working. Our nat gas needs are satisfied by N. American sources, so there's no political risk. Oil travels well by tanker, nat gas goes where the pipes go. Oil can be stored in tankers and sold forward for a riskless arbitrage play thanks to the futures cantango. I think a more useful comparison would be a nat gas/coal price ratio.
Jim

Jun 15 08:43 AM

[basehitz:]

If I were a cynic, I would look at the recent massive volume coupled with the recent promotion by professional traders, and draw certain conclusions. Look, the momentum traders can push it if they want. From a fundamental perspective, the old rules of equating oil to NG are in question. And the oil/gas ratio I think more likely relates to these same speculators pushing oil beyond fundamentals, rather than NG lagging. Anything can be a trade. Investors should be aware of the change in rules here. Many articles have been written. Here's just a few.

community.investopedia...

blogs.wsj.com/environm.../

seekingalpha.com/artic...

I won't chase this up. I may buy puts when Da Boyz have had their fun.

Jun 15 08:55 AM

[beabaggage:]

put your money where your mouth is, if it is cheap buy some of the crap you listed as attractive! chickens play options.
utilities looking to improve margins that can do so may use NG for summer needs, helping, plus storage being nearly full means producers will have to stop producing so much- there is no where to put it! and yes as others have commented, oil can go back to $35.
China is talking a W shaped recovery in their market after stimulus wears down, see G-8 meeting comments. dollar will come back (albeit temporarily) and 10ytreas will rise. summer will be tough with all the dealership/plant closings and related fall out. back to school could be tough also, setting up for a Sept/Oct retest of market lows taking commodities with it. safe haven money will flow back into treasuries and gold, more stimulus will be needed but harder to push thru with 2010 elections looming next- and we are back to where we were, maybe worse.

so NG may be a short-term play, 4-5$ range bound probably for a while.

Jun 15 09:07 AM

[Shale Gas:]

I agree with some of the other comments that oil can decline to move this ratio back to its historical level.

Jun 15 09:17 AM

[YoYoMama:]

The correct spelling is "Linn Energy", not Lynn Energy, symbol LINE.

Jun 15 09:18 AM

[scfranklin94:]

All the talk of the Obama administration helping out NG usage is just that, a bunch of talk. The Waxman Cap and Trade bill gives the coal-fired generators free carbon emission allowances, while industrial users of NG have to buy the emission credits at auction; so in effect, we're subsidizing coal over natural gas.

I wish people would stop bringing up the oil to natural gas ratio; there's only a very small part of the country that can swap oil-fired generation for nat gas generation, and over 99% of cars can't use natural gas for fuel, so the fuels aren't interchangable.

If natural gas is so valuable, how come it trades in the $2.50 to $3.00 range out west? Could it be that we have too much supply; no it must be evil speculators forcing the price down!

Jun 15 09:36 AM

[Energy Trader:]

The long-term story for nat gas is pretty good, I think that has been pretty well explained a 1000 times in other articles and by Aubrey Mcclendon's TV commercials. What the author fails to mention is in this current environment the UNG is set to lose money at it rolls its contracts into next month at a higher price.

Along with the fact that demand is dropping and supply is still increasing even though rigs are being laid down, you should be selling puts not buying them.

Jun 15 09:43 AM

[Bull Run:]

Why is NG cheap? It's the economy.. NG runs manufacturing and industry, not crude oil. NG produces electricity and energy to produce products, which then reflects employment and disposable income. The UNG chart the worst chart I can every remember, is just reflecting how bad it really is..NG pricing has NO political spin, or Wall Street "pump up the market". It just is what it is.. The Price of a very weak economy and job market.

Jun 15 10:15 AM

[Michael Fit...:]

i would contend the history oil/natural gas ratio has been broken due to two fundamental developments:

1) peak oil, or alternatively, a future in which worldwide oil supply will not keep up with worldwide demand

combined with

2) abuandant natural gas reserves.

the result of 1 and 2 will be that the oil/nat gas ratio will leave historical trends and move ever higher going forward.

Jun 15 10:28 AM

[Mad Hedge F...:]

You may be going out on a limb. Every evening, after the cleaning staff has swept up the discarded trade tickets from the floor, the networks have swapped relentlessly opinionated commentators for game shows, and all but the most ambitious traders have decamped for the bars across the street, I sit down and go over my portfolio, asking myself a few key questions. Have I gone completely insane? What have I missed? Are these the positions of someone who has gone completely barking Mad (oops)? Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60. Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain’t talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader... ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 15 10:29 AM

[Ferdinand E...:]

I'm afraid that the experts are often wrong about things like solar and wind - or so I've been told by the cognoscenti because my own knowledge here is not what I would like for it to be. Strangely enough very many of them are also wrong about nuclear, but in the other direction, and here I think I know a few things. With all this unawareness I'm really very skeptical about the possibility of easily finding out the kind of knowledge we need about gas in order to really and truly judge whether it is capable of taking us where we need to go.

Jun 15 11:40 AM

[twotraps:]

Interesting article and even more interesting comments. Experience with energy futures says they are still highly emotional/volatile. Even more so than grains, despite fundamentals sometimes! Happy to go with UNG on a break-out today and perhaps a few chances to add to it............its not the kind of thing you want to turn your back on however.

Jun 15 02:53 PM

[Energy Trader:]

Incase there was any doubt that there is a bubble forming in UNG, it is now official.

www.djnewsplus.com/art...

Basically, the fund is running out of shares b/c people are jumping at much greater rate than ever expected.

Jun 15 03:45 PM

[sdcougar:]

the NG/oil ratio can also come back to the area of its historical ratio with the decline in oil prices which have run too far.

Re:"... legislation is aimed directly against carbon and its role in global warming."

More and more people are waking up to the entirely useless and harmful 'carbon tax.' {And hopefully they will be able to wake up congress, just as they have done with the Ron Paul bill}

See the Senate minority report and this must see video:video.google.fr/videop...

Jun 15 04:40 PM

[T. Marc Sch...:]

Good article! Boone's Plan seems like a good idea to me. It might not be the exact solution, but it's on the right track. Something has to be done to solve the oil dependency. I wonder if more natural gas cars were available for purchase in the US, would it catch on and natural gas become more popular. I think now it would seem hard to drive a natural gas car too far from home because of the lack of fill up stations that carry it. If more cars are on the roads, stations will have to carry it.

Keep it up T Boone Pickens.

Jun 15 04:54 PM

[LOLcapitali...:]

This story sounds great and has an excellent "megatrend" idea behind it. Unfortunately, like most good stories, this one is largely fiction. Let me offer an opposing view.

First, there are reasons oil trades at a significant premium to natural gas. Oil enjoys huge cost advantages in transportation and storage (this has been pointed out already in the comments, but it bears repeating). In practice, oil is a truly global market. All else being equal, the difference between the oil price at point A and point B will be the transportation differential, including cost of capital in transit. Not so for natural gas. Other than LNG, natural gas is limited by pipeline access, so is largely priced locally. Also, the US is the only free market for natural gas. The rest of the world heavily regulates pricing so when discussing NG, we should understand that we are actually talking about Henry Hub, which is the reference price for North American natural gas. WTI, on the other hand, is one of the primary reference points for global oil prices (even though delivery is at Cushing, OK) so forces in the North American gas market can have an out-sized effect on the oil/NG price differential when stated in terms of WTI and Henry Hub. This is the case today. The pricing case for NG can never rest on the oil/NG relative price argument.

Second, it is a dangerous game to bet on the outcome of a new regulatory regime such as carbon taxes. Much more go into these regulations than the stated intent of the legislation. And, as has been hinted at in the comments, no carbon tax (I include cap&trade in this category because it's just a different form of carbon tax) can pass the House without significant support from coal state Democrats. That support will not be forthcoming for legislation that gives natural gas a regulatory advantage over coal.

Third, the huge shale plays such as the Marcellus (W. Virginia and Pennsylvania mostly) and Haynesville (which is in Louisiana, not Alabama) do, in fact, have the potential to satisfy North American demand for decades at least and at prices below $10. (And before you ask, yes, most of the published data is wrong.) The interesting characteristic is that these wells blow down at 65%-80%+ in the first year. This means that meaningful supply adjustments will lag a drop in rig count by at least a year. However, working against this is the necessity for shale players to develop properties to retain the leases for which many of them paid large bonuses over the last couple of years. So we are looking at an oversupplied market through mid 2010 at least. Unless, of course, the shale players hedge out into 10 and start drilling again (a very plausible scenario) in which case we will see oversupply through 11-12.

Fourth, as someone else pointed out, there is a huge wave of LNG heading for shore (somewhere) over the next five years. Most of the new contracts have diversion rights so this LNG will seek the highest priced markets which is seldom North America; however, this does not mean LNG will not hit our shores. Once a large liquifaction train starts up it only stops for maintenance. These projects are heavily leveraged so require cash flow to pay the debt. This means that global LNG supply does not adjust to global demand. New LNG always seeks the highest priced market net of transportation and diversion costs, regardless of what that price is. This means there will be times when the US acts as the global "sink" for LNG even if the market is already oversupplied.

Finally, while I agree that NG is an obvious "transition fuel", this is not tradeable information unless one has a time horizon measured in decades. In any case, the way to play it would not be using the prompt month contract.

Jun 15 05:00 PM

[ur2smrt4me:]

UNG is based on natural gas futures *and swaps*

"In the UNG’s case, however, the growth has been so large that in order to avoid a regulatory clampdown on its futures positions the fund managers have been forced into the world of over-the-counter swaps. Accordingly, the fund’s swap positions are now 2.6 times larger than its future ones."

see the original article for more details:

ftalphaville.ft.com/bl.../

disclosure -- long UNG (this may change very soon)

Jun 15 05:23 PM

[Not Jerry A...:]

I think you nailed it spot -- when oil was around thirty you can bet you a$$ no one was sucking it out of the ground...now that we see it in the 70's it's all of the journal about companies struggling to get functioning again...this sort of news alone can push prices higher...

Today was a good sign closing about the 70$ mark...the minute we were under I started to pick up more...my only regret is waiting until the mid 40s to start accumulating...as it was known that 30$'s a barrell wouldn't be tolerated from the nations who control supply..

Happy trading

On Jun 15 08:05 AM Andy1234 wrote:

> I think the guys above are looking at the demand side....the supply
> side looks horrible when oil is $50/barrel.
>
> I think people in the market are looking forward and saying....damn
> we won't have any new projects coming online if oil is under $70-60
> a barrel.....we might not even have anything coming online at $80/barrel.
>
>
> Then the look the other way and see this massive pile of cash being
> created.....I dunno.
>
> Its all about demand/supply and the cost to replace the supply when
> used. The price cannot eclipse the majority of new oil coming online
> for a very long period....otherwise shortages occur. NG and oil are
> too low for new projects to come online in the mass....and if new
> projects are cut.....the natural decline of 7-9% of supply (new oil
> isn't coming online) will eclipse the demand pretty quickly if oil
> remains low.
>
> I do see we significantly rose the production of NG when prices were
> high....so the relationship between oil and NG may change in the
> future if we find significant amounts and are able to produce them
> at a reasonable price (the shales).

Jun 15 06:12 PM

[baldskits:]

There are no significant large capacity liquifaction plants for LNG in the USA that I am aware of that could store some of the excess gas. If hydrafraced wells can't be shut in without harming future flow rates, then this is a real problem. I know they use a hard material that is pumped with the slurry to hold the fracture fissures open to let the gas flow. What happens if the well is shut in?


On Jun 15 10:29 AM Mad Hedge Fund Trader wrote:

> You may be going out on a limb. Every evening, after the cleaning
> staff has swept up the discarded trade tickets from the floor, the
> networks have swapped relentlessly opinionated commentators for game
> shows, and all but the most ambitious traders have decamped for the
> bars across the street, I sit down and go over my portfolio, asking
> myself a few key questions. Have I gone completely insane? What have
> I missed? Are these the positions of someone who has gone completely
> barking Mad (oops)? Just as I was going through this exercise last
> night, a long time friend from the energy industry, who used to put
> me up in his Dallas mansion when I was wildcatting for natural gas
> in the Barnet Shale a decade ago, called me up and told me I was
> out of my tree putting people into NG at $3.60. Huge discoveries,
> such as the Hainesville shale in Alabama, have made available enough
> NG to last the US another 50 years. The new generation of fracting
> technology, while great for taping into marginal, low grade fields,
> is much more difficult to turn off when prices are low without causing
> permanent damage. And then there is the looming threat of large scale
> LNG imports from abroad. The big gas companies will be forced to
> dump whatever they have on the market at any price, possibly taking
> prices this summer down to $2, or even $1. This, after all is the
> mother of all overshoot contracts. Of course, one could argue that
> these risks are what already took it down to $3.20, and that industry
> demand will happily soak up the excess supply. Did I mention that
> the hurricane season started yesterday? Only Mr. Market knows for
> sure, and he ain’t talking. In the past month, my calls have enabled
> traders to catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader...
> ). No one will think less of you if you want to cash out here at
> $4.30 and stay on the sidelines until a more definitive bottom is
> put in. As they love to tell you in flight school, there are old
> pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 15 06:48 PM

[LOLcapitali...:]

There really isn't much good data on what happens to flow rates when you shut in a shale well (that's what I assume Mad Hedge Fund Trader is referring to). The vast majority of the economics are in the first 4 years (because of the steep decline rates) so I don't know of anyone who's taken the risk on shutting them in during that time frame.

Liquefying natural gas purely for storage is uneconomic.


On Jun 15 06:48 PM User 400728 wrote:

> There are no significant large capacity liquifaction plants for LNG
> in the USA that I am aware of that could store some of the excess
> gas. If hydrafraced wells can't be shut in without harming future
> flow rates, then this is a real problem. I know they use a hard material
> that is pumped with the slurry to hold the fracture fissures open
> to let the gas flow. What happens if the well is shut in?

Jun 15 08:27 PM

[BioBoy:]

UNG definitely not great for long-term (1-5 years) NG speculation, as it tends to underperform actual NG spot prices by about 10% per year.

Jun 15 08:28 PM

[BioBoy:]

Also this is not a "commodity stock" it is a fund comprised of futures contracts, so it is not going to "correct" along with the rest of the stock market. UNG was up 6.5% today... a day when the S&P lost 2.4%.

Jun 15 08:35 PM

[Northstar10000:]

Obama will not have enough power to pass a yugo in a vette by the end of this year. Rats will be jumping off his sinking stinking ship by year end. Hillary will leave in 2010. As for natural gas, forget it until it corrects with oil. Ratio will narrow but both will drop. After that nat gas is a great play.

Jun 15 09:16 PM

[ken3602:]

In my opinion NG will go up only when there is another huge spike in oil price again, something like.. over $120 barrel. Another thing is it seems NG has never been politician's favorite. I don't know why but they always talk about solar, wind, ethanol, and even clean coal, but not that much of NG. It just sounds boring and not energy savvy, or there is no lobbyist who is lobbying for NG.

Jun 15 10:20 PM

[Brian McM:]

Andy, you got it. Industry insiders who have to do the E&P are now saying $70 is the floor. They won't drill under that price. So, $40 oil is a pipe dream (pun intended). There is no more cheap oil to be found on the planet. It is all 10,000 feet under the ocean, in politically hostile locations or in the arctic.

Gas, as an alternative fuel, must maintain its relationship to oil, though may have its ups and downs along the way


On Jun 15 08:05 AM Andy1234 wrote:

> I think the guys above are looking at the demand side....the supply
> side looks horrible when oil is $50/barrel.
>
> I think people in the market are looking forward and saying....damn
> we won't have any new projects coming online if oil is under $70-60
> a barrel.....we might not even have anything coming online at $80/barrel.
>
>
> Then the look the other way and see this massive pile of cash being
> created.....I dunno.
>
> Its all about demand/supply and the cost to replace the supply when
> used. The price cannot eclipse the majority of new oil coming online
> for a very long period....otherwise shortages occur. NG and oil are
> too low for new projects to come online in the mass....and if new
> projects are cut.....the natural decline of 7-9% of supply (new oil
> isn't coming online) will eclipse the demand pretty quickly if oil
> remains low.
>
> I do see we significantly rose the production of NG when prices were
> high....so the relationship between oil and NG may change in the
> future if we find significant amounts and are able to produce them
> at a reasonable price (the shales).

Jun 16 12:52 AM

[H. T. Love:]

On Jun 15 03:45 PM energytrader wrote:

> Incase there was any doubt that there is a bubble forming in UNG,
> it is now official.
>
> www.djnewsplus.com/art...
>
>
> Basically, the fund is running out of shares b/c people are jumping
> at much greater rate than ever expected.


For those that don't get to the DJN site soon enough, the article is supposedly only available for a couple of days (I don't know for sure, but that's what it said - I've not tried to confirms it). Anyway, I made a snapshot of the article and stuck it in the blog I'm keeping to teach myself about this stuff.

If you go there, remember I'M NEW AT THIS STUFF AND LEARNING!

It's near the bottom of the article. A click on the article should expand it enough to be readable.

seekingalpha.com/insta...

Hope that helps someone.

HardToLove

Jun 16 04:49 AM

[tuj:]

"What happens if the well is shut in? "

You have a few months where things will be ok, pressures will hold open the frac'ing, but longer than that and you risk damaging the geology, which will require a refrac to get the well producing again. It also remains to be seen how much re-frac'ing will take place as IP rates decline and how much impact it will have. This is unlike conventional, where a shut-in can last indefinitely.

Jun 16 06:55 AM

[User 130171:]

A blanket statement like the one you just made is inaccurate. UNG's relative performance to the futures (or a rolling spot contract) is purely a function of the term structure of the market, so whether it's good or not for long term speculation depends.....

When the futures market is in contango (as it is now), UNG will underperform. The degree of underperformance is dictated by the degree of contango which changes from month to month, not by some arbitrary (10%) figure. When the futures are in backwardation, UNG will outperform the rolling spot by an amount that is also determined by the degree of backwardation. In that case, it's actually great for speculation.


On Jun 15 08:28 PM BioBoy wrote:

> UNG definitely not great for long-term (1-5 years) NG speculation,
> as it tends to underperform actual NG spot prices by about 10% per
> year.

Jun 16 12:42 PM

[Sovestor:]

Natural gas is American commodity, hence not too sure whether this can actually go up as much as oil.

Jun 16 02:13 PM

[zzhcct:]

yes, i competely agree with you. the historical oil/NG ratio is calculated in the background that:1) there was less speculation in the NG markets than in the oil markets, however, as demand turns into NG, the situation would be inverse, as a result, the historical would become meaningless...2) from the fundamental sides, i think (have never done research about this) now it is very difficult to increase the capacity of oil production while the NG production will increase because of the higher prices driven by demand. my point is, there is a posibility that the NG prices may not raise so high from the fundamental analysis...

However, the oil/natural gas ratio will decrease, however, it will not revert to the historical ratio.


On Jun 15 08:35 AM john s. gordon wrote:

> in comparing oil price &amp; gas price you are assuming that there
> is no speculation component in the oil price.

Jun 17 02:56 AM

[Murph3637:]

In regards to User 400728 comments about LNG Receiving terminals in the US there is a US company building three. The company is Cheniere Energy which trades under the symbol LNG. I think one of them may be complete. Any thoughts on this company is appreciated

Jun 17 11:14 AM

[user396040:]

As oil has become more and more a specialty transportation fuel and there are fewer and fewer "switch hitters"(facilities that can switch between oil and natural gas) it is not surprising that there is a decoupling of prices. My own long term prediction is for a strong market for natural gas because of increasing demands in the electric power sector. Natural gas emits roughly half the carbon dioxide per kwh as coal and the easiest, quickest way for electric utilities to reduce greenhouse gas emissions is to switch from coal to natural gas. On the motor vehicle front, my bet is on the plug in hybrid - it is an ideal solution for commuters and does not require a massive investment in new infrastructure. It will create a new and massive demand for electricity and natural gas is the only direction in which the industry can expand quickly and at a reasonable capital cost.

Jun 17 11:52 AM

[User 357705:]

Wishful thinking on both counts.


On Jun 15 09:16 PM Northstar10000 wrote:

> Obama will not have enough power to pass a yugo in a vette by the
> end of this year. Rats will be jumping off his sinking stinking ship
> by year end. Hillary will leave in 2010. As for natural gas, forget
> it until it corrects with oil. Ratio will narrow but both will drop.
> After that nat gas is a great play.

Jun 17 11:52 AM

[buyforeclos...:]

UNG is a casino right now.... with NG reserves at historical highs it should be NG 3.50 and UNG 12.86 but right now its at almost 16 and NG over 4.00 sure it will go higher but too soon IMHO

I will wait for pulback to 13's

Jun 17 12:45 PM

[baldskits:]

This is User 400728's reply to Murph3637's comment about LNG Receiving Terminals:

In my original posting, I said that there were no "large liquifaction plants" in the USA, not receiving terminals, two different animals. There are also receiving terminals in Cove Point, MD and in Georgia.


On Jun 17 11:14 AM Murph3637 wrote:

> In regards to User 400728 comments about LNG Receiving terminals
> in the US there is a US company building three. The company is Cheniere
> Energy which trades under the symbol LNG. I think one of them may
> be complete. Any thoughts on this company is appreciated

Jun 17 03:14 PM

[Eye Forget:]

Don't I recall reading that new supplies of oil are getting harder to find yet I hear about new "mega" gas fields every day. Where are the new applications for all this gas? 10 years out with fuel cells. Cars can run on LNG quite well. But that would take something like a national energy policy. Renewable energy utility plants with gas providing the flex fuel? Probably takes another act of our national assets in congress.

Too much supply, not enough demand.

Jun 17 08:24 PM

[mightywurli...:]

This is most likely because of the steep contango that the NG market is in right now. Nobody really pointed this out yet, but holding UNG over any extended period of time is going to be toxic because long positions eat the price spread between contract months every time they roll.


On Jun 15 08:28 PM BioBoy wrote:

> UNG definitely not great for long-term (1-5 years) NG speculation,
> as it tends to underperform actual NG spot prices by about 10% per
> year.

Jun 18 02:40 AM

[Immigration:]

be careful about classifying NG or Oil as an asset class - in the end, it is consumed - very different than a bond

Jun 18 05:39 AM

[Delojozafado:]

Global production continues to increase. Third world entities are now liquefying rather than flaring most of the gas by products of oil production. The world fleet of LNG carriers continues to swell as vessels contracted for when gas was pushing $16/MM`BTU are delivered. At some point in a correction of this commodities led rally in the markets Nat Gas should bottom. The markets are even now reacting to the green shoots theories as being rather too sanguine. Nat gas may be the value of a life time right now, but after this market meltdown I would rather live twice! Look at the 52 week low for CHK! Ouch if you get in here and there is a retrace and test in the market of the March lows! I am awaiting a dip and then may tip toe in.

Jun 18 08:02 AM

[bigbuilder13:]

It seems to me that there is a great disconnect between long term fundamentals and short term trading. I have made more money with NG than I have lost so I am sort of hooked on NG as an investment. However, I fear that forces beyond my control could whipsaw the markets for NG and the stocks of the E and P firms. Therefore, I am essentially out of the market for the time being.

I wonder why someone has not looked at using cheap NG as a power source for the conversion of coal to diesel. I know there is a way to make oil (and its byproducts) from coal; the Germans did it in WWII. IF the wind power and cheap NG of the Rockies were applied to create electricity, then that power could convert cheap western coal to diesel and provide domestic fuel for trucks and cars. There would be no need for a huge investment in electric grid; the diesel would move by pipeline. Just a random thought; guess the economics won't work...if they did, others would be talking about it.

Jun 18 08:43 AM

[31October:]

Just an aside about the author's aside "Pure hydrogen vehicles are a better environmental option..." comment.

This false science has been marketed by pop media for years. The US DoE and research grant universities have countered the hydrogen economy. N.gas cleanly burns into CO2 and water. The tiny amount of carbon added to the hydrogen is like a turbocharer. Pure H2 has very little energy, and it takes far more carbon to make it than if you just power the car with n. gas.

(Not the core of the article, but every bit counts...)

Jun 18 11:09 AM

[LOLcapitali...:]

Syntroleum (SYNM) has been trying to make the Fischer-Tropsch (FT) process (which is the process you're referring to) work economically for years. There's no question that it works. In addition to the Germans, the South Africans made virtually all of their liquid transportation fuel during the period of apartheid sanctions from coal using the FT process. It's dirty (like most coal) and at best only marginally cost effective. Add the cost of carbon sequestration and it's a non-starter.


On Jun 18 08:43 AM bigbuilder13 wrote:

> It seems to me that there is a great disconnect between long term
> fundamentals and short term trading. I have made more money with
> NG than I have lost so I am sort of hooked on NG as an investment.
> However, I fear that forces beyond my control could whipsaw the markets
> for NG and the stocks of the E and P firms. Therefore, I am essentially
> out of the market for the time being.
>
> I wonder why someone has not looked at using cheap NG as a power
> source for the conversion of coal to diesel. I know there is a way
> to make oil (and its byproducts) from coal; the Germans did it in
> WWII. IF the wind power and cheap NG of the Rockies were applied
> to create electricity, then that power could convert cheap western
> coal to diesel and provide domestic fuel for trucks and cars. There
> would be no need for a huge investment in electric grid; the diesel
> would move by pipeline. Just a random thought; guess the economics
> won't work...if they did, others would be talking about it.

Jun 18 03:25 PM

[Mad Hedge F...:]

Here's another counter arguement. The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia’s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30 (see www.madhedgefundtrader...). When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens’ plan to shift our transportation system to NG (see www.madhedgefundtrader...). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia’s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

Jun 20 05:30 AM

[DHH:]

What do you think of this NG play? EPEX

Jun 24 06:13 PM

[ironaddict:]

That's not true. Natural gas is now being shiped by NGL, check out CQP


On Jun 15 08:43 AM User 431447 wrote:

> Sorry but that oil/nat gas ratio for justifying higher nat gas prices
> has been around a long time and it's no longer working. Our nat gas
> needs are satisfied by N. American sources, so there's no political
> risk. Oil travels well by tanker, nat gas goes where the pipes go.
> Oil can be stored in tankers and sold forward for a riskless arbitrage
> play thanks to the futures cantango. I think a more useful comparison
> would be a nat gas/coal price ratio.
> Jim

Jun 25 12:50 PM

[maryanne:]

anyone still in this trade? I realize he may be thinking long term but this short put option is almost $6, very deep in the money which is very risky and could get assigned

Jul 06 08:17 PM

[buyforeclos...:]

went to 11.96 and currrently around 13....

cap n trade pump send it higher or reality lower?

Jul 27 08:07 PM