The Fall in Natural Gas Is Over 47 comments
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Natural gas has been in a free fall for almost a year now. Speculators have been trying to call a bottom for some time, but the price just kept falling and falling. At least up until the last few months.
The good news is that the bottom looks to be in and I see natural gas soaring over the next six to eight months.
Why do I say this? Take a look at the chart below. The Commitment of Traders report for natural gas shows how large speculators have been adding short positions.
Commitment of Traders report for natural gas, large speculator, previous five years:
The key to my belief that natural gas is ready to take off lies in the fact that the price has stopped falling, even as the large speculators were adding short positions.
Look at the period in late 2007 when the price started rising even as short positions were added. See how natural gas goes on a tear from December ’07 until peaking in June ’08? The price jumped from $7 to almost $14 in just under seven months.
The kicker is that the bearish position that has built up now is almost 40 percent larger than we saw back then. The net number of contracts short at that time was around 110,000 contracts and now we are looking at an approximate 150,000 contract net short position.
Turning our attention to the weekly chart, you can see that natural gas has moved back above its 13-week moving average. See how the 13-week kept the price in check all the way down from the fourth quarter of ’08 through the first quarter of ’09? Now natural gas has moved above this trendline and may very well use it as support over the coming quarters, much like it did in the rally in early ’08.
This is an intermediate term play. The volatility is likely to continue over the short term, but if you handle the volatility correctly, the reward could be huge. The first level of resistance will be in the $5.50 level and then at the $9 level.
My recommendation would be to buy multiple contracts and close out in thirds. Take the first profit at the first resistance point, and then take another third off the table in the $8.75-$9.00 level. Let the final third ride as long as you can or until the price falls below the 13-week moving average again.
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This article has 47 comments:
www.eia.doe.gov/oil_ga...
And some think the future picture is also bad as producers need the cash and are having a hard time slowing their production after years of frantic drilling as described in this 5/21/09 article "No End in Sight to the Natural Gas Glut"
blogs.wsj.com/environm...
The often cited oil/gas ratio may be resolved by oil decline rather than NG increase. If the market corrects (my bet), USD should rally as a short term hideout. This would knock commodities down. But I am watching for a long play here, just not yet.
blogs.wsj.com/environm.../
> jack
Therefore, instead of understanding the reasons,lets rail against it with other people's money.
Yes NG is at 22% over a five year average and at an all time high in inventory-but look at the futures market: $6/MMBtu in Feb/09. (Vs $4/MMBtu now). Isn't it colder in the USA in February and the demand for NG as a heating fuel will go up? If you are a producer wouldn't you rather sell your product for 50% by simply waiting a few months? The costs of storing NG is outweighed by injecting NG into underground storage-They may have already sold the gas, for delivery in the winter.
NG rig is is falling-now at a seven year low. Eventually demand will catch up with supply. NG simply has coal beat when it comes to producing electricity.
Over time fundamentals will drive the price of NG-Speculators are insignificant in the long run.
First, last year folks watched oil rise to $147 *and* believed that traditional oil/ng price ratios were valid.
We have since learned that the ratio is "broken".
Boone Pickens had just started publicizing his transitional plan that emphasized NG for transportation to wean us from $700B being sent out of the country. People believed, forgetting that our government is populated by clowns, that we actually had a chance to do something constructive and that NG would be a part of that.
Short and long-term investors believed that commodities were their "savior" and NG is in that category. After a while, this religion was proved false.
As others have mentioned, the fundamentals are horrible.
If the shorts try often enough, they will be successful as long as the fundamentals don't improve. Since the fundamentals have actually *deteriorated* this year, my take is that the shorts will at last make some money. In other words, don't count on short-covering to help the price rise here. At best, a little support will be provided.
It has been pointed out in other comments that closing a well has some significant costs, that many suppliers have to keep pumping because of cash-flow issues, that many of the "shut-ins" were moving rigs from older depleted (or nearly so) wells to more efficient sites.
Now
- natural gas in U.S. storage has exceeded the 5 year average in storage for two consecutive weeks,
- weekly injections show no dramatic decrease yet,
- all prognostications for energy consumption world-wide predict reducing energy consumption (except that China and India may start a big recovery and use some, but nowhere near enough to off set U.S. and the rest of the world's decline in use),
- milder hurricane season predicted,
- milder summer predicted,
- reduced import/export activity at ports (where a lot of vehicles have been converted to NG)
- etc.
And the final stroke: after perusing all the news stories about the house energy bill this weekend, the only reference I can find to natural gas in the bill is that Alaska will be permitted to borrow from public coffers at a very low rate to build a pipeline down to the lower 48 to increase the supply above what we already have down here (gee! I guess there are no more sources to be found down here, huh?).
I see no up-side catalyst at this time. With oil/ng price ratio hanging around 19:1 and oil not able to maintain strength to the up-side, we can't even count on oil to drag NG up. My feeling is that if the dollar index can even just hold stable around the $79/$80 interface, oil is on a slow trend down.
My Humble Opinion
HardToLove
> Under the recently passed climate bill (In the House)) the 'cap and
> trade program' would favor NG over coal.
But this would be only a long-term stimulus since most NG generation is only for peak demand and lots of new generation plants would be needed to make NG a substantial contributor. That means large capex, regulatory delays as rate increases are sought, etc.
> If a utility wanted to
> increase electricity production and their choice was limited to fossil
> fuels NG is a logical choice-About half the greenhouse gases of coal
> and as a bonus significantly less nitrous oxides, negligible sulfur
> and mercury. (And the transportation and disposal of NG are much
> simpler than coal.
> Yes NG is at 22% over a five year average and at an all time high
> in inventory-but look at the futures market: $6/MMBtu in Feb/09.
> (Vs $4/MMBtu now). Isn't it colder in the USA in February and the
> demand for NG as a heating fuel will go up? If you are a producer
> wouldn't you rather sell your product for 50% by simply waiting a
> few months? The costs of storing NG is outweighed by injecting NG
> into underground storage-They may have already sold the gas, for
> delivery in the winter.
If the open interest volume supported that, I could agree. But the months leading into 2010 and beyond have pitiful volume. So I don't think that is happening. I believe that cash-flow needs with prices so low are causing many producers to "take the money and run". Further, if what I have seen in these comments is correct, there gas is actually bought by a storage outfit and they re-sell it later. So they bear the costs of storage and reap the profits later. I *myself* don't know if that is really how it works.
> NG rig is is falling-now at a seven year low. Eventually demand
> will catch up with supply. NG simply has coal beat when it comes
> to producing electricity.
I think we need to be careful of focus here. From www.reuters.com/articl...
"The number of rigs drilling for natural gas in the United States fell 3 to 700 this week, a fresh 6-1/2-year low, according to a report issued Friday by oil services firm Baker Hughes in Houston"
Drilling for natural gas *may* portend future supply reductions if this reduction continues for an extended period. However, *pumping* from already established wells continues unabated.
Further, since the energy bill lets Alaska get low-cost loans to build the natural gas pipeline down to the lower 48 states, the incentive to increase exploration (long-term) will be reduced, everywhere but Alaska.
Since shale depletion rates from shale are relatively high, more exploration will be needed down the road. But unless we have a *big* surge in usage, that won't need to start for a long time.
As to the NG choice encouraged by the energy bill, it is not an explicit statement in the bill. Look at where the tax breaks are eliminated (if I recall correctly) - oil and gas companies. BOH has constantly been promoting "clean coal" and, although I've not yet had time to assure myself, I expect that tax breaks are going to "clean coal". One of the majors is already running big adds about how they are helping that process. They probably know they will make money on it.
HardToLove
That doesn't mean I'm bullish or bearish. I just think that the import argument may not be a factor.
HardToLove
On Jun 29 10:54 AM JJR wrote:
> What could really keep domestic long term NG prices down is importation
> of LNG into the United States. Overseas supply of NG dwarf proved
> US reserves-Russia alone has 6 times US reserves. If overseas NG
> is significantly cheaper than US NG at the well head-then the question
> is how much does it cost to transport LNG to the US. LNG requires
> specially designed and expensive ships and port facilities at both
> ends to handle the same. Presumably infrastructure is in place (via
> pipeline) once the LNG is landed. It is estimated that it takes
> between 15% and 25% energy equivalent of a ships load of LNG to deliver:
> The energy is consumed by liquifyng, maintenance of same and physically
> moving the ship. Also insuring such a load must be significant.
>
> Over time fundamentals will drive the price of NG-Speculators are
> insignificant in the long run.
An interesting thing popped up when I went to the tonto... site and looked at the monthy summary. Lots of imports fell off the cliff.
At least I've finally seen something rational happen in the "new environment". I'd about decided I needed hallucinogenic drugs to make sense of all this. There is certainly no way that rational thought is much use.
HardToLove
On Jun 29 11:32 AM JJR wrote:
> Interesting article on LNG: shareholdersunite.com/.../
> The author claims that the added costs of shipping LNG are in the
> neighborhood of $2.15/Mcf. (Works out to $2.15/MMBtu) He also adds
> that China and India have a high potential for utilizing more NG.
> Interestingly the price of LNG has been higher than natural gas delivered
> by pipeline from Canada and Mexico- tonto.eia.doe.gov/dnav...
> This site also lists countries of origin shipping LNG to the US over
> the six year period 2003-2008.
tonto.eia.doe.gov/dnav...
Do you notice that US LNG import price in April was $4.20, much lower than the norm of LNG import price but still much higher than domestic natural gas price. Mean while the US LNG export price was $7.33, much higher than import price and much higher than domestic natural gas price.
There is now a huge incentive to STOP all US LNG importation, purchase natural gas from domestic market, liquify the gas and EXPORT the LNG to other countries. This will drive up the price.
JJR
sailingmarkets.blogspo...
It went UP.
On Jun 29 05:16 AM basehitz wrote:
> Da Boyz have been working overtime to push this trade on the sheeple.
> Per Jim Rogers, focus on supply and demand. For NG, the current picture
> is awful.
> www.eia.doe.gov/oil_ga...
>
> And some think the future picture is also bad as producers need the
> cash and are having a hard time slowing their production after years
> of frantic drilling as described in this 5/21/09 article "No End
> in Sight to the Natural Gas Glut"
> blogs.wsj.com/environm...
>
> The often cited oil/gas ratio may be resolved by oil decline rather
> than NG increase. If the market corrects (my bet), USD should rally
> as a short term hideout. This would knock commodities down. But I
> am watching for a long play here, just not yet.
For now, that optimism does not exist in the economy. And the monthly reports show that April (the latest month reported so far) is the 3rd lowest levels since reporting began in 2001. And the prior months are not showing growth, but middling-to-lower consumption.
Although development wells drilled dropped to 1337 (April '09), there are still 452.8K producing wells (end of 2007) and 11,823 development wells were drilled 11/08-04/09. If all those went to production, we bump producing wells to 453K. this doesn't include the oil wells, which often contain dissolved or associated gas that might be produced from those wells.
So the different environment we are now in might negate any effects that comes from unbridled optimism.
HardToLove
On Jun 29 11:54 PM El rosarino wrote:
> The fundamantals of NG was awful too in the rebound of september
> of 2007. And look at what happened:
>
> sailingmarkets.blogspo...
>
> It went UP.
>
> On Jun 29 05:16 AM basehitz wrote:
We'll need to see increased demand for our LNG exports, regardless that increased foreign capacity is supposed to come on-line next year (if I recall correctly) to see quantity/price increases for our exports. Since Mexico accounts for almost zilch and Japan's demand has dropped to less than 50% of 11/08 quantities, I can't see the scenario to support increases of either quantity or price for now.
Japan is not notorious for its explosive growth.
HardToLove
On Jun 29 06:13 PM Mark Anthony wrote:
> I believe LNG import/export will be one factor among many to drive
> natural gas in the US market much higher, in short term. Check out
> the pricing:
>
> tonto.eia.doe.gov/dnav...
>
> Do you notice that US LNG import price in April was $4.20, much lower
> than the norm of LNG import price but still much higher than domestic
> natural gas price. Mean while the US LNG export price was $7.33,
> much higher than import price and much higher than domestic natural
> gas price.
>
> There is now a huge incentive to STOP all US LNG importation, purchase
> natural gas from domestic market, liquify the gas and EXPORT the
> LNG to other countries. This will drive up the price.
And here I thought it was a big wste of $$ all these years,
HardToLove
On Jun 29 09:11 PM JJR wrote:
> LOL-Greed and fear: Maybe that is why markets seem so irrational
> HTL. I have not factored currency rates into any of this LNG business.
> Also an article today on using algae to make cheap bio-fuel. www.nytimes.com/2009/0...
> I wouldn't worry too much-yet!
> JJR
Perhaps today's $3.95 natural gas reflects the bad fundamentals of today, but not the improving fundamentals of tomorrow. Are we being overly pessimistic?
As John Templeton said: buy at the point of maximum pessimism.
With the forecasts for world economy, energy consumption, etc. negative for near-term, that can't indicate a good entry time.
With excess supplies, still-falling demand, supplies *still* growing, a cfurrent severe supply-demand imbalance indicates this is not a good time to invest.
There *are* catalysts lurking in the shadows, but they are at least a couple years, if not more, in the future.
Properly identifying the leading indicators and the time-frame they portend will guide one to the correct entry point.
HardToLove
On Jun 30 07:42 AM Plan B Economics wrote:
> Today's fundamentals are bad, but so were the fundamentals for the
> global economy on March 9th, 2009. Equities have since rallied 30%.
>
>
> Perhaps today's $3.95 natural gas reflects the bad fundamentals of
> today, but not the improving fundamentals of tomorrow. Are we being
> overly pessimistic?
>
> As John Templeton said: buy at the point of maximum pessimism.
Well-head prices at <$4, the fees for pipeline shipping (either a % of sale price or a chg per qty), processing, shipping, etc. come into play. Plus there is often sales involved (e.g. a storage outfit may buy and then sell later) so that revenue goes to different players.
As of 4/9 well-head price was $3.43 and LNG was $6.33, -$1.54 from 11/08 prices. As Japan is the biggest purchaser of LNG from us and their recent demand has dropped to less than 50% of 11/08 price and is the lowest level ever for April since 1973 (the earliest year the EIA reports), I can't see a comeback based on LNG exports.
As mentioned elsewhere, there are supposed to be competing LNG plants opening in the middle east soon(?) that will be shipping to places that might have been potential customers. Some said they woulkd ship here, but I never believed that because of the $ weakness and the low well-head prices here.
If Mexico recovers, there could be some small demand there, but a pittance (single-digit values) compared to what Japan was.
If there is to be demand for NG, it has to be domestically generated. And with the energy bill the U.S. House of Clowns just passed, there won't be government-provided impetus.
The demand will be caused by weather and the organic growth of industries that are switching regardless of the idiots' actions (businesses are driven by business cases, not polidiotical socialist-oriented programs). The business cases are out there, but it just takes a while for all the infrastructure, conversions, etc. to get done. This is exacerbated when a weak economy causes a reduction in capex and a conservative approach to making major changes at this time.
As I've been advising (keep in mind that I'm a n00b, but I've been doing ok so far on this issue - trying not to crow about what NG/UNG is doing today - OOPS! Just blew that goal for the day!). So be sure you do your DD and make you own judgements. I won't point to my blog or article - you've probably seen them.
HTH (Hope This Helps),
HardToLove
On Jun 30 08:54 AM pockyclips 2020 wrote:
> So, if NG is nearing max storage capacity, and there is no economic
> upturn for at least 9 mos to a year, where is the demand going to
> come from? Why aren't we exporting LNG if we have "excess" natural
> gas? I recall reading somewhere that LNG was not profitable < $10
> mmcf, but that was back in 2008.
should be "demand has dropped to less than 50% of 11/08 quantity".
Sorry,
HardToLove
On Jun 30 05:25 AM H. T. Love wrote:
> <snip>
> Although development wells drilled dropped to 1337 (April '09), there
> are still 452.8K producing wells (end of 2007) and 11,823 development
> wells were drilled 11/08-04/09. If all those went to production,
> we bump producing wells to 453K. this doesn't include the oil wells,
That would be 463K wells.
> which often contain dissolved or associated gas that might be produced
> from those wells.
><snip>
Sorry for the error,
HardToLove
investment implication:
suggestion 1)
buy UNG (or ditm calls on UNG with long dated expirations 2010/20011) and sell covered calls against those every month. watch the market carefully, especially the fundamentals to decide when to stop this.
suggestion 2) accumulate high quality, low cost ng producers at rock bottom valuations (MCF; CHK)
On Jun 29 06:13 PM Mark Anthony wrote:
> I believe LNG import/export will be one factor among many to drive
> natural gas in the US market much higher, in short term. Check out
> the pricing:
>
> tonto.eia.doe.gov/dnav...
>
> Do you notice that US LNG import price in April was $4.20, much lower
> than the norm of LNG import price but still much higher than domestic
> natural gas price. Mean while the US LNG export price was $7.33,
> much higher than import price and much higher than domestic natural
> gas price.
>
> There is now a huge incentive to STOP all US LNG importation, purchase
> natural gas from domestic market, liquify the gas and EXPORT the
> LNG to other countries. This will drive up the price.
tonto.eia.doe.gov/dnav...
If there were no LNG export how could there be a market price for LNG export? Of course there were LNG export. And where does it say it is illegal to export LNG?
On Jun 30 12:18 PM Energy Trader wrote:
> That is impossible, there is no way to liquify US nat gas (any LNG
> leaving the US was liquified oversees and brought here to be stored).
> On top of the fact that it is illegal.
Since we exported to Canada and Mexico via pipeline, must we presume that we imported LNG, stored it and then shipped it out via pipeline to the two countries? And did we import somehow, store, re-load onto a ship and send to Japan?
According to the comments, we do have one in Alaska. The poster seems "authorative".
seekingalpha.com/user/...
seekingalpha.com/user/...
seekingalpha.com/autho...
But, it does seem we are certainly not "big time" players. The lead time for new plants is quite long from what I've run across so far.
HardToLove
On Jun 30 12:18 PM Energy Trader wrote:
> That is impossible, there is no way to liquify US nat gas (any LNG
> leaving the US was liquified oversees and brought here to be stored).
> On top of the fact that it is illegal.
I guess if you guys write one of these every week eventually you will be right, after you have lost all your money guessing bottoms.
On Jun 30 01:53 PM Maxe Paul wrote:
> So funny, every week we get a story on SA saying "it's the bottom",
> and "everyone else was wrong, but i am right".
>
> I guess if you guys write one of these every week eventually you
> will be right, after you have lost all your money guessing bottoms.
If you bothered to look at the same graphs for production you would see in April only 2 BCFs were exported, for the whole month! Not very material considering storage builds were 94 bcfs last week
My point about it being illegal is still correct as there are no pipes taking nat gas to mexico b/c it is illegal. To further explain why nat gas prices are not going up due to exporting of the gas, can you imagine a scenario of CHK or BP exporting nat gas? If they tried to export the nat gas from the Barnett or Haynesville or anywhere they would find Congress calling a hearing about exporting our natural resources. In short it would be political suicide for these companies along with the fact it is illegal.
On Jun 30 01:34 PM Mark Anthony wrote:
> I showed you the EIA price chart, it shows an LNG export price:<br/>
>
> tonto.eia.doe.gov/dnav...
>
> If there were no LNG export how could there be a market price for
> LNG export? Of course there were LNG export. And where does it say
> it is illegal to export LNG?
If you bothered to look at the same graphs for production you would see in April only 2 BCFs were exported, for the whole month! Not very material considering storage builds were 94 bcfs last week
My point about it being illegal is still correct as there are no pipes taking nat gas to mexico b/c it is illegal. To further explain why nat gas prices are not going up due to exporting of the gas, can you imagine a scenario of CHK or BP exporting nat gas? If they tried to export the nat gas from the Barnett or Haynesville or anywhere they would find Congress calling a hearing about exporting our natural resources. In short it would be political suicide for these companies along with the fact it is illegal.
On Jun 30 01:34 PM Mark Anthony wrote:
> I showed you the EIA price chart, it shows an LNG export price:<br/>
>
> tonto.eia.doe.gov/dnav...
>
> If there were no LNG export how could there be a market price for
> LNG export? Of course there were LNG export. And where does it say
> it is illegal to export LNG?
By the way, US has so much NG and I am very curious why the Americans or the governments are not making full use of this CHEAP source of energy, but instead continue importing of oil from other countries?
It is such a shame that one side complaining about high gasoline price, while on the other side wants to keep continue importing oil. NG is a clean alternate source of energy and there are plenty everywhere. Is it me or is everybody seems to forget the White House had promised to use/invest alternative energy or NG as a new source of energy to replace Oil?
Whatever the reasons are, NG has a lot of potential and I see it as a a long term HOLD. I am so happy that NG is so cheap and it is a great opportunity to hold a small position first and accumulate more as it goes down.
"...but in no way was produced in the US ..."
and
"or 2) the LNG is from the nat gas fields in Alaksa where they do have the ability to liquify"
There's my confusion. I presumed that Alaska is a state of the U.S. and used terms like "here" inclusively.
I believe that most others would make the same mistake I made. So you might want to clarify in future posts that Alaska is not part of "here" and/or similar euphimisms.
HardToLove
On Jul 01 06:56 AM H. T. Love wrote:
<snip>
> of "here" and/or similar euphimisms.
of "here" and/or similar euphemisms
><snip>
HardToLove
On Jun 30 07:23 PM BPYHO wrote:
> All I can say as a novice in the market I HOPE this guys right. I
> was one of the suckers who bought NG when all the commentators were
> shoving it down our throats. I have 1k shares of HNU.to and would
> LOVE for energy prices to go back gas prices to go back UP!
So when
On Jul 01 06:58 AM H. T. Love wrote:
> Proof read first dummy!
>
> On Jul 01 06:56 AM H. T. Love wrote:
> <snip>
HardToLove
On Jul 01 02:04 PM Energy Trader wrote:
> Alaskan nat gas should not be considered in any supply, demand, import
> or export when talking about the US nat gas industry. Until there
> is a pipeline that can bring it to market it is just the same as
> Qatar, Yemen, or Australia's nat gas, a world away.
> So when
Are there trading techniques out there that can benefit from knowing how the 3month (or 2 or 1month) energy futures contract prices will change from day to day? In this case, b.c. only the front contract prices are counted day to day, it is at constant maturity... 3month or 2month or 1month.