Natural Gas: Worth Another Look 21 comments
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Recently, the energy markets have seen extreme volatility. Natural Gas has fallen roughly 40% YTD. In the past 10 days, the commodity has fallen nearly 10%. There are many factors which could lead to high volatility in commodities. The past two weeks has focused on political tensions and supply/demand concerns.
Political Tensions:
Iran, a country which owns one of the highest natural gas reserves in the world, has recently experienced a new wave of political troubles. These troubles have sparked a sense of fear and uncertainty amongst energy traders. If political matters were to ease and calm down, natural gas prices could depreciate and level at a fair market value. On the other hand, if political tensions were to intensify, natural gas prices could experience a tremendous spike in price. Thus, it would be wise to have a proper hedge for all open positions.
Supply/Demand:
On 6/24, the EIA (Energy Information Administration) reported natural gas stockpiles of 2,651 Bcf. This is a 3.6% increase from the previous week. According to the EIA website, current stockpiles are 31.2% great than last year. Has our economy improved that much in 1 year that we need 31.2% more Natural Gas?
http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html
Short term traders view the year-over-year surplus in Natural Gas as a bearish indicator.
Below is the 10-day chart for UNG:
We see that UNG has been range bound with resistance levels at:
- 50 Day Moving Average
- 100 Day Moving Average
- 200 Day Moving Average
- 10 Day Channel Resistance Trendline
These key resistance levels act as technical barriers that need to be overtaken before UNG can expect a positive price movement. If UNG proceeds with the bearish momentum it has developed, natural gas may revisit the yearly lows. On the contrary, if UNG were to move upward, breaking the 200 Day MA, UNG could rally for another week.
Looking deeper at the option contracts, option traders have positioned themselves for a pullback in UNG.
The overall Open Interest Put/Call Open Interest Ratio is roughly 1, meaning for every purchase of 1 Put, 1 Call is bought. The last time that the Put/Call Open Interest Ratio was 1, UNG sharply retraced from the 52-week high. Could this be a sign that Natural Gas is overbought and due for a correction? Time will tell….
For those looking to commence a bearish position on UNG, consider the following analysis:
Buy one July $14 strike put option contract and one AUG $16 strike call option for a total cost of $146 (.66*100+.88*100). Simultaneously sell one AUG $12 call option contract.
The final cost for your Bearish Calendar Spread should be a credit of $124 with a Break-Even price of $13.57.
Disclosure: At time written, author did not own any securities of UNG.
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This article has 21 comments:
On Jun 30 10:14 AM Mad Hedge Fund Trader wrote:
> Look carefully. 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 (seekingalpha.com/symbo...)
> 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.
Jesus, do people do any research anymore??!?!?
Iran's natural gas has NOTHING to do with the price of natural gas at Henry Hub (read: nothing to do with prices in the U.S.A.). Tell the class, Herman Hemati, about the pipeline from Iran to the U.S. that is bringing in natural gas daily....
Iran...LOL.
More than likely, a rise in prices at one location will cause prices to rise at others; i.e. Henry Hub.
The U.S. produces about 60 bcf/d of natural gas. Iran produces about 10 bcf/d.
The U.S. is the "middle east" of natural gas, not Iran.
You need to due some more due diligence.
www.eia.doe.gov/oil_ga...
On Jun 30 12:45 PM Herman Hemati wrote:
> I am just pointing out the fact that there is a link between political
> tensions and energy prices....
>
> More than likely, a rise in prices at one location will cause prices
> to rise at others; i.e. Henry Hub.
You see, the 50 day and 200 day moving averages won't change or alter the 20 mmcf/d Haynesville wells that Exco, PetroHawk, etc. keep bringing online, flooding the market more and more every day as storage levels brim full.
I love all of these "UNG must be at a bottom!" articles and NONE of these authors adress the storage issues. Right now, there is more gas in storage in the "producing region" than at the peak of last year (2nd week in November before withdrawls started). And we still have 4 more months to go before withdrawls!!! You will start seeing PHYSICAL limitations on injection (read: you wont be able to inject and with no place for the gas to go, the price will be driven down at Henry hub).
Good luck catching this falling knife!
Never mind the massive oversupply and the worst fundamentals of all the energy sectors ATM, nevermind that the Iranian supplies are of little concern in the massive oversupply, never mind that gas is falling even with the US dollar rising, nevermind the fact gas was bid up to crazy levels by hedge funds and is still deflating. Forget that the entire global economy is in recession, forget that it's now the US summer and off season. Forget that noone in the world is reliant on Iranian gas.
No people, buy now for the Iranian spike!!!
Forget the crazy hedge fund guys, it's the crazy Iranian gas guys now, LOL.
How would New York even know that its water is tainted when they won't let anyone drill in the Marcellus? Banning hydraulic fracturing in the U.S. would be a catastrophe. The fluid is 99.5% water. Read this article:
shale.typepad.com/faye.../
On Jun 30 10:27 AM GordonScott wrote:
> Those new fracturing technologies have also been found to lead to
> a tainting of the water supplies around the world. Once this fact
> comes to fruition and New York water supply is tainted, these technologies
> will no longer be allowed to be used and the surplus will quickly
> be used.
You don't have a clue of what the fracturing process involves, do you? The federal oversight mandates might increase well costs by $20k apiece, but it's not going to stop fracturing. Most wells are drilled at depths of 10k+ feet, I don't think that's going to bother a hundred foot water well.
The only reason that the industry is complaining about this is 1) the states already have fracturing laws on the books. 2) the only instances of 'fracturing contamination' have happened when an operator is violating the state laws, so why is federal oversight needed?
> I am just pointing out the fact that there is a link between political
> tensions and energy prices....
>
> More than likely, a rise in prices at one location will cause prices
> to rise at others; i.e. Henry Hub.
Amazing! This is but one of several articles I have read by authors on this site that lead me to believe they know little, if anything, about the energy markets. You can try to cover your tracks by claiming you are pointing out the link between political tensions and energy prices but it is a poor defense. EVERYONE understands that already. It's like stating "the ocean is deep". Yeah, no kidding.
Moreover, political unrest in Iran has ZERO impact on US Nat Gas prices. My bet is you have very little experience in the natural gas market. I'm just annoyed that I'll never recover the 30 seconds I wasted reading this article!
USA has plenty of NG and there is no need to import and LNG and I don't think Iran invested in LNG terminal and infrastructure.
Typical pump and dump by desperate conman newbie trying to unwind.
Listen look for suckers somewhere else pal!
When mentioning Iran... it was a small possibility that would cause the dollar to fall, thus increase the prices of commodities.
Heavy put open interests (July and August) in the US markets, especially UNG, are my main reason for being bearish.
Did you just post that "I am extremely Bearish Natural Gas."? Oh really? So you are advising with options trade details for the suckers since you just made those trades yourself?
Classic pump and dump, CHUMP!
PS - how many of the contracts per your "recommendation" did you buy?
"Buy one July $14 strike put option contract and one AUG $16 strike call option for a total cost of $146 (.66*100+.88*100). Simultaneously sell one AUG $12 call option contract.
The final cost for your Bearish Calendar Spread should be a credit of $124 with a Break-Even price of $13.57."
On Jul 01 10:55 AM Herman Hemati wrote:
> Make a point clear - I am extremely Bearish Natural Gas. I believe
> there is tremendous surplus in the US markets which will cause prices
> to fall.
>
> When mentioning Iran... it was a small possibility that would cause
> the dollar to fall, thus increase the prices of commodities. <br/>
>
> Heavy put open interests (July and August) in the US markets, especially
> UNG, are my main reason for being bearish.
nice! so you don't understand that the weakness in the dollar affects oil prices because the GLOBAL OIL MARKET trades in $/bbl, whereas the natural gas market is domestic and thus the dollar has very little (to none) impact on natural gas prices.
do us all a favor and don't write any more articles on natural gas. it will save you time and embarrassment.
> the dollar to fall, thus increase the prices of commodities.
Again flawed logic. A falling dollar boosts oil prices because it increases the purchasing power of those whose base currency is something other than the greenback (think China, India, etc). For example, as the dollar falls, 1 Chinese yuan buys more oil than before. Demand rises.
NG is a domestic market predominantly traded by those of us whose home currency is the USD. Very little FX impact
On Jun 30 02:00 PM skrangeo wrote:
> I know that's EXACTLY what you were saying. Which is a TERRIBLE analysis
> because you obviously don't understand anything about the differences
> between the oil markets (global) and natural gas market (domestic).
>
>
> The U.S. produces about 60 bcf/d of natural gas. Iran produces about
> 10 bcf/d.
>
> The U.S. is the "middle east" of natural gas, not Iran.
>
> You need to due some more due diligence.
> www.eia.doe.gov/oil_ga...
>
On Jul 01 09:04 AM Storm Cat wrote:
> Jun 30 12:45 PM Herman Hemati wrote: