Natural Gas: Was Thursday Capitulation Day? 19 comments
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Or did investors come to believe that the natural gas price is a runaway train on a dead end track?
Despite a natural gas injection this week (52 bcf) that was smaller than forecast, and quite a bit less last year’s 88 bcf injection (and less than 5 year average injection of 64 bcf), natural gas prices tumbled.
Investors focused on natural gas inventories inching closer to being full. The fear of natural gas companies having to shut down production en masse, in the near term, took over sentiment.
While the natural gas price tumbled, natural gas stocks, however, did not. The Amex Natural Gas Index was up almost 1%. That has me intrigued.
Negativity hit a new high today on natural gas. Look at the volume on the ETFs in the US and Canada. UNG-NYSE traded had its biggest volume day in two months and set a new low. Investors were clearly voting with their feet and walking. In Canada, the Betapro Horizons 2x leveraged natural gas long ETF, symbol HNU:TSX, had record volume and dropped 10% to dip under $3/share.
These are good indications of capitulation, which is “a volume surge after an extended decline reflects a selling climax or capitulation that exhausts selling pressure”, according to www.stockcharts.com.
But of course, it could get worse. Calgary-based, First Energy Capital Corp. Analyst Martin King, was quoted in a Reuters story today saying, “This is the precursor to a bit more of a pullback down into the $2.25 to $2.50 range. Producers have to carve back supply, otherwise it’s going to run into a big wall come late September.”
For me, this is the beginning of opportunity. The next 6-10 weeks should bring some of the natural gas stocks I have been tracking into buying range.
Subscribers will be kept updated on any new portfolio purchases. The most recent purchase has a natural gas play that one analyst showed as having one of the best economics of any play I have ever seen. I bought shares in the company for its new oil discovery and debt free balance sheet, but once the natural gas price moves up, it will be one of the most highly levered companies - as a low cost producer.
Disclosure: I own no HNU or UNG
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Prices need to stay low or even lower for a sustainable time (weeks) to force marginal guys get serious and cut back output. Before that happens, I am expecting a significant overshoot on the downside and then, not surprisingly, a same dramatic rebound. Looking forward to exciting weeks ahead.
"I continue to believe that sometime after Labor Day, that we will see gas prices at $2 or below."
- John Walker, CEO, EV Energy Partners LP
"We're gonna be full up on storage by the end of the year," McClendon said. "It'll cause involuntary curtailment. There's no reason for us to voluntarily curtail gas when pretty soon everyone will have to do it on an involuntary basis. We didn't see any reason to take it on the chin for the team right now."
At the current rate of injection we should reach full within the next three months unless a hurricane shuts in GOM production.
Why, I haven't a clue.
investor.shareholder.c...
^
Download that and click on the sheet called "US Oil and Gas Split"
investor.shareholder.c...
On Aug 21 09:26 PM OilFinder wrote:
> According to Baker-Hughes, the US natural gas rig count has actually
> risen by 30 in the past 6 weeks.
>
> Why, I haven't a clue.
>
> investor.shareholder.c...;fileid=313753&...
>
> ^
> Download that and click on the sheet called "US Oil and Gas Split"
- NAT GAS is the only asset that kept falling after 6th Mar 2009.
- all th bad news are already captured into the current price
- the potential good news are NOT captured in the current price (Nat gas is the cleanest raw energy source, oil and coal being much worst; Natural GAs companies started to lobby in Senate for NAtural GAs incentives and to be promoted as the cleanest energy source)
- The caloric ratio and the historical price ratio Oil: Nat GAs is 6:1. Oil is trading at $74 => Nat GAs should be around $12.30. Something is gotta give: either Oil should come down to $16.8 (6 times $2.80 the current price of NatGas), or Natural GAs will have to rise to $12.30. As a matter of fact he current price ratio Oil:NatGAs is an all-time historical record at 26.4.
Most probable scenario - around Christmas time Oil will come down to around $45 per barrel and Nat Gas wil increase to roughly $7.56.
Because all the listed ETF based on Nat Gas are rolling over to the next settlement month, then there is a contango risk. For all those pundits that claim that the contango on Nat Gas is too high, I will have to remember them that Nov '09 price is $4.2, Dec '09 is $5.03 and Jan '10 is $5.31.
In the worst case scenario (January 2010) it looks to me that Nat GAs still has a potential price of 42% HIGHER then the the Janury 2010 current price.
For 42% return in 4 months I am willing to take the risk here.
Coming back to the original points of the articl, yes - it seems that the sell in NAtGAs is overdone and indeed it seems that the high volume from this week is the final washout.
Can the price go even lower from here?
1. Yes, but most certainnly no lower then $1.83.
How much time will be the NAt GAs price depressed?
2. Looking at the 2000-2003 recession, Nat GAs reached a bottom in Sep 2001 and then prices started to rebound and after Sep 2002 the NAt GAs price never ever went lower then $3.72.
To summarize - if we were to believe the equity market and if this is gone be a V-shaped recovery, and we are pretty much as in Apr 2004 (at least this is what the global equities market are indicating) then the Natural Gas prices are long overdue for a POSITIVE price correction - meaning that current prices are too depresed for the current and future state of the economy.
If we were to belive the NAtural Gas prices and not the equities markets then it looks like we are exactly as in Sep 2001, point from where it took the equities another 12 months to bottom in Oct 2002.
So, for those of you o believe that we have seen the worst of this crisis and the worldwide equities bottomed in 6-9 Mar 2009, then the current Nat Gas price is making no sense at all at current prices and should be much higher than is rght now.
For those of you who believe that the equities market did NOT bottomed yet and probably will not do so until the end of 2010 and we will see at least a retest of the mar '09 lows, than this coming month is the LAST chance to enter in NAt Gas at depressed prices.
As in regards my personal view, is that I am inclined to believe that we do stand like in Sep 2001 where we are right now and that in the worst case scenario nat GAs prices will be depressed just for one more month. And that the equities market will have to retest the Mar '09 lows. But this is just a subjective opinion, because in reality the equities markets are indicating that this crisis is OVER and we stand right now exactly as in Apr 2004 - in which case, once again, the washout in NAt GAs prices is way too overdone.
it's called a license to steal.
remember take-or-pay contracting that we had back in the 1974 era?
t-o-p meant that the 8.00 tight or deep gas got produced & sold to consumers while the 2.00 gas was left in the ground. great way to rip off the public.
t-o-p caused the bankruptcy of columbia gas, which a few people have told me was a country club in delaware & not very effectively managed. they got themselves snookered into that arrangement,
> jack
HardToLove
On Aug 21 08:47 PM bartpr wrote:
> keep this in mind. production now is at 16 bil cfpd. at the rate
> that drilling rigs have dropped(down to 600 from 1100) some feel
> that a 600 rate can only support production of 11 bil cfpd. this
> is based on past records. shortage will be next year at this rig
> rate. shortage equals price rise. wait and see. it has happened
> every cutback in rigs.
That used to mean something, but without a good harsh winter forecast and/or economic recovery (latest GDP capacity estimate was 68% if I remember) we'll still be filling up.
However, things *are* getting serious now. Check this comment.
seekingalpha.com/autho...
Which mentions the EIA report that two major companies are ceasing all NG drilling for now.
HardToLove
HardToLove
On Aug 21 08:47 PM bartpr wrote:
> keep this in mind. production now is at 16 bil cfpd. at the rate
> that drilling rigs have dropped(down to 600 from 1100) some feel
> that a 600 rate can only support production of 11 bil cfpd. this
> is based on past records. shortage will be next year at this rig
> rate. shortage equals price rise. wait and see. it has happened
> every cutback in rigs.
static.seekingalpha.co...
HardToLove
On Aug 21 09:28 PM OilFinder wrote:
> Bah, that link didn't work. Go here and download the "North American
> Rotary Rig Count - Current & Historical Data - See all 13 tabs
> in spreadsheet"
> investor.shareholder.c...
static.seekingalpha.co...
HardToLove
On Aug 23 07:55 PM H. T. Love wrote:
> Maybe you'll like this better?
>
> static.seekingalpha.co...
>
>
> HardToLove
Disclosure: Long GAS on TSX.