Oil Prices, Natural Gas Futures and Speculators

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody, and welcome back to HardAssetsInvestor.com. Well, not long ago, famed oil man Boone Pickens said that we would never see $2 gas in his lifetime. Well, as far as I know, Boone’s still around. But guess what? We are now at a $2 handle for natural gas. Here to talk about that is John Woods, head of Integrity Energy and over from the NYMEX. John, thanks a lot for stopping by. John Woods, head of Integrity Energy (Woods): Glad to be here.

Norman: What about that comment? I think it was back in 2004. We did spike up. We had Katrina. But wow. I mean, here we are down in a $2 handle. Did you ever think, as somebody who was in the marketplace, that we’d see such a low price? Woods: Not initially. I mean, you had those high prices right after Katrina. And then you had Boone coming out. And he’s pretty much a guru when it comes to that stuff. And all of a sudden it just sort of settled. If you looked at what’s happened since then, we really haven't had a major storm in that Gulf area. We’ve had very mild winters, very mild summers for the past few years. So you have this storage just building and building and building, and it’s a trickle-down. Now you have your speculators coming in, saying, “All right. We have all this storage right here. You know what? We’re going to start hitting it a little bit.” And, sure enough, it just slowly moved its way down. I mean, if you look on any kind of chart, it’ll just show a slow downward spiral. Norman: But it’s quite a collapse. Woods: Oh yeah. Norman: And it’s interesting you mentioned the speculators. Because often, when we talk about speculators, we’re looking at the speculative activity from the other way around, which pushes prices up. Woods: Right, yeah, right. Norman: So you're saying they’ve been part of the action … Woods: Oh, most definitely. Norman: Or part of what has been driving the price lower. Woods: I guess you’d call them the good guys for pushing the gas down. And crude oil, they’d be the bad guys. But, for the most part, you see a lot of people putting a lot of pressure on this market right now. We expired just the other day, and we were above $3 for our stock contract. And here we are trading $2.50 today. Norman: Now, you mentioned the inventory situation storage, as they call it in natural gas. And at the time when Boone made that comment, there was concern that we were experiencing what would be long-term tightness in supply. But, is it purely … you mentioned the weather; is that all it is? Woods: Well, you’ve got to remember, natural gas is a domestic product. We’re really not affected by what happens overseas. We had a good run-up. That was really based on crude. We found it. It was just like this euphoria, I guess. Speculators said, “All right, if this is going up, I’m buying natural gas because that’s cheaper, relatively speaking.” And it just slowly went up. And then, all of a sudden, you have to look at it. We have a lot of gas out there. And you know what? You're going to have to get out of it. And we just basically came down to Earth.

Norman:All right. But, now, gas … there has to be a price connection at some threshold between natural gas, let’s say, and crude oil products … to use gas for electricity generation. So, for example, if gas is really cheap, you're not going to use fuel oil, which may be a substitute. Now, if you're not using fuel oil, maybe you need to refine less of it, which means you don’t need as much crude. Is this collapse in natural gas prices going to sort of flow over, do you think, into crude?

Woods: It might have a slight effect on it. But, for the most part, you have a lot of people really pushing that crude market right now. Crude was just above, what, $72-$73? Now it’s $68. So it’s in a little bit of a range right here.

You got to remember, with natural gas, our industrial demand is really nil. You have a lot of plants closing. You have a lot of factories shutting down. So, you take that out of the market. When you take that out, all of a sudden there is your glut. And you look all around the country; people just aren’t doing it.

And plus, you have to look at the economy. A regular person is not going to go out and say, “I’m going to buy this. I’m going to buy that.” The economy, you know, is not too good right now.

Norman: But I can't help myself. It’s just the contrarian in me that, when I see, for example, prices this low, and when I read headlines blaring “No bottom in sight,” wild horses couldn’t stop me from at least taking a look at the long side of the market now. Do you think some of this smart money is getting into the …

Woods: Oh, most definitely. I mean, when everybody says it’s green, you know what? It’s going to be turning red pretty soon. It’s just one of those things. When Goldman Sachs a while back … $200. Then they adjusted it to $150. All of a sudden you saw it get up to $147. This was oil. It was just a landslide. So, that’s what’s happening right here.

And you’ve got to look at it from a speculator’s point. If he’s selling natural gas at $2.50, he’s got to look at his risk/reward. So you're getting in very, very low numbers. Maybe Mr. Pickens was talking about $2 even, maybe not $2.50.

Norman: He’s still alive, so maybe he’s going to try to qualify that.

Woods: So you really have to start looking at it from that perspective. If you look at the back end of natural gas, you have really high prices back there. I mean, you have spreads back there that pretty well bid. And it’s just a safe haven right now. And you're like, “All right, this is going in the tank. But it’s not going to stay there for long.”

Norman: All right, so futures markets predicting, now, at least down the road, we’ll see a rebound?

Woods: Mm-hmm.

Mike Norman, anchor, HardAssetsInvestor.com (Norman): You were talking about the curve of the market; the futures price is now higher relative to spot, which is sort of a forecast, I guess you could say, that down the road we’ll see higher prices. John Woods, head of Integrity Energy (Woods): Right.

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Norman: You also mentioned that we’ve had really quiet weather, which is very influential in the natural gas market. What if we have a big season now? What if we get another Katrina? I mean, could we go all the way back up there again, with the $14-$15? Woods: Well, I don’t know about $14-$15. That has to happen if you have disruption, if you have platforms going down or destroyed. If we have any kind of weather, if you look across a map, you're saying, “All right, it is very hot here.” But you look over here to Chicago or New York, and it’s really mild. Chicago recorded one of its most mild Julys in, what, I think five, six years. So it’s pretty much offset. And you just don’t have any storms out there. I mean, we had a couple, but they went up the East Coast. Made a lot of surfers happy. But, for the most part, there was no real disruption whatsoever. Norman: Now, I know you deal a lot with the trade, the actual … the hedgers and the producers and people who are involved in the business of natural gas. Are they happy that the speculative element is not there in the size that it is, let’s say? Because I’ve spoken to other people who deal with folks in the trade and other commodities, and they're saying that all the speculation really distorted lots of things. And it was very hard for them to conduct their regular hedging activity. Woods: Well, in any active market, you're going to get those speculators; it’s inevitable and there’s nothing you can do about it. You're just going to have to work around it. I mean, there’s not a perfect picture out there. Does it disrupt it? Yeah, sure it does. But you're going to have to really just adhere to what they want to do. Norman: In natural gas, do they have an ETF as they do with … Woods: Oh, we have a fund out there; UNG ... it mirrors it. So, if you like natural gas higher, buy UNG. Norman: Does it function in the same sense? Woods: It’s pretty close to our spot, yeah. Norman: But how do they take a position … by taking the futures position? Woods: Yeah, the futures position. They’ll have their roll coming up, and they're just rolling their present position to, say, the next month or the month after. And that’s what you really have to look at. If they don’t do it the month right after, look at the third one. And then you’ve got a pretty good indicator. Norman: But now, with the market in a contango, where we have the higher futures prices, that roll is a cost for anyone who’s buying nearby every month that they have to do that. Because people have asked me, who have had the oil ETF, how come they're not making any money when oil prices were going higher, and it incorporates that roll; cost is factored in. Woods: Yeah. Norman: So you’ve got to be careful about that. Woods: Oh yeah, most definitely. You really do. But that just gets back to, you have to stick to what you believe in. If you're trading this, you have to know where you want to get in and where you want to get out.

Norman: Now, you’ve been down there on the floor a long time.

Woods: Too long.

Norman: And I think we kind of knew each other back in the day when I was a floor trader. Tell us a little bit about the environment down there. It’s certainly not what it was. Everything’s electronic.

Woods: Oh yeah. The electronic market has taken away the first couple of months in natural gas. And it’s actually more efficient that way. If you just want to get in and out, do it on the screen. Our back end of the market … you really just have to come to the floor, because things just move so quickly. And you really can't get a good sense of value back there, because it’s too wide. You punch up any computer screen, and you're going to see a market that’s extremely wide. You go to the floor and you go to the market makers.

Norman: You know what’s interesting? You mentioned before that natural gas is really a domestic commodity. And you see now a ... I guess you could almost call it a disconnect between other petroleum fuels. You know, you guys are very low. And people say, “Well, when oil was going up to $150,” they're saying, “well that’s the market setting price. It’s a free market.”

Yet, you have monopolistic forces. You have the Saudis. You have the Russians. In natural gas, I think the fact that you said, “Look, this is a domestic commodity. We don’t have those influences …”

Woods: Yeah, we just don’t.

Norman: Why do people say that oil is a freely … I mean, it’s not, is it?

Woods: With oil, you have so many outside factors: You have somebody going down on strike in Venezuela; boom, it goes through the roof. You had a guy, a rogue trader a couple weeks ago – took it from $68 to $73. That’s a rogue trader, all right. Those guys are going to pop up in any market. But, for the most part, there’s so many things to look at when you look at crude oil.

When you look at natural gas, your biggest concern is, “All right, is this storm going to hit here? Is this storm going to disrupt? Or is this weather pattern really going to come to fruition?”

Norman: All right. Well, we’ll be watching the weather. And I’m sure Boone Pickens, he’s going to say, “Well, I meant $2 even, not a $2 handle!”

That’s it for my interview with John Woods. John, thanks very much.

Woods: No problem.

Norman: And folks, we’ll see you next time. This is Mike Norman. Take care. Bye-bye.

Comments

[Mad Hedge F...:]

mne T. Boone Pickens, CEO of BP Capital Managements, which manages three energy hedge funds, also made some interesting comments on oil. I worked with Boone on some of his “pac man” oil company takeovers during the eighties when I was at Morgan Stanley, and he has been the best call on crude for the last 30 years. At least until last year, when the stunning speed of the crude collapse hit him squarely between the eyes, decimating his funds. Boone continues to ring the alarm bell about China. Its insatiable appetite for crude and other commodities led it to recently lock up 5 billion barrels in global reserves through foreign takeovers and partnerships, and that demand is only going to increase. During the last five years the Middle Kingdom’s consumption has soared from 3 million barrels/day to 8.1 million barrels/day, and half of that has to be imported. The super spike in oil prices is inevitable, unless the US does something radical to replace imports. With most reserves now controlled by foreign governments, the US is at risk of getting shut out of the oil market. Long time readers know that I have been a huge bull on crude prices since the beginning of the year when it traded at $32/barrel. The only question is how fast they will go up. If we do get a synchronized global economic recovery, then look out above! Single stock traders have Warren Buffet’s favorite, vertically integrated super major ConocoPhillips (COP) to look at, foreign stock investors should be focused on Petrobras (PBR), ETF players have the United States Oil Fund (USO), and if you want to play in the futures, where you can still get 7:1 leverage, then email me at madhedgefundtrader@yah... to set up an account.

Oct 07 08:47 PM

[MattZN:]

The domestic nature of NG production is well known. I would like to know how the falling dollar effects LNG imports which are one of the few outside factors pressuring domestic gas production and prices.

I wonder if this would also spur movement on domestic LNG production for export (or as a vehicle fuel). I know our current capability is basically zero, but if the dollar continues to devalue and NG prices continue to stay low it could become a factor a few years from now.

-Matt

Oct 09 02:39 PM

[Gold Bug:]

Oil at $200 Stocks Can Keep Rallying says Jim Rogers
Source :
jimrogers1.blogspot.com

Oct 09 09:15 PM

[Joe Shareho...:]

Mad Hedge, you've been bearish for weeks. Changing your mind?


On Oct 07 08:47 PM Mad Hedge Fund Trader wrote:

> mne T. Boone Pickens, CEO of BP Capital Managements, which manages
> three energy hedge funds, also made some interesting comments on
> oil. I worked with Boone on some of his “pac man” oil company takeovers
> during the eighties when I was at Morgan Stanley, and he has been
> the best call on crude for the last 30 years. At least until last
> year, when the stunning speed of the crude collapse hit him squarely
> between the eyes, decimating his funds. Boone continues to ring the
> alarm bell about China. Its insatiable appetite for crude and other
> commodities led it to recently lock up 5 billion barrels in global
> reserves through foreign takeovers and partnerships, and that demand
> is only going to increase. During the last five years the Middle
> Kingdom’s consumption has soared from 3 million barrels/day to 8.1
> million barrels/day, and half of that has to be imported. The super
> spike in oil prices is inevitable, unless the US does something radical
> to replace imports. With most reserves now controlled by foreign
> governments, the US is at risk of getting shut out of the oil market.
> Long time readers know that I have been a huge bull on crude prices
> since the beginning of the year when it traded at $32/barrel. The
> only question is how fast they will go up. If we do get a synchronized
> global economic recovery, then look out above! Single stock traders
> have Warren Buffet’s favorite, vertically integrated super major
> ConocoPhillips (seekingalpha.com/symbo...) to look at, foreign
> stock investors should be focused on Petrobras (seekingalpha.com/symbo...),
> ETF players have the United States Oil Fund (seekingalpha.com/symbo...),
> and if you want to play in the futures, where you can still get 7:1
> leverage, then email me at madhedgefundtrader@yah... to set up an
> account.

Oct 12 10:41 PM