Natural Gas Report: Winds of Change

Natural Gas Closed Up $0.16 to $8.259 on what was essentially an in-line gas storage report.

Here's where storage stands now:

How I'm playing the move in gas right now. I have been long gas companies for quite some time and added highly gas leveraged Southwestern Energy (SWN) once it was clear gas was going to hold up technically (it almost failed $7 but not quite). At this stage I think the recent rally (up $1.30 or 18% in two weeks) is getting into the "too far too fast" category, especially with the way the very near term storage situation is setting - see the tough comps graph and thoughts below).

While there are plenty of names I want to own calls on for 4Q earnings and/or reserve reports, I plan to lighten my position in gassy stocks over the next week (hopefully into the last vestiges of gas price strength) in ones that have worked, again (SWN), and to ride out positions and extend positions in highly hedge players like Chesapeake (CHK). I will also be taking puts on the natural gas ETF (UNG), most likely sometime next week.

Gas Graphs

When last the YoY storage comparison stood at these levels (mid May), the current front month contract was trading around $10. If the weather cools off again and allows for further deterioration of this chart expect gas to remain aloft for a little longer.

The preceding chart may be just about the most bullish one you can show for natural gas right now. You have to go all the way back to 2005 to find a surplus to the five year average this small. Again, while I think gas is due a pull back, this recent draw down towards more "average" levels should prevent gas from taking a drastic turn lower over the next couple of months… probably now lower than mid 7s barring a heat wave.

Withdrawals were near the high end of the range for this week of the year, which makes sense given the extremely cold temperatures experienced during the reporting period.

Tough Comps On The Horizon. The recent deterioration of the gas storage overhang has been made possibly by a combination of chilly air and easy comparisons relative to last year. However, we are about to enter a period of more difficult comparisons to last year when just about now it was starting to get cold. This year temps are expected to moderate, yielding smaller withdrawals, and I would venture that we will start to see some softening in gas prices either late next week or early in the following week.

Comments

[Ernie Montague]

I have to suspect that when inflation of the dollar is taken into account, that stable gas prices mean it is 5-8% cheaper every year, to match the actual inflation of the dollar, not the phony core CPI. I also suspect that ten years from now $7 gas will be looked on like $3 gasoline. A fond memory.

[Michael B. Krause]

Yes, agreed. Against $95 crude, natural gas against the same 'inflation scale' of 6:1 ratio with more balanced (not bearish as the last 2 years) supply/demand outlook gives a price target of $15.83. Heating oil prices are even higher per energy unit.

There's a lot of room for upside, and even prices at $8.xx, while historically high, are just a reflection of dollar buying power in a *bear* market. This market has an aweful lot of price resistance, and will need the cool to stay as well as a continued hot summer for prices to recover, but I imagine by next winter $15 gas (not in the presence of a hurricane related spike) would not be unimaginable.

[jbougearel]

Very nice chart on the suprlus to the 5 year average, I would not be surprised to see the next chart read "deficit to the 5 year average" rather than surplus.

I think legislatively increased mandates in the ethanol market will create a deficit in nat gas underground storage in 2008 and beyond for the foreseeable future - unless substantial new capacity comes on line via the new rockeis express pipeline that is just now opening in Jan 08.

John Bougearel
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