Options Trader: Tuesday Outlook 12 comments
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And another hurricane bites the dust!
This is turning into another disaster for natural gas traders, who ran up the price up to $14 just 4 weeks ago from $7 at the beginning of the year and now, 30 days later, it’s back to $7. Of course, as Secretary Paulson will tell you, this is due entirely to fluctuations in supply and demand as speculators play only a very small part in the futures market, but I’m not even sure we’re done going down yet.
The "demand" for natural gas futures at this time of year is based on the "supply" of people who believe there is going to be a hurricane or a war or something to cut off the very plentiful actual supply of natural gas, which we do not import from overseas and is (see Zman’s chart) drifting along at the upper end of the 5-year average storage levels, a little below last year, when we were bursting at the seams with natural gas in the US.
We won’t get into the scam that is LNG here, other than to remind you that this is a scheme to INCREASE imports of energy into the US of one of the only things we have plenty of. The key to the drive to build LNG terminals is that energy companies can store months’ worth of natural gas in the ground, rather than be forced to sell it at market prices as it’s produced. Recent failures to get a plant under construction on the Taunton river in MA were the last straw for traders, and gas prices fell almost 20% from the point the plant was essentially blocked (July 18th). Chesapeake Energy (CHK), who routinely have had to cut back production the past two years to prevent US storage from overflowing, have been in free-fall, dropping from $74 on July 1st to $44.92 yesterday.
Natural gas averaged $12 in Q2 and is already averaging less than 9 this quarter. Coupled with a mild summer, this goes hand in hand with falling oil prices to give consumers a huge break so far in Q3. I mentioned in last night’s post, most of the data we’ve been looking at is backward looking and we’re hitting the reports that show our economy with oil at $145 and natural gas at $14. It will take more than a month for us to get a picture any sort of recovery, but let’s look for early signs and take them seriously.
Meanwhile the market is, as I predicted yesterday morning, back in its depressive state and we’ll need to watch our levels to see how low we can go. I’ll be bottom fishing in the banking sector and Google (GOOG) is getting very attractive under $500 as will Apple (AAPL) be if they can test and hold $170 (the 50 dma). I’m expecting AAPL to test $170 as news is out of Japan that IPod Nanos are overheating while they are recharging.
We’ll be watching to see if the Dow can retake its 50 dma at 11,578 and we need a 100 point gain just to get there. The S&P is closer to the target at 1,286 but anything over 1,275 will make me happy. The Nasdaq finally gave up the 200 dma yesterday at 2,425 and has a big drop to the 50 dma at 2,350 if things turn sour in Techland. 2,410 is going to be the line in the sand for the Nas, if we don’t get a bullish bounce there, we are very likely to head to the lower test.
The NYSE never did get it together and has been drifting along between 8,300 and 8,500 for a month and it’s the NYSE I’ll be looking to for a clue on which way we go. That 8,300 mark is critical for the 2,764 companies the index tracks (Nas is bigger with 3,200) as we are looking for that sector rotation to drive us up through the 8,500 mark this month. Semis also face a critical test at 365 as do transports at 2,450. Losing these levels will be a very bad sign and very likely lead to a retest of the July lows.
Our PPI came in at a tragic 1.2% and is the same joke as last week’s CPI so I won’t waste time here telling you what idiots the "economists" were who were forecasting 0.6% for July as these are the same idiots with the same clueless forecasts. For those of you keeping score, PPI was 1.4% in May (oil averaged $127), 1.8% in June (oil averaged $135) and now 1.2% in July (oil averaged $130). Let’s see if clever econonomists will be able to figure out what will happen to the PPI with oil averaging $117 so far in August… They say the market is a forward looking mechanism and last Thursday we looked at the CPI numbers and decided to move past a very bad open and BUYBUYBUY into a 250-point rally. This morning the Dow is likely to open at the same 11,450 we tested on Thursday, but today we also have anemic Housing Starts and Building Permits to also weigh down sentiment even though lack of new housing allows us to burn off inventory, which is actually a good thing…
Nothing was good in Asia this morning as markets there fell to a 2-year low with the Nikkei falling 3000 points as the BOJ held rates steady at 0.5% but downgraded their assessment of the economy. The Hang Seng dropping 446 and Australia also hit the 2.5% rule to the downside and the Shanghai was a bright spot for a change with a 1.5% gain but really just a bounce off yesterday’s 5.3% drop. China Merchants Bank jumped 3.2% as first-half profits more than doubled and led a rally in the financials over there. Miners continued to fall, even BHP Billiton (BHP), who had very good earnings just yesterday.
Europe is down 2% ahead of our open, spooked by the financial sector, but German Investor Sentiment finally improved, rising from -63.9 to -55.5 (still awful) and was, of course, nowhere near "economists" expectations of -62 points. Current conditions hit a new low in the survey at -9.2, the worst level since February 2006, when it stood at -19.5 - the beginning of a year where the DAX climbed 25% so I’m actually more encouraged by the turn in outlook than I am discouraged by the drop in sentiment.
Like last Thursday, we’ll have to play this one by ear, but I’ll be a little quicker to remove covers and jump on some momentum plays today if it looks like we’re heading higher - if we can shake off today’s data, we should be looking more forward to a retest of 11,700 than backward to 11,450.
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This article has 12 comments:
Basic premise is probably okay...we are seeing supply running higher than last year and demand falling, but our storage is still about average...which is good. The storage is there to help ensure we can get through a severe winter and/or a supply disruption. Like, a hurricaine in the GOM or some other disaster.
I don't see the storage as a way to game the system nor do I see LNG as a dirty scheme. But you have a basic distrust of my industry so I've grown to expect it. Truth of the matter is that no one will be able to attract large quantities of LNG to the shores of the U.S. due to pricing differentials with the Far East. Why send gas to the U.S. ofr $7, $8, or even $12/mmBTU when it can go the the Far East for $15??
My read on pricing/supply: prices will probably drop a bit more; when they hit $6-7, new drilling for expensive gas will stop. When it stops, you'll see supply drop as our new plays can only sustain production levels with intensive new drilling. As the supply drops, you'll see prices start to go back up again. As they reach $12-13, drilling will accellerate and the supply will go back up and the whole cycle will repeat itself. All of this assuming no large scale disasters that take GOM supply offline or that pull the remaining LNG out of the US market.
The site links to a listing of headlines supposedly showing the corruption of LNG. When in fact, most of the links relate to bribery/corruption at a contracting/constructi... level, not the business case of the LNG plant or anything else. It is all about a contractor trying to secure a construction contract. These have occurred in the building industry, most industries located in Chicago (sorry, a small mob-related dig) and probably half of any work done with Washington DC policiticians from both parties. But to try and reach from that to a "LNG is corrupt" stance is beyond the pale. Once I finished puking over that guy's website, I decided to respectfully ask that you take that link out of your post. It is below you and your standards.
That doesn't change the fact that I think LNG is a scam. If as you say, there is no point shipping gas here when we pay less, then why build the terminals? I really believe that the whole thing is to find a way to shove nat gas into the ground, kind of like the SPR. Let's say we build terminals that can hold 10% of the nations' annual demand. Filling it would cause other inventories to dip and prices to go up. Once they are filled, then our best case scenario is the same case we have now - gas is sent to market as it's produced.
Of course, having LNG terminals does allow our Nat gas producers to SEND gas to other countries,taking it out of the American market and driving up the prices at home. If I were to tell you I was making a warehouse and intended to fill it with 10% of the world's annual gold production - in what scenario do you think that would cause prices to come down?
Al - as you asked, the XLF longs dropped back to $4.85 so we're up just 2.7% now, not including the callers we took out for huge profits of course. FRE was well covered and we took out the callers and actually added down at $4 so we'll see how that goes.
Nat gas did have a good day, making back 3.5% of the 25% drop. I was pleased that it didn't break back over last week's high yet and oil had trouble at $115 so inventories will be critical tomorrow.
Why build the terminals if gas won't come here? The LNG terminal projects were initiated when we were suffering through shortfalls in NG (only 3 years ago the forecast was big shortfalls) and we didn't have the big shale gas discoveries like the Haynesville, Marcellus, etc.. Since it takes several years to finance, design and build a terminal, the work was kicked off only to find the market whipsawing the builders. Bad investments to say the least.
Also, the LNG re-gas terminals cannot store large quantities of gas so their use as storage is not possible. And to your comment that these terminals can be used to send LNG out of the country, well Phil that is not phyically possible. The LNG terminals being built here in the US are re-gas terminals...the take LNG off of ships, decrease the pressure and re-gasify the product for pipeline use. These plants cannot reverse this process...they don't have the equipment needed and converting them to do this is a multi-billion dollar exercise that will take a few years. So, that was a misstatement. Now, there are some folks talking about export LNG as we (US) grow our natural gas business and more wells are drilled, etc. Aubrey of CHK has mentioned it, although I really don't think he's all that serious about it. But LNG export facilities are 3 year projects and require 20-year guarenteed supply contracts for 3-8 TCF gas. I seriously doubt anyone would put the money into this type of a project with US gas needs being so volatile.
Seriously, TWO--out of how many millions? You have to be kidding. No? Well, I would like to buy more, too...