Energy Trader's  Instablog

On June 30, the EIA released EIA-914: Monthly Natural Gas Report (you can find it at http://www.eia.doe.gov/oil_gas/natural_gas/data_publications/eia914/eia914.html).  The report is short, easy to read, and a must for anyone trading nat gas.  The data is through April.  In the lower 48 states nat gas production dropped 0.2% from March (63.49 BCF/d to 63.37 BCF/d). During this time the natural gas rig count dropped from 810 rigs on March 27 to 741 on May 1, a decrease of 69 or 8.5% (all rig data from Baker Hughes).  The reason for the large decrease in rigs without a corresponding decrease in production is due to the fact that the first rigs to be laid down are typically the vertical type.  The vertical rigs drill the less productive wells and generally not in the up and coming shale plays.  This is further evidenced by the report when you look at the breakout by state.  In Louisiana, with the Haynesville Shale, monthly production is up from 3.95 bcf's in March to 4.07 bcf's in April.  LA's rig count was 93 on March 27 and 91 on May 1.  Louisiana's production increase almost off-sets the rest of the country's decline in nat gas production.

This demonstrates 2 commonly misunderstood issues about the nat gas markets.

1) The new shale plays are truly a game a changer. Compared to prior nat gas fields wells are so productive that E&P companies are capable of increasing production with fewer rigs. The operations occuring in these fields are like a manufacturing process where the operators are refining their process on each successive well and then repeating the highly effecient process a mile away.

Lately I have been reading numerous articles about buying into the UNG for mainly two reasons.  One is the oil/gas ratio.  Two is its cheap.  I would recommend those that would like to profit from the oil/gas ratio to go get a natural gas powered car.  That will be the only way to make money this year on this ratio trade.  As a matter of fact I would recommend that to us all.   At the current ratio we would be paying approximately 1/3 to fill up our tanks.  Hell, if you pay about $1000 you will not have to leave home to do it. 

But, I have wondered off topic.  The second reason I am hearing is that it is cheap.  Really, I have heard people say the have bought X amount of UNG b/c it is cheap, without really understanding anything about the fund.  I commonly refer to these people as dumb money.  I try to stay away from them.

These two reasons I believe will turn out to have negative effects on nat gas over the course of the summer.  The oil/gas ratio I believe does not have to come in (and will not).    Anyone who believes the oil/gas ratio is a good reason to buy gas, I ask them to come up with a situation in real life where they can freely switch b/w the two fuels.  (I mentioned the nat gas powered car above as an example but with a $20K+ upfront cost I would consider it freely switching between the two)  Another common item that is often mentioned when discussing switching fuel is power plants, well they all switched along time ago.  As there is no practical further fuel switching, I would say the oil/gas ratio is about as great of a trade as gold/diamonds or platinum/copper.