H. T. Love

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

I wrote

"For Oct 2005 - Mar 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf)."

and I meant

"For the months of Oct - Mar for 2005 - 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf)."

Sorry for any confusion this may have caused.

HardToLove

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

On Oct 11 01:14 PM Albertarocks wrote:

> H.T.Love, I follow you mainly because although you often admit that
> you're still learning, how can I not be impressed with how fast you're
> learning? (not to mention that you're a pretty good guy).

LoL! If only you knew how *slowly* I feel like I'm going. I guess it's because there's so much to learn in so many areas, my hopes are not being supported by reality!

As to "good guy", thanks. But I have my faults, for sure.

> But, your
> depth of study on the topic of natural gas goes way beyond the bounds
> of "normal". You've uncovered facts I would never even have thought
> of.

I've always been good at learning. But I've felt for a long time that my real strength is in the "associative processer" area. Back in the days of my computer career (began in 1969 in school), I always seemed to have a knack for coming up with "out of the box" solutions that met a specific need faster, or cheaper or had more power, ...

>
> I've invested in natural gas in the past and have lost more times
> than I've gained, I still find it a very intriguing subject, one
> that can be very, very lucrative if you get it right. And living
> right in the middle of one of the most gigantic natural gas fields
> on the planet, you'd think I'd know something about it. I don't.
> All I know is that when you cut the branch off a tree, natural gas
> comes out.

LoL! Does the ground "burp" too when you walk on it? ;-))

>
> I'm going to have to take the time so sit down and dedicate a hour
> or two just to reading all your posts on this subject. I don't think
> I could find a quicker or better schooling on the subject.

Pshaw! Two things: I'm verbose. If you can read all I wrote in a couple hours, you obviously are "skimming"! ;-))

Second, we both know I've only started to skim the surface. Why just last week one kind poster reminded me of the price seasonality, which I knew, but I got so involved in the other stuff I forgot to consider it at that time.

When I really know something, I won't make that sort of slip often.

>
> Normally I don't pay as much attention to "fundamentals" as I do
> to the technical side. But in the case of natural gas, the seasonal
> factor just makes too much common sense to ignore. At the same time
> though, underground storage capacity in Canada is pretty much topped
> up and I understand it's almost topped up in the U.S. as well. To
> my way of thinking, gas should therefore be falling, in spite of
> the seasonal tendencies.

One useful term I spotted a while back, and the power of it: "sell siders". I believe, without any sort of proof, that folks that have to feed thier family get marching orders from someone that says "'Tis the time, of the season ..." (if you admit recognizing that lyric, you date yourself, so be careful! ;-)) And they don't have time to research or consider, just as many investors don't. That's why I'm so high on a site like this. The "community knowledge": each of us has time, interest, strength to learn in at least a small area. If we can share that, we *all* benefit.

>
> And yet...BOOM, it takes off in Sept. just as it does every Sept.
> To my non-informed eye, this made no sense. That's a good way to
> lose money, isn't it. Fortunately I stayed out of it because of
> the conflict between the seasonality and the "topped up" storage
> condition.

Time will tell, but I *believe* that's the right move for now.

>
> There's something really goofy going on that I wasn't understanding
> and you're analysis is extremely valuable in clearing it up. I think
> there are probably a lot of readers here who are interested in the
> gas play and who are more than happy to hear what you have to say.
> I know I do. Thank you!

As as I've said before, my pleasure. I firmly believe that as I try to contribute, I'll recive back, in spades. And to close, think of those famous lyrics from Arlo Guthrie in "Alice's Restaraunt": "... and then it's a movement".

Good to hear from you again.

Working on my first million,
HardToLove

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

On Oct 11 12:32 PM John Lounsbury wrote:

> H.T. Love - - -
>
> Thanks for such a comprehensive review of nat gas fundamentals. You
> provided much more depth than I had gotten to on my own.

As you probably noted in my bio, I'm big on "sharing". It's the only way to repay others for all I've learned here.

> I have taken
> the UNG position as a trading opportunity, not an investment. I admit
> that I could have tried to take advantage of the contract roll-over
> price impact and did not.

I'd like to suggest that you pick a reasonable time-frame and strike-price and write some covered calls so you can "get paid to wait". That's what I do in my retirement accounts and have garnered some small gains that way even as UNG prices dropped.

Or you can buy some puts to limit downside. I know you are already aware of these, but NG is just so uncertain these days and UNG with contracts in contango has such a high negative roll yield that I try to always remind folks to use some options with UNG.

>
> I am aware that you have written extensively on nat gas.

Naw! I'm still a tyro compared to some of the long-time contributors here. Using SA's search facility with "UNG", "natural gas" or "energy" will yield *lots* of folks with opinions counter to mine.

<*sigh*> They sure make it hard for a n00b ilike me to get over-confident, no?

> May I suggest
> that you consider writing a monthly analysis of the market? You might
> chose to time the articles around the monthly futures contract roll
> over dates, either just before or just after.

With my attitude about "sharing", I'd love that. However, I've still too much to learn in so many areas (heck, I'm still discovering, or folks point me to, new resources almost every week). Until I meet my criteria of a high level of competence, I'd feel uneasy acting as a "knowledgeable" regular contributor. That's why you see me constantly reminding folks (except those I know are familiar with me already) that I'm new.

On top of that, gathering data points and combing them with things to consider (weather, economy, ...) and then presenting them to other folks that haven't the time to do the digging is a *lot* easier than figuring out what trend "Mr. Market" is enamored of this week.

I don't know how long until, if ever, I'll think I've got "Mr. Market" figured out. And of course, when that happens he'll spank me good and proper! :-((

But thanks for the kind comments and the suggestion.

V Live long and profit! ..... er "prosper".

Good fortune to you on the UNG excursion!

HardToLove

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

John,

I'm new at this, so consider the following in that light. I touch on a few things here that are more recent than my articles or blogs. But what I'm developing is not yet ready for publication.

Long-term I'm bullish on NG. But I've been studying up on this for a little while now and I believe you are early, *especially* in UNG.

It has some structural issues that gives a negative roll yield as long as futures are in contango, like now.

www.nymex.com/ng_fut_c...
www.nymex.com/ng_fut_p...

If the roll forward was done Friday 10/9, contracts owned would drop 10.5%, before "friction" is considered.

Last I looked, Feb-May contracts were showing some signs of coming normalization, or even "backwardation" that would give a positive roll yield.

But even if that holds, which is uncertain, the negative roll yield will eat you until then unless NG prices move up big time.

I don't believe this will happen.

Right now you are paying a premium for UNG. See
www.unitedstatesnatura.../

Next roll dates are Oct. 14-19. See
www.unitedstatesnatura...

Over 60% of the time, UNG price drops immediately prior to and during this period. That's the time to buy *if* you must use UNG, which I advise against for now.

Many advise buying the min-contracts directly, but that's beyond me for now, so I can't offer a thought on that.

EIA projects *average* (across all price stations) NG prices for October at $2.25. The November contract (current UNG contract) dropped $0.193 last session to $4.77 and seems to be following the pattern of all the front-month contracts recently - trending down. Spot closed at $3.92.

If the EIA projected price is on target, and that $0.85 differential of spot:futures holds, the futures contract will be dragged down further to $3.10. If we use a +21.7% differential instead, the future would go to $2.738. Of course, that presumes there are no reasons for buyers to bid up the futures. But it seems folks are hanging their hat on the projected colder than normal winter without considering factors aside from that, so prices may continue up, contrary to what my assessments would indicate.

Further, there will be some buying by consumers wishing to lock in fixed prices and delivery (I don't think they need to worry about delivery though) and this will lend some support to higher prices.

Before the roll, the future contract to NAV is 2.39:1. This means that we could be looking at NAV of $7.409 - $6.544 *if* that $2.25 price works out as EIA says and no catalyst appears and the "lock in" above isn't a strong factor. Further, the negative roll yield will further reduce the ratio of NG:NAV. I don't know how much.

As you might expect, this ratio has been falling as each roll occurs, because of the contango. A few months back it was 3.4:1, if I recall correctly. This was before the CFTC caused changes in the way UNG does business, which may increase the expense ratio as OTC swaps must now be used along with the futures.

Sentiment and reliance on past seasonal price actions could hold the NG front month contract price up, just as it brought a huge jump in the last couple weeks, but I really don't think the trend will hold.

From Oct. 2008 through July 2009, industrial use was down 10% compared to the same period 2007 to 2008. Industrial accounted for 28.94% of consumption during that earlier period. Commercial was 13.20%, electrical generation 29.04%, vehicle fuel 0.13%, residential 20.54%. I mention this so you can apply your own estimates of the effects of weather and the economy on these elements.

Total consumption for Oct 2007 to Mar 2008 was 12,323.18 Bcf (excluding lease/plt and pipeline/dist which averages about 8% of wellhead production). The same period for 2008 - 2009 was 12,038.87 Bcf, a -0.0231% decline.

However, as we recall in the 2007 - 2008 period we had not yet felt the full effects of the recession kick in yet. For comparison, here's some declines, as compared to the same months in 2007 - 2008, for April through July of this year, which average -5.1%.

Apr -0.0481
May -0.0565
Jun -0.0579
Jul -0.0416

If these declines hold, we can expect consumption (ignoring lease/plt and pipeline/dist) for the October - Mar period to be only 11,694.70 Bcf. If we allow for colder weather requiring an extra 2%, we get 11,928.59 Bcf.

Gas in storage on 10/2 is all time high @ 3,658 Bcf, 15.1% above 5 year average range, and EIA says it will be full before Oct. is over. I expect we'll see another 75 Bcf or so in the next report detailing through 10/9. Anyway, this means on 10/2 we already have 30.7% of requirements for the Oct - Mar period already in working storage. So we only need to produce 8,266.5 Bcf to satisfy needs (only if we were willing to completely draw down all working storage - not a good idea). So that means in 26 weeks, we only need to produce 317.94 Bcf per week to get through the drawing season.

For Oct 2005 - Mar 2009 the *average* monthly marketed production was 1,677,829.7 MMCf (1,677.83 Bcf). Using 4.345 weeks for the average month, this works out to 386.15 Bcf per week. At an average difference of +68.21 Bcf/week over requirements, we should not have any shortage appear.

At the end of March, we should still have somewhere around 1,773.46 Bcf (1.7735 Tcf) of working storage gas IF WE ASSUME NO NEW PRODUCTION ADDED - not supported by the rigs coming on-line in the last 12 weeks.

New gas rigs were added 11 of the last 12 weeks and the count is now at 726 (+14 this week). Of course, some of the new wells coming on-line will be replacing depleted wells, but that should be a relatively miniscule number.

Although not a perfect test, the rig counts are now at the level of Jan 2003 and weekly average was 389.11 Bcf/week in that period. So this seems to lend credence to the marketed production estimate above.

With storage at 15.1% above 5 year average range, new rigs coming on-line, OFOs (Operational Flow Orders) already restricting unbalanced flows in/out of storage (due to capacity constraints) and operators denying (storage) access to producers with interruptible contracts and even restricting some pass-through flow, I can see no real upside to the natural gas prices yet BASED ON FUNDAMENTALS.

From one Tarheel to another - BE CAREFUL OUT THERE!

HardToLove

On Oct 10 02:45 PM John Lounsbury wrote:

> Dr. Banks - - -
>
> Look at the 15 month chart for UNG. When I see a trend like that
> (straight as an arrow from over $60 to $9.01on Sept. 3), it makes
> my contrarian blood boil. Any commodity that loses 86% in 15 months
> gets my attention. Now, the close on Friday was $11.81, up 31% from
> Sept. 3, but still down 81% from July, 2008. Simply looking at the
> oil/nat gas price ratio (which is not reliable to do rigorously,
> as the author has cautioned in the article), UNG could well be around
> $30 +/- right now.
>
> I know from your past comments that you are not a big fan of traders
> and technical analysis, but I hope you will allow me the liberty
> of disagreeing with you on such grounds. And, for one little fundamental
> creeping in for consideration, we are going into winter in the northern
> hemisphere. That is when demand for nat gas increases seasonally.
>
>
> So, I respectfully take the opposing view to you and support Mr.
> Gheit. I bought UNG a couple of weeks ago and put it in my contrarian
> portfolio for the autumn at TheStreet.com (www.thestreet.com/stor...)
> and (www.thestreet.com/stor...)
>
>
> By the way, glad to see your comment here. I always enjoy reading
> your comments, whether I agree or disagree, and have not seen you
> for a while.

Natural Gas ETF Suspends New Shares: Are There Alternatives?

Thought it might be useful to know that UNG is taking steps that could affect an assumpton of premium over NAV.

On Aug 21 07:08 PM H. T. Love wrote:

><snip>

> But U.S. Commodity Funds, LLP - the general partner - has lots of
> cash and equivalents and is working in OTC swaps right now (this
> adds counter-party risk which used to be about non-existent). What
> they do long-term will probably be affected by the CFTC decisions
> more than anything else.
>
><snip>

> With a normal UNG NAV to underlying ratio of 3.45:1, a $3.25 NG price
> e.g., would give an $11.21 NAV price point to UNG. If the premium
> over NAV continues to hold around 10% (I have no idea if this is
> likely), we could expect UNG to trade at $12.33 or so.

Over the long haul, we should assume a premium of 0, based on this article.

seekingalpha.com/artic...

HardToLove

Natural Gas ETF Suspends New Shares: Are There Alternatives?

At $13.00 you can make a little and maybe more. I got in at $13.50 and have no doubt I'll make some *unless* UNG decides to shutdown and return cash.

First, I'm new, so you may wish to discount what I'm about to say.

If your goal is not to get rich quick, but to profit over time, and you are already in UNG, write some calls or buy some puts (we're betting on further price declines) and hang in there while we see what comes about. But you have to work it to profit. Plan your entry/exits for the calls/puts and be disciplined.

As I've said many times, UNG is not an investment, but a trade.

My play is premised on getting in at a "reasonable" price (which you've done), garnering cash while while awating the intermediate-term reversal (you're starting late, but if you work the numbers you may still profit), and cashing out *probably* no later than March or April (depending heavily on what's been "seen" until then).

This depends a lot on winter weather, legislation, drawdown due to improving economy ("heh", as the saying goes) and how fast development drilling and/or un-capping "shut-in" commences.

Needless to say, there is some risk. For some folks the best bet may be to cut their losses and dump out soon.

This week's gas rig count is +7 (but 57% off YoY), normally causing a bearish reaction. But net injection was at the low end (52 Bcf?) of expected, normally bullish. But not low enough for the bulls to come charging, based on the market reaction.

The biggest risk is that the fund collapses totally and returns the NAV to the holders in the form of cash - that'll certainly be a loss. But U.S. Commodity Funds, LLP - the general partner - has lots of cash and equivalents and is working in OTC swaps right now (this adds counter-party risk which used to be about non-existent). What they do long-term will probably be affected by the CFTC decisions more than anything else.

Everyone says it's acting more like a closed-end fund (CEF) now.

Here's how I implemented my strategy.

I prefer to write calls as that puts the cash in my pockets - the least risk. Others buy puts. Knowing the resistance formerly was at $13.50 and the stock worked around there in the past, I bought a couple small positions at that price (this was before all the uncertainty began) and then sold $14 puts for $1.10. This put my effective cost/unit at $12.40 (excluding friction) and if the price of NG rose (unlikely was me feeling) I would get a nice little profit in two months ($15.10 - $13.50 - friction).

I knew that 60% of the time the unit price declined during the 4 day roll period. With the current glut of NG, I felt this would probably go higher than 60%. I planned to close my short calls at a profit during that period and then see what the landscape looked like.

I did that, netting a profit on the original calls of $0.70, making my effective cost/unit $12.80. I then sold $13.00 calls another month out for $0.80, bringing the effective cost to $12.00. This was after the cessation of new unit issuance and I was aware that units would likely begin to trade at a premium - a benefit to me since I already own my units.

Now, the point is to repeat this process of close the short calls and write new ones (commonly called "roll forward" if I recall correctly) until one or two things happen (presuming that UNG survives).

Sep - Jan (and often Feb-Mar) is a traditional time of price rise for NG. It should be muted this year for many reasons, but there should still be enough draw/injection disparity or "extraneous events" to bring NG back above $3 sometime during the winter. If the winter is harsher or economy recovers more strongly, this effect may be enhanced.

With a normal UNG NAV to underlying ratio of 3.45:1, a $3.25 NG price e.g., would give an $11.21 NAV price point to UNG. If the premium over NAV continues to hold around 10% (I have no idea if this is likely), we could expect UNG to trade at $12.33 or so. This is above my current cost (discounting any future short call rolls) and only $0.47 off my cost if I had to close my short calls at $0.80 (unlikely since roll them again during UNG's roll period).

The second thing that should happen is that as winter comes, NG prices squeek higher, rig counts stay down (currently at 2003 average levels) drawdown from storage begins, legislation on NG for transportation finally gets passed (that may be a non-factor or may not happen), ... the contango should be replaced by backwardation for a brief time (I emphasize *brief* as storage is over 20% above normal 5 year range and I don't think economic activity alone will be sufficient to cause a longer-term rise and I don't know what the winter forecast is yet). At this time, UNG will begin to gain contract counts at roll instead of losing them like it does currently. If there is a delay between this situation and the start of injection season (March-April?) or injection start up is low until more development drilling can occur, NG futures prices might rise and UNG NAV could rise an appreciable amount due to the combination of increasing NG price and increased number of owned contracts.

There are also "shut-in" wells that might be un-capped to start injection quickly but I have no idea how many. I do believe that the producers will delay as long as possible to obtain a better price by letting storage get emptied more than normal. I'm sure they're as sick of these prices as any of us.

This intersection of NG price rising and backwardation is the time to either cash out or decide to increase a position, depending on your view. For me, I'll be out unless I see the industry controlling their production more tightly or some of the long-term bullish indicators (legislation) appear.

Go to

seekingalpha.com/insta...

and look at some of the charts there. Maybe they'll help you decide.

I hope this helps,
HardToLove

On Aug 21 05:33 PM oldtenor wrote:

> Thanks for the article &amp; comments.
> Unfortunately, I bought UNG several weeks ago at $13.00.
> Should I sell to take a loss ?
> Thanks for advice.

Natural Gas ETF Suspends New Shares: Are There Alternatives?

Thanks for the link. That article gives me some more things to think about. <*sigh*> As if learning about all this stuff didn't have me overloaded already! :-(

HardToLove


On Aug 18 08:56 PM Static Chaos wrote:

> "Some LNG producers can realize enough income from selling natural
> gas liquides (NGLs) to cover the cost of the LNG, and still have
> profit left over. In that case, they would find no natural gas price
> too low to stop sending LNG cargos to the United States."
>
> Here is the article discussing the natgas and LNG: "Natural Gas
> Prices and LNG's Dirty Little Secret" http://rigzone.com/new...
>
>
> Again, short natgas / $UNG, long crude oil!
>
> On Aug 18 06:24 PM H. T. Love wrote:

Natural Gas ETF Suspends New Shares: Are There Alternatives?

Factors other than cost may affect one's choice. Futures, as with options, have time-decay. For longer-term investors they may not want to have to guess both direction and magnitude of changes to profit for their investment. An ETF (depending on which one) offers the convenience and liquidity of trading stocks and, for the longer term, hopefully allows them to ignore such issues as time-decay.

Unfortunately, they may not understand the other types of risks that come with and ETF based on futures contracts that must be rolled. That's why I have been consistently advising that UNG is *not* an investment, but only a trade opportunity.

HardToLove


On Aug 18 10:18 AM Maxe Paul wrote:

> "This move may keep the fund trading at an expanded premium to its
> underlying net asset value (seekingalpha.com/symbo...),
> making it more expensive for those retail investors who can only
> gain exposure to the gas futures market through the fund."
>
> Why can some people only gain exposure through the fund?
>
> Is there some law that says people must lose more money than on the
> underlying futures?
>
> I can access NG futures for a $1.00 mini contract, is this too expensive
> for "some people"?
>
> Has the world gone totally mad?

Natural Gas ETF Suspends New Shares: Are There Alternatives?

I've read that NG is often dissolved or co-located with oil. It used to be that it was just "flared" and wasted. So for an oil producer, NG is "free". If they build a liquification plant, the only real "cost" is the liquification and shipping since the feedstock is essentially free. If the producer is an oil-rich country, they can afford to see it that way.

HardToLove


On Aug 18 08:12 AM pockyclips 2020 wrote:

> How can LNG be imported when the NG that's already here is selling
> this cheap? I must have been asleep in Econ 101. If this is indeed
> the case, will some one please pull the "Kick Me" sign off of Uncle
>
> Sam's back. We should be taxing energy imports, not encouraging
> more.

Natural Gas ETF Suspends New Shares: Are There Alternatives?

You are so right. Lng imports in the first qtr totaled about 10% of injections made in just one month recently. If the dollar can't hold the strength it exhibited today, I believe that other markets without a deteriorating currency will be more attractive. I think we would only see imports of excess capacity that can't be sold elsewhere in just a few months from now.

seekingalpha.com/autho...

HardToLove


On Aug 17 06:14 PM Barbarous Relic wrote:

> Dian, any growth in LNG imports into the U.S. are likely to be more
> than offset by reduced dry gas imports from Canada, which has also
> seen its drilling activity plummet. LNG is currently a rounding
> error in the U.S. gas supply picture.
>
> Further, LNG pricing is effectively oil-indexed in other parts of
> the world. Netbacks into the U.S. are and will likely continue to
> be among the lowest in the world -- thereby ensuring that the LNG
> goes elsewhere. I would be surprised if LNG imports into the U.S.
> in the next couple of years even surpassed 2007 levels (a big year),
> when it represented only 3% of U.S. supply.
>
> Time will tell.