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Stock, Options, ETF and Commodities Investor; My educational background is in Computer Science and Accounting with significant entrepreneurial and Fortune 100 Corporate experience in Information Management and Technology services in industries including: Consulting, Oil and Gas, Manufacturing,... More
  • DGAZ Headed For Bullish Turn 9 comments
    Feb 6, 2014 8:08 PM | about stocks: DGAZ

    For those who have been short Natural Gas via DGAZ, yesterday provided a nice fall after the great buying opportunity with the spike to 5.7/mmbtu in NG price. Lets take a look at where we are now and where I think we are headed in the near future.

    First, let me share my thoughts on Storage, one of the biggest issues that coupled with the severe winter storms we have had across the US have given rise to the bulls and the spike in prices.

    Storage Inventory and Withdrawals Q1 2014
      2-Jan 9-Jan 16-Jan 23-Jan 30-Jan 6-Feb 13-Feb 20-Feb 27-Feb 6-Mar 13-Mar 20-Mar 27-Mar Total
    Storage begin 2,982 2,825 2,538 2,431 2,193 1,931 1,748 1,591 1,456 1,338 1,233 1,142 1,081  
    Withdrawal bcf 157 287 107 238 262 183 157 135 118 105 91 61 33 1934
    Storage end 2,825 2,538 2,431 2,193 1,931 1,748 1,591 1,456 1,338 1,233 1,142 1,081 1,048  

    Withdrawals
    Estimates

    Today's storage report to confirm withdrawals for last week, including Thursday, January 30th, the withdrawal came in below the 270 estimate at 262 noted in the table above. As you recall, that week was very cold all week across the vast majority of the US. We have all heard about how the Storage inventory levels for Natural Gas are below the 5-year average and the bulls have driven fear based on demand placing the US in a position of supply disruptions. While there are supply logistics challenges in the Northeast, (an infrastructure challenge estimated to take a few years to resolve), and a report from California today asking people to conserve their use because of constraints, the fears I think are mostly behind us.

    I have taken the numbers from the model that is used by the CME Group to populate the table and viewed what they have so far for this week through Wednesday - a milder early week than the past several. Then, I estimated for today and Friday using the highest daily withdrawal numbers from last week since we do have some cold weather across much of the US this week. According to my estimate, the 183 bcf withdrawal estimate in the model is too high and we will more than likely come in closer to 160-162 bcf withdrawal.

    Assuming the remainder of the model out through March is reasonably accurate with weather continuing to trend to milder temperatures across the US, then we should not go into April at risk of a major supply disruption based on inventories. Barring another very severe late season storm that blankets the US, I see us as trending lower highs and lower lows on Natural Gas from here.

    To address the injections of Storage, I reviewed information from the EIA website. Key information is included in the tables below:

    April Estimated Storage 1,100 bcf
    5 year average 1,800 bcf
    10 year average 1,600 bcf
    Nov 1 Estimated Storage 3,500
    5 year average 3,800
    10 year average 3,600
    Injection Season estimate 2,400
    5 and 10 year average 2,000

    Injections into Natural Gas Storage typically run from April through October in order to prepare for the next winter season. Considering that Natural Gas prices were as recently as August at 3.2/mmbtu and October, 3.4/mmbtu, you can imagine that current producers have some incentive to meet more of the demand requirements at these higher prices and as more supply comes on line, prices will tend to moderate on average. You can see from the table that we certainly will be lower in April Storage than our 5-year and 10-year averages, but estimates are that injections will be 2.4 tcf, achieving by November close to the 10-year and 5-year averages. For consideration of prices in Natural Gas beyond say mid-year this year, we will have to monitor the continued progress on supply, demand and injections.

    What is ahead for DGAZ:

    Since the sell off following the Storage report today, Natural Gas has traded in a range from 4.9 to 5.04. I will be looking for a trading range we settle into here in the near future, but my best guess at this point is that range may be from 4.7 to 5.1, or as low as 4.4 to 5.0. We still may have the bulls try to mount some rally's that barring any major unexpected news, I would expect to run off quickly and probably not peak at higher than 5.4 - presenting buy opportunities for DGAZ. Of course, all of this is subject to dynamics that certainly could change.

    Lets look at the latest DGAZ chart.

    (click to enlarge)(click to enlarge)

    Some things to take notice of:

    1) RSI has been bottomed out in DGAZ below 30 and now has crossed 30 at 32.02, which is a bullish indicator.

    2) Volume has been very high at these low prices in DGAZ which is also bullish.

    3) Finally, MACD has not yet confirmed the bullish turn as we don't quite have the crossover, but based on appearance of where we are, this could happen very soon - within the next few trading days unless something unexpected disrupts the trend.

    Risks:

    Market manipulators could use current cold weather days to drive storage fears, but I think this would be short lived. The bulls could build a concerted effort for one more big push, but they would need something to rally behind. I just don't see anything that would realistically take us far or for long on any bull run as discussed earlier.

    I think we have seen the low in DGAZ at 2.50 and will begin to move into a trading range base in DGAZ, along with a trading range in Natural Gas. After some trading opportunities at both ends of that range, I think we will then be heading to higher DGAZ prices.

    Disclosure: I am long DGAZ.

    Additional disclosure: I may trade and reposition DGAZ shares based on dynamics associated with the Natural Gas Market. I may also trade in and out of UGAZ, or buy/sell calls and puts on BOIL or KOLD (2X Leveraged ETFs on Natural Gas Index).The thoughts and opinions in this article, along with all stock talk posts made by the Author, are my own and are shared on the basis of helping others learn, to provoke other points of view that help us all on our journey to become better investors. My posts are never intended to provide investment advice. Investors should always view multiple sources of information in their due diligence process.

    Stocks: DGAZ
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Comments (9)
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  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » In the table above reflecting storage levels and withdrawals, I could not get the system to keep the color coding from the spreadsheet. All withdrawal numbers for this week (Feb 6 heading) through March are all estimates.
    6 Feb 2014, 08:11 PM Reply Like
  • rxraider
    , contributor
    Comments (35) | Send Message
     
    Good article, Grow. I've got 3/4 of my position in DGAZ at an average of $3.10/share. Will add to the position on the next NG rally. Hopefully in March, we'll see NG sliding down towards 4.
    6 Feb 2014, 10:53 PM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » Raider - I think a cost position of 3.1, with some cash or margin ready to capitalize on any bull run is a position that looks good for this trade. Re-positioning when we get good swings will keep you winning both directions.
    6 Feb 2014, 10:56 PM Reply Like
  • mebane
    , contributor
    Comments (2) | Send Message
     
    Do you see a higher floor on natural gas for this year? I think it will not get down into the $3.40-3.80 range this year.
    7 Feb 2014, 12:55 AM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » I'm continuing to work on gauging this, but my theory at present is, I'm looking for Natural Gas somewhere over the course of the months - April to September, to get to 3.6/mmbtu. It is possible that some of the drivers and pressures keep it around 4 or so for a good bit of this time - adding production to manage levels of injections
    - preparing infrastructure and production for future LNG exports

     

    But, I am of the mindset that this shale gas is plentiful and if lots of companies were producing it at 3.2 and 3.4/mmbtu during a large injection year last summer, then more should want to ramp production (not necessarily huge drilling programs), but increase flow from wells and fields and rather than flare off gas from crude wells, channel that to production at these price levels. Over time, this supply will put some downward pressure on prices.

     

    Of course, if dynamics, policy or significant news events change things, we may have to model prices a little higher. Long-term trend out several years I think, is for higher NG prices.

     

    In the meantime, I think we have to understand there will be trading ranges in NG prices and we should take advantage of those opportunities when we can.
    7 Feb 2014, 10:36 AM Reply Like
  • drgonzo8000
    , contributor
    Comment (1) | Send Message
     
    Great articles covering DGAZ. Do you think we'll see a huge spike in UGAZ late March/early April when everyone starts to look at the "final" storage numbers? That would also result in a very attractive entry point for DGAZ.
    7 Feb 2014, 05:14 PM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » drgonz - That is a good question. If production is up and growing and the injection estimates hold or improve, not sure we would see a spike just by looking at the storage numbers. Our surprises now I think for a little while, are going to be on the lower than estimates side. Now, if we get a change in weather or production isn't showing the growth, or the injection estimate heads downwards, then I think the concern will mount for next winter going in with low storage levels and fear of another harsh winter.

     

    Key is, staying in tune with the weather forecasts, watching the storage, watching the production and reading what the NG traders are communicating. Sentiment can shift and drive a different direction. At some point, there will be another spike. We just have to be in tune to where that is and know how we want to play our positions - when to add and when to sell.
    7 Feb 2014, 05:25 PM Reply Like
  • Never Again
    , contributor
    Comments (6) | Send Message
     
    Grow do you see this latest storm setting inventory level far enough back to alter your estimates here? Thanks again for your great work. Jim L
    13 Feb 2014, 04:24 PM Reply Like
  • Growfast
    , contributor
    Comments (295) | Send Message
     
    Author’s reply » The withdrawal on storage was a bit higher than expected this week and, next week after this current storm, we will expect a good draw. So far, I have not changed my target estimates, but may want to get more information on the contracts for storage injection and how that might impact pricing if the 2,400 bcf injection estimate for this season will be expected to increase. More to come....
    13 Feb 2014, 04:44 PM Reply Like
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