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UNG: Effects of Contango In One Short "Snapshot" 32 comments
If you have followed my posts and comments, or those of many more knowledgeable Seeking Alpha participants, you are by now aware that UNG has changed the way it attempts to accomplish its goal to avoid possible CFTC limits. You are also aware of the issue of negative roll yield during periods of contango.
These issues have been described, but the words you have read may not have had as dramatic an impact as the below image.
The below partial "snapshot" of this UNG Daily Holdings web page, on Wednesday 10/14 at 21:16 EDT, tells the whole story. Note that it changes daily, so the contents may vary depending on when you visit the page.
(Click to enlarge)
Due the math and note the reduced number of positions after completion of the next three roll periods (hint: -7,955?). On a part of the page above that is not shown in the "snapshot", the total holdings after the first roll day was completed are 180,960 positions. If price ratios remain unchanged over the next three rolls, the net positions will decline a further 4.4%.
To add insult to injury, the November futures contracts (the current UNG position being exited) has begun the expected price decline and the December contracts (the position being entered) are also declining now, albeit more slowly than the November contracts. If the futures contract prices continue to decline, UNG will again own fewer contracts which are declining in value at the end of the roll period.
While writing this article, I checked the previous session contracts. November showed a -$0.152 decline to 4.436 and December showed a decline of -$0.118 to $$5.357.
Prior to the start of roll, the NG:UNG price ratio was 2.39:1. After roll is completed, if nothing else changes, we can expect 2.285:1.
Note that this is also options expiration week and that can have an effect on UNG prices if short covering is in play.
Go to the Nymex Natural Gas current session contracts to see current prices. You can also select the previous session to see what prices were at close of the previous session. Click on one of the contracts to bring up a chart, which can be used to show various intervals.
Premium paid at end of 10/14 was +3.77% (NAV $10.60, market closing price $11.00).
The new prospectus is available from the UNG website in PDF format under the Literature drop-down menu.
Disclosure: long UNG, short covered calls, long synthetic short positions.
Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.
This post has 32 comments:
Some of the commenters to my prior articles had gone short Oct and we had that unexpected rise. I hope they got out soon enough to avoid too much harm.
If it was me (being still a bit on the conservative side), I would look at the current Feb-May strips and note that contango looks reduced, even approaching "backwardation" there. If I expect that to come to fruition, I think timing a good entry point a little early and going long, waiting a short while for a price rise and then selling covered calls that meet a profit objective (for me, out of the money tends to be my bias) would be what I would do. That way you probably make a profit with out the risk associated with being short. And if the change from contango to normal or even "backwardation" is correct you can close (or expire) your calls and still have lots of upside potential.
I see the downside risk smaller this way as I can repeatedly sell covered calls and keep bringing some cash in even if the price falls.
If "backwardation" is sufficient, we actually get a positive roll yield and so benefit from increasing numbers of contracts that increase in value.
But, as you know, I'm still really new and it may not be the most profitable way to approach it. Some prefer buying protective puts. But that's money out of pocket and if it goes against you the time decay combined with a potentially limited rise in price reduces your potential profit.
By the way, in the published article, ctgas points out that I had forgotten that the ICE positions are only 1/4 the size of the normal contracts. So my estimated UNG:NAV ratio is off a bit.
I've noted his posts before - usually constuctive and knowledgeable and have started following him.
HardToLove
On Oct 15 10:45 AM optionsgirl wrote:
> Great research, HTL. I'm convinced that UNG has been seriously wounded.
> At this point, I see better opportunities in an equities proxy like
> DIG than I do in using UNG as a commodities play. From what you are
> saying, if you want to dabble in UNG, it is best to go short.
Also keep in mind that the new NG:NAV ratio is 1.989:1. With the December contract right now @ $5.047, NAV s/b $10.03, if that price holds. Since 10/20, UNG is down from an intraday high of $12.07 to a low so far today of $10.12.
Baker-Hughes reported +3 gas rigs this week, up to 728. That;s not a big jump and shouldn't affect prices much.
I'm pretty sure it's all going to be weather driven right now.
As a really positive note, the spread between front-month and next month contract, and following months, is starting to narrow a lot.
If it continues for a while, I'll be able to suggest folks getting long UNG as the contango dissipates. The Feb-May contracts are showing backwardation (depending on when you look, May may not be in that situation) as they were in the past and still looks like a good entry point exists a little before they come into play.
Hope your play is holding up well.
HardToLove
On Oct 30 03:33 PM H. T. Love wrote:
> Keep in mind that as of yesterday UNG issued new creation baskets
> and the premium was +3.77%, $0.38 above NAV.
>
> Also keep in mind that the new NG:NAV ratio is 1.989:1. With the
> December contract right now @ $5.047, NAV s/b $10.03, if that price
> holds. Since 10/20, UNG is down from an intraday high of $12.07 to
> a low so far today of $10.12.
>
> Baker-Hughes reported +3 gas rigs this week, up to 728. That;s not
> a big jump and shouldn't affect prices much.
>
> I'm pretty sure it's all going to be weather driven right now.<br/>
>
> As a really positive note, the spread between front-month and next
> month contract, and following months, is starting to narrow a lot.
>
>
> If it continues for a while, I'll be able to suggest folks getting
> long UNG as the contango dissipates. The Feb-May contracts are showing
> backwardation (depending on when you look, May may not be in that
> situation) as they were in the past and still looks like a good entry
> point exists a little before they come into play.
>
> Hope your play is holding up well.
>
> HardToLove
NG is being shut in because of lack of Storage, I wonder whether CQP will be used as a Storage Facility and how much do they get paid to do so.
I think Gammell predicted a 30% reduction in production by the end of the 1st quarter of next year.
It will be a combination of weather, Ag use and War premium. I really do not believe people actually know how much NG Iran produces.
><snip>
> There will be a Bigger call for Nitrogen Fertilizers ( doesn't matter
> which harvest)
>
> NG is being shut in because of lack of Storage, I wonder whether
> CQP will be used as a Storage Facility and how much do they get paid
> to do so.
I've not studied this co or LNG yet. But my *impression* is that storage of LNG is not the same as creating it, which if I recalls requires some more equipment.
From the description available on the Etrade platrform, CQP is doing a receiving and send out terminal at the Sabine location.
I've no other info right now.
>
> I think Gammell predicted a 30% reduction in production by the end
> of the 1st quarter of next year.
>
> It will be a combination of weather, Ag use and War premium. I really
> do not believe people actually know how much NG Iran produces.
You could be right on all counts. But I'm looking very short-term right now, maybe 3-6 months. For that time frame, knowing the other factors are fairly predictable in that time-frame, I'm thinking weather will be the bigest variable.
So many variables change so quickly, I don't even want to think any further out.
HardToLove
Russia and Iran need Fossil dollars, Qatar is pissed at the Saudi's for stealing the show on the Gulf Regional Dollar which is due to be resolved early 2010.
NG didn't have a Global presence until now.
We talked about CQP's ability to transform itself into a full fledged, all purpose "In/Out" LNG facility within a few days. You have the Link I gave you, somewhere.
The idea was to buy cheap, store and sell when demand increased, as I recall.
So, I look at the long term prospects. NG demand/usage is likely to grow worldwide as Oil prices rise. The Glut here will be shipped where needed. If demand is exacerbated here by some form of NG platform, the printing presses would have to run amuck to fund another Trillion dollar unfunded program which would not show any immediate return, this, on top of all of the other Congressional proposals should do a number on the USD. Everything rises then.
> How about this then. Earlier this year, Iran, Qatar and Russia formed
> a Mini-Opec to regulate the price of NG. They haven't decided on
> what the price should be.
>
> Russia and Iran need Fossil dollars, Qatar is pissed at the Saudi's
> for stealing the show on the Gulf Regional Dollar which is due to
> be resolved early 2010.
LoL! Way over my ability to put all this stuff together right now. Hell, I'm not sure I even want to try. I already got slapped pretty good by how strong the "seasonal" influence was on NG. But it was only a light slap so far - I've still got a chance to be in the ballpark.
>
> NG didn't have a Global presence until now.
From everything I've been able to see, that doesn't seem likely to have a strong effect on local prices until they try to rise substantially. With Qatar producing(?) and Australian LNG plant coming online next year(?) and the Alaskan production facility apparently having lots of spare capacity, this could cap prices in terms of relative purchasing power.
The "global presence" seems most likely to come into play as emerging economies develop. They have less current dependence on oil imports and should be abole to take advantage of cheap international LNG prices. Apparently, import-only terminals are cheap and fairly quick to build. That's probably why we have quite a few here in the U.S.
With the dollar weakening expected to resume/continue over the longer haul, I can't see imports entering the U.S. for consumption for a while as long as there is demand in places with stronger currencies and economies. The exception would be places in the U.S. that don't have any/sufficient delivery available through conventional pipelines (which I've never investigated) but do have substantial demand and an import terminal.
>
> We talked about CQP's ability to transform itself into a full fledged,
> all purpose "In/Out" LNG facility within a few days. You have the
> Link I gave you, somewhere.
>
> The idea was to buy cheap, store and sell when demand increased,
> as I recall.
From 9/12,
seekingalpha.com/insta...
I recall that clearly. For receiving LNG, store and re-sale, that conversion seemed quick. I recall looking for any follow-on for a brief time to see there were any plans, estimates, etc, anywhere for what it would take for any kind of conversion to produce. It was completely fruitless and I've not revisited the issue since. It might be that I just couldn't combine the right google terms though.
Without some conversion to produce LNG, it would seem to mean that NG on-shore in pipes or in-ground due to OFOs would just stay there.
I haven't undertaken any additioanl in-depth search for cost or time for converting a receiving station to produce LNG. I think that if there were any, I would've at least seen a clue to that in my earlier searches.
It seems to me that CQP's bet has to be purely (it's stated plan) re-export to foreign soil. So projecting their returns will be heavily dependent on guesstimated selling prices to foreign markets and purchase prices of the incoming. Doing an arbitrage of seasonal prices seems to be the strategy.
I've never even started thinking about this part of that.
Certainly beyond what I've learned to date.
HardToLove
ap
Colorado county copes with methane mystery
Exploding wells: Colo. county sits atop natural gas bonanza, awaits outcome of methane mystery
* By Judith Kohler, Associated Press Writer
* On 7:19 pm EST, Sunday November 1, 2009
WALSENBURG, Colo. (AP) -- Bernice and Jerry Angely like to show visitors the singed T-shirt a friend was wearing when their water well exploded and shot flames 30 feet high.
AP - In this photograph taken on Monday, Aug. 10, 2009, Ben Bounds stands next to a pipe that vents ...
AP - In this photograph taken on Monday, Aug. 10, 2009, Ben Bounds stands next to a pipe that vents ...
Related Quotes
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EGAS 8.88 -0.03
Chart for Energy, Inc.
{"s" : "egas","k" : "c10,l10,p20,t10","o" : "","j" : ""}
The friend wasn't hurt. But that and an explosion at another home weeks earlier forced Colorado to suspend natural gas drilling around this southern plains town until someone could find out why dangerous levels of methane were getting into the groundwater.
Two years later, Walsenburg and surrounding Huerfano County are still waiting, its residents caught in a collision between two of the West's vital resources: Water and natural gas.
"The water is so saturated with methane and other chemicals it is not to be used for human consumption," said Bernice Angely, who's had water trucked to her home 10 miles west of town since her well blew up in July 2007.
Petroglyph Energy Inc., a Boise, Idaho-based firm that has worked the rolling plains of the Raton Basin since 1999, suspended drilling until it can stem the methane. Colorado also is rewriting rules that had allowed Petroglyph to discharge water runoff from its drilling into streams and creeks.
But Petroglyph says it's not clear the drilling caused the methane leaks or prompted other area water wells to run dry. Eying what it calls an extremely promising natural gas field, it believes a shallow water formation tapped by area homeowners isn't connected to a deeper one pumped by the company for its drilling operations.
Petroglyph chief operating officer Paul Powell also believes a growing number of new homes in the area could explain some of the dry water wells.
"We'll do what we need to do," Powell said, stressing that his firm is working with the state on a solution.
Petroglyph has a plan to prevent the flow of methane into water wells by creating a hydraulic barrier. The company has proposed pumping water from an underground formation and injecting it into a row of wells where gas drilling occurs. Powell said gas will migrate into a void, and "if the void is full of water, there isn't room for gas to migrate through it."
State regulators say the plan is plausible but that Petroglyph needs to prove it works. Democratic U.S. Rep. John Salazar, who farms in the nearby San Luis Valley, has asked the U.S. Geological Survey to weigh in by evaluating the area's water quality and formations to determine if the gas drilling is to blame for the problems.
Water coursing through porous rock and streams has allowed farming, ranching and new subdivisions to thrive in the semiarid area about 160 miles south of Denver.
It also helps trap methane gas in the vast coal seams that once made the area a mining hot spot. The coal mines are gone, but the methane that made digging for it dangerous is a valuable resource. Companies like Petroglyph pump huge volumes of water out of the ground to relieve the pressure trapping the natural gas.
Steve Gunderson, director of Colorado's water quality control division, said Petroglyph will have to build a water treatment plant before it gets a new permit to discharge water. The old permit allowed Petroglyph to release up to 8 million gallons of water daily.
Fourth-generation dairy farmer Brett Corsentino blames the discharges into the Cucharas River for ruining his corn crops. He uses river water to irrigate his crops just a few miles east of the homeowners having problems with their wells. He says the high levels of sodium in the wastewater has diminished his soil's ability to absorb water and stunted the corn's growth.
"They say, `Well, there's no proof,'" Corsentino said. "Well, we'd been getting along for generations just fine until they started pumping 8 million gallons out of this country."
Corsentino also says his herd suffered abnormally high birth and death rates and now numbers 400, down from 650. He believes the cows consumed too much sodium from the water and corn grown from it. His corn used to produce 6,000 tons of silage; this year's crop yielded 1,500 tons.
However, Corsentino says his herd is healthier and milk production has increased since drilling stopped.
"There's an obvious direct, substantial impact to Brett Corsentino's dairy," the state's Gunderson said of the drilling.
Petroglyph paid for soil tests on Corsentino's farm. They showed high levels of sodium but that it also needed more calcium, Powell said. Petroglyph and Corsentino are discussing possible treatments.
"We still don't believe we have liability for the situation," Powell said. "But we were willing to help him fix his land and get back to productivity."
Ten miles west of Walsenburg, a rushing sound emanates from a pipe that vents methane from Ben and Melanie Bounds' water well. The pipe was installed after a June 2007 explosion blew off a shed roof covering the well.
The Bounds had moved from Dallas to build what they call their dream home atop a hill with a breathtaking view of the Spanish Peaks. They say their problems started when Petroglyph began drilling nearby. They're suing the company and haul water from town to their cistern.
"If I could run the clock back, we'd have never tried this," Ben Bounds said.
"I had more methane coming out of my water well than they had out of any of their gas wells. It sounded like a locomotive going down the road," said Kent Smith, who also has a methane detector in his house. "The damage and the problems they've caused have got to be addressed, and they keep getting pushed aside and forgotten about."
Petroglyph insists it's a good neighbor. Despite the methane mystery, it's trucking water to 14 area homes and has supplied 15 homes with methane alarm systems.
Petroglyph Energy Inc., tinyurl.com/ybfpcco
It is certainly no bother. I appreciate that you took the time. One Eye had expressed concerns about pollution of ground water in the shale plays, but it seems to be a possible issue in the more conventional areas too. Different reasons and effects, but nevertheless real!
Thanks OG!
HardToLove
No, I didn't forget a word in that last sentence.
Regardless, I'll try to think a small bit about it right now.
See below.
On Nov 01 03:24 PM Freya wrote:
> Short term, its all weather. I'm long term orientated.
>
> So, I look at the long term prospects. NG demand/usage is likely
> to grow worldwide as Oil prices rise. The Glut here will be shipped
> where needed.
My thought is "Is there really going to be a continued glut"? One Eye pointed out environmental issues. I think these *must* be addressed.
Net effect: slightly increased expense and slightly (?) decreased proven reserves (remember that means economically viable gas). A side-effect is longer time to break even, fewer new-drills, ... Of course, somewhere there is a balance achieved.
A related thought is "Are we the only continued glut"? From the activity in Qatar, Australia, various energy-related blogs, etc., it seems not. This would tend to indicate there would not, normally, be a *strong* market for our excess gas. If the $ becomes essentially toilet paper (which seems to be the target value) we might be able to sell all we want since it will be akin to giving it away.
> If demand is exacerbated here by some form of NG platform,
> the printing presses would have to run amuck to fund another Trillion
> dollar unfunded program which would not show any immediate return,
Well it's not that dire. The most straight-forward programs would be converting all "reasonable" electricity generation from coal and converting short-haul and local heavy and medium trucks to NG.
Thinking of utilities that are regulated, one sees no need for federal dollars to assist them in conversion. It would only be to "spare the poor (literally) consumer" and this can be accomplished by extending state tax credits, allowing small rate increases , etc. State utility boards have been mandating various types of "green portfolio" initiatives for their regulated utilities for some time. I don' see any need for Federal intervention into this process.
Conversion of trucks has been going on for some time with *mostly* private and local civic monies with some Fed dollars thrown in. Local transit systems and shuttles have also been converting.
As delivery infra-structure continues to build-out, we should see more conversions going on as the economic and environmental advantages are obvious. As mentioned in other articles, major fleet delivery companies are running trials for truck conversions too.
But keep in mind the current use for transportation fuel in Oct-Sep 2007-2008 was only 28.84 BCF/year and seems on track for less this period. This represents about 0.12% (give or take) of total consumption, including "overhead" uses. So although the impact on oil imports would be noticable, the impact on NG demand would probably not be felt unless we saw a fleet size about 50 times larger than current, bringing usage to about 6% annually. This will not happen in less than 5 - 7 seven years (average turnover time for a truck) and will be further slowed by lack of delivery infrastructure to less densely populated locales.
Would it be enough to offset declines in industrial and commercial? Not if my other comment about this years decline *so far* through July(?) averaging -5% holds. I think it will.
Although I can't see a big impact yet, I think there is a place for things such as HYGS, that One Eye identified. It seems to me one of those things that can either just lay there fallow or suddenly affect our deliberations on the way forward. I've not thought about it yet.
I still see no need for Fed assistance. I would rather do without than give them one more penny, program, industry or person to oversee. In my view that's the best for the country.
> this, on top of all of the other Congressional proposals should do
> a number on the USD. Everything rises then.
Except things produced *here* and priced in dollars and sold here and priced in dollars will not benefit from this.
Exports could benefit, as mentioned above, but there should be some competition, although I think nobody's currency will be as relatively weakened as ours.
I know there is nothing new here and I'm sorry I can't be more useful.
HardToLove
On Nov 02 01:38 AM H. T. Love wrote:
<snip>
"Exports could benefit, as mentioned above, but there should be some competition, although I think nobody's currency will be as relatively weakened as ours."
But there is the problem that we have only one liquifaction plant, in Alaska, and our dollar might be so weakened that the materials and expertise to build a new plant or two might be too expensive to allow a profitable endeavor. So no plants, no exports.
HardToLove
Coal Sequestering? its a Myth? Nah, the Planet did it, we can too.
A totally simplistic approach is to look a Coal Bed Methane, we are going to tap it and burn it. But it stayed in the ground for millions of years until some one dug a mine.
What's the Difference, close up the Mine, it will stay there.
But the same thing Can't be done to CO2? Why?
www.philly.com/philly/...
www.pagaslease.com/
HardToLove
On Nov 03 03:01 PM Mayascribe wrote:
> Opps! That was a story. Here is the site mentioned in the story.
>
>
> www.pagaslease.com/
Great day, day trading. Gold stocks and ATPG (again). I was out of the market by noon, feet up, learning, sharing right along.
This article also references etn's which I don't invest in anymore.
sorry I forgot the link.
On Nov 10 02:39 PM optionsgirl wrote:
> HTL did you see this article? UNG is a big barfola. I feel like capitulating,
> so I thought I'd go nibble on a piece of chocolate to bolster my
> resolve not to capitulate.
> This article also references etn's which I don't invest in anymore.
blogs.chron.com/newswa...
blogs.chron.com/newswa...
HTL- would you consider starting an insta as a repository for gas stories?
I'm thinking we are in the range where it still can fall another $1.00, but after that, up.
Here's the other part of the marcellus shale clean up.
Thanks for the link thoughg - can never tell when I amy have missed one!
HardToLove
On Nov 10 02:40 PM optionsgirl wrote:
> seekingalpha.com/artic...
>
> sorry I forgot the link.
I'll keep an eye open for where I see him next and see if he's on board with this article.
HardToLove
On Nov 19 01:42 PM optionsgirl wrote:
> Another little article about cleaning up after dirty shale frac:
>
> blogs.chron.com/newswa...;utm_medium=feed&a...
Some early analysis is here.
messages.finance.yahoo...
HardToLove
On Nov 19 01:50 PM optionsgirl wrote:
> new infrastructure build out approved:
> blogs.chron.com/newswa...;utm_medium=feed&a...
>
>
> HTL- would you consider starting an insta as a repository for gas
> stories?
> I'm thinking we are in the range where it still can fall another
> $1.00, but after that, up.
seekingalpha.com/insta...
HardToLove
On Nov 19 01:50 PM optionsgirl wrote:
> new infrastructure build out approved:
> blogs.chron.com/newswa...;utm_medium=feed&a...
>
>
> HTL- would you consider starting an insta as a repository for gas
> stories?
> I'm thinking we are in the range where it still can fall another
> $1.00, but after that, up.
www.moneyshow.com/inve...
I would not presume that local prices won't "recover" until 2015. I really believe that, like most of our economy, we are finding a "new normal" in NG prices. This will be, of course, affected by our economy, environmental concerns, weather effects, ... Once the first stages of the "new normal" shakes out some of the less financially able players the remaining companies will have some pricing power and we should see some rebound. But not to previous levels or anywhere near it (short-term disruptive events excepted). The push for more "green" energy will also help, but that's a slightly longer-term effect I think.
As to the article, it says "The International Energy Agency recently projected a global natural gas glut that would persist through 2015".
But that is not really the same as addressing prices. Since NG is "local" a "world-wide glut" doesn't provide enough information to project prices, even if we knew what price levels are implied by "recover".
The biggest threat to U.S. prices would be from producers of LNG that get their gas essentially "for free" as a by-product of oil production. Then if their calculated costs of production plus shipping came in lower than prices they might get by shipping to a U.S. import terminal and they didn't have a more attractive customer (stronger currency, physically closer with lower shipping costs, willing to pay more, ...) it could impact U.S. prices.
But we should have more than adequate supply for quite some time and I don't see U.S. prices rising substantially very soon so that should prevent /large/ influxes of LNG.
For one take on the situation, recall that an LNG import terminal off the Louisiana coast recently got permission to export LNG, which we can produce only in Alaska and have no way to get that to the terminal. Their plan is to buy and store LNG when price is low and then ship to foreign customers when prices are higher. This says they see no big demand for LNG imported to the U.S. and are "hedging" by making the terminal dual use - ship to U.S. or ship to foreign customers as demand and prices dictate. With a weak dollar, foreign should be more attractive.
Also I recall that in one of my comments I calculated that the total LNG imports in one /quarter/ were a very small percent of that produced in one /month/ by U.S. producers. I don't recall the exact number but I think it worked out that imports added 2 or 3 percent contribution to total U.S. /annual/ supply. A pittance.
If the dollar continues to weaken relative to other currencies, or maybe just stays where it is at, I can't see much increase in imports (which a lot of folks worried about previously). Low dollar value and high local supply should suppress imports.
Again, thanks for the link - it will prove useful down the road.
HardToLove
On Dec 04 04:29 AM optionsgirl wrote:
> HTL- This one is for you. I'd love to know what you think of it when
> you have some time. If Jubak is correct, nat gas won't see upside
> until 2015 in the USA.
> www.moneyshow.com/inve...;iid=Jubak_Journa&...
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