Aricool

Today in Commodities: Ramifications

unless the consuming region has a bitter cold winter starting from now until end Jan, you will likely lose your bad on Nat gas. The pipes are literally bursting w/ High pressure. The low injections are not bullish in my eye b/c they are even less than the '02 rate, which was a bitter cold year. The model you should go by is '04, which max'ed storage like now and had avg winter- Nov and Dec crashed. You should not go long until Nat gas drops to 3.5 or until Feb. I've been short since Oct. and it is only b/c of the darn cold snap and damn whimpy bulls that I'm only up 10%.

Today in Commodities: Fed Stays the Course

unless the consuming region has a bitter cold winter starting from now until end Jan, you will lose your ass on Nat gas. The pipes are literally bursting w/ High pressure. The low injections are not bullish in my eye b/c they are even less than the '02 rate, which was a bitter cold year. The model you should go by is '04, which max'ed storage like now and had avg winter- Nov and Dec crashed. You should not go long until Nat gas drops to 3.5 or until Feb. I've been short since Oct. and it is only b/c of the darn cold snap and damn whimpy bulls that I'm only up 10%.

Today in Commodities: Positioned for a Mild Dollar Rally

Great articles and take on sector dynamics. Keep'm coming and ignore those that are harsh w/o sticking there own neck out making directional calls and putting their money on it.

Watch out on Nat Gas though. It is a very complex trade. IMHO, you are litterally betting on the weather at any price above $4 until after Jan.

Cheers!
Ari

Today in Commodities: Dollar Sets the Tone

great articles! Keep up the good work. Playing commodities is a lot like predicting the weather, but inverted; i.e., short term random noise, but long-term more predictable. The Nat gas trade seems to have reduced itself to a singe variable- cold weather, which saved it from collapse. So, it is entirely driven by weather predictions now, which is a very tough trade b/c they are wrong 50+% of the time beyond 3 days.

BTW, how much (cold) weather premium do you think is built into the grain complex now? And if winter turns out to be average, will global (i.e., China/India) demand pick up the slack? I own JJG and GRU from ~ 13% lower, but am timing when to add to my positions.

thanks again,
Ari-

Opportunities for Both Shorts and Longs in Natural Gas

Great article! Time to buy Nat Gas. Here are some reasons why:

i) The economy is picking up: Demand is showing signs of life and the manufacturing sector is demonstrating its first signs of growth. One can expect gas demands from gas-fired power plants to rise accordingly.

ii) The oil to gas price ratio: Eventually, I do believe that the relation between the price of oil and gas will resurrect. The recent spike in the oil to gas price ratio to 25x will likely return back to normal in the long run. With the economy picking up and oil futures pointing upwards, one can expect that the gap in this ratio will close.

iii) The weather: We are heading into Q4 which means that winter is approaching! Gas demand typically picks up in the winter months and gas prices historically have done well during this time of the year. Further, a very cold winter is forecasted, allowing inventories to come way down.

iv) Environmental policy: The Obama administration is pushing ahead with climate change initiatives that will cut green house gas emissions over the coming decades. Although the plan is not centered on gas-fired energy production at the moment, there is almost no feasible alternative to the power plan that would allow the U.S. to reach its targets in its given timeframes. Most of the power in the U.S. is generated from coal-powered power plants which are a key contributor to the green house gas problem. Getting off of coal and onto emission friendlier power substitutes like wind, solar, and nuclear is a long term project which will likely require a mid-term solution. Gas-fired plants do produce green house gases but much less than their coal-fired counterparts - it would be much quicker and cheaper to substitute coal-fired plants for gas powered ones. This would allow for an interim step in achieving the green house gas emissions reduction time frames.

v) Demand from Emerging Economies: It's a known fact that India and China are consuming more oil, but they are also consuming more natural gas. With gas liquefying techniques improving, the transportation of natural gas across our oceans, as is done with oil, is likely to become more feasible in the future. More accessible gas transportation = more demand from emerging economies = increased prices.

vi) With new CFTC position limits and the fact UNG is not able to sell many new shares so it will not be able to significantly affect the nat gas futures.

Nat Gas is too cheap. The Natural Gas futures bull run always stays strong in October!!! Buy buy buy...

Cheers,
Ari-

Natural Gas, And Lots of It

what was the point of your article? Was it that SA followers should go to Bloomberg for real helpful information/commentary on Nat. Gas? I'm increasingly learning this to be the case.

Also, using UNG as a "Proxy for Nat gas" is very amateurish for well known reasons.

Why Pros Spread Oil and Gas

this is a lame article because you waited until Nat Gas got a technical rebound after Labor Day to publish it. If you would have published this article any time this year before Labor Day you would have looked like an idiot within two weeks. That rebound in NG had nothing to do with the stupid oil/gas ratio, but was just a matter of OFO's getting annually lifted on Labor Day, which kept the Henry Hub spot price from heading towards $1. Same thing with oil, it is going down b/c distillates have been piling up all year and are maxing out storage- crack spread going towards zero. So speculators and oil market manipulators cannot overcome such blatant evidence of collapsed demand so they bug out, maybe quicker because its a soft time of the year, but nothing special about the oil/gas ratio none-the-less. This article is completely hog wash and opportunistic to look smart about a stupid oil/gas ratio that the traders always love for some reason!

Ari-

Why the Sudden Run Up in Natural Gas Prices?

HT,

Thanks for effectively answering all those questions. Re the below one, though, in a prior post I had mentioned that this $2.23 EIA Oct target was for spot prices, not the NYMEX. In the past, when storage gets filled up the spot market has been $1-3 below NYMEX. Much of thoses OFO and non-allowed injections get dumped into the spot market. This should drag down the front month but I cannot figure out a deterministic mechanism of how they are related. To me, that is a kind of "shadow storage" that hides how bad things are and can make lower injections seem like good news. Now, if consumers are able to store and/or use a lot of gas off the spot market until Dec, then they would buy less NYMEX contracts, which could drop the futures prices, but b/c consumers are such a small % of NYMEX NG, even that supply/demand market mechanism is completely distorted. From what I can tell it is just the bull and the bear speculators that will drive the futures based on headlines and tactical opportunities. I should not take much bad news to cause a land slide, though. I'm expecting this year to be a combination of the demand destruction aspects of '02 with the maxed storage aspects of '04; hence, double dip is very likely, but Sept. could have been the lows. However, weather is the big variable in my mind. If Nov is average to mild, I expect Dec NG to plummet sub 3, and even towards 2.

BTW, glad you found my last posting very informative. This is a tough nut to crack. I really wonder what GS knows and is up to. My guess is that the same crew that ran NG up on fake good news will also slam it down on some bad news event to come. Next time hitting stop losses of the longs one after another going the other way.

Cheers,
Ari-
On Sep 22 03:07 PM H. T. Love wrote:

> Bloomburg's being too generous. EIA is calling for an *average* October
> price of $2.23. Of course, that is a "blend" of prices from different
> pricing locations and I have no knowledge of the history of EIA accuracy.
>
>
> HardToLove

Why the Sudden Run Up in Natural Gas Prices?

HT,

Thanks for effectively answering all those questions. Re the below one, though, in a prior post I had mentioned that this $2.23 EIA Oct target was for spot prices, not the NYMEX. In the past, when storage gets filled up the spot market has been $1-3 below NYMEX. Much of thoses OFO and non-allowed injections get dumped into the spot market. This should drag down the front month but I cannot figure out a deterministic mechanism of how they are related. To me, that is a kind of "shadow storage" that hides how bad things are and can make lower injections seem like good news. Now, if consumers are able to store and/or use a lot of gas off the spot market until Dec, then they would buy less NYMEX contracts, which could drop the futures prices, but b/c consumers are such a small % of NYMEX NG, even that supply/demand market mechanism is completely distorted. From what I can tell it is just the bull and the bear speculators that will drive the futures based on headlines and tactical opportunities. I should not take much bad news to cause a land slide, though. I'm expecting this year to be a combination of the demand destruction aspects of '02 with the maxed storage aspects of '04; hence, double dip is very likely, but Sept. could have been the lows. However, weather is the big variable in my mind. If Nov is average to mild, I expect Dec NG to plummet sub 3, and even towards 2.

BTW, glad you found my last posting very informative. This is a tough nut to crack. I really wonder what GS knows and is up to. My guess is that the same crew that ran NG up on fake good news will also slam it down on some bad news event to come. Next time hitting stop losses of the longs one after another going the other way.

Cheers,
Ari-
On Sep 22 03:07 PM H. T. Love wrote:

> Bloomburg's being too generous. EIA is calling for an *average* October
> price of $2.23. Of course, that is a "blend" of prices from different
> pricing locations and I have no knowledge of the history of EIA accuracy.
>
>
> HardToLove

Natural Gas Momentum Likely to Continue - Blackmont

If you can't even read stated facts that are under your nose then you should downgrade your psuedonym to HedgeFundInfant....


On Sep 21 02:56 PM HedgeFundBaby wrote:

> on which month?

What's Driving Natural Gas?

Ron2008,

At $4/Mcf (NYMEX) at least half of U.S. projects cannot make a positive return on capital. Many are borderline at $5.5. The weak ones may not make it into next year, thus even less drillers. So incentives to drill a lot next year may be a lot lower than you think, esp. since if we have a average or mild winter, an over supply overhang could persist with high storage until next winter (see 2005 storage stats after '04 max'd storage). That killed most of the '05 NG strip.

Now, if GS is right and NG will be $6-7, drill baby drill.....!

Ari-


On Sep 20 07:27 PM Ron2008 wrote:

> Futures for 2010 are all above $5.50. The drilling and production
> won't fall off as much as you think.
>
> On Sep 18 01:52 PM Mmarrkk wrote:

Why the Sudden Run Up in Natural Gas Prices?

HT,

My understanding has always been that a strong El Nino kills hurricanes b/c a hotter pacific means a cooler Atlantic; i.e., no name storms now that we are past season peak, and ending quickly, is a strong indicator that it is not a mild El Nino, but a moderate to strong one. Thus, winter should very likely be below average to mild.

This continues to be a perfect storm against NG. GS is the only thing it's got going for it this year.

Ari-


On Sep 15 11:08 AM H. T. Love wrote:

> Last time I looked at NOAA (several months ago) they were calling
> for 50% of U.S. to be normal to warmer - mid-continent.
>
> Subsequently, I've seen several posts relating that NOAA has called
> for warmer than normal in the northeast too due to a minor el nino.
>

Why the Sudden Run Up in Natural Gas Prices?

HT:


On Sep 18 04:47 PM H. T. Love wrote:

>Well, anything is possible, but did you consider
>the current storage is 17%+ above the 5 year average highs?
<snip>

he may also have an old play book that does not include LNG. I've read reports that LNG gets diverted from the US @ NG < $3. This is confirmed by the LNG importers petitioning Washington to allow them to re-export LNG imports b/c NG prices too low.

A couple weeks ago Conoco filed this (coincidentally?) when NG fell < 3 "*ConocoPhillips requesting authorization to export LNG, says: Due to global LNG Market conditions,U.S. natural gas demand and prices do not currently support the importation of LNG into the U.S"

Here is another snip "Conventional wisdom suggests that LNG cargos come to the United States because it has the largest available storage capacity, which is true. However, people believe that when gas prices get very low, below $3 per Mcf, LNG sellers will look for other international markets with better prices. Many of these foreign markets have linked their LNG pricing to crude oil prices, which was partially the reason why we heard of LNG cargos going for $18-$20 per million Btus (roughly per Mcf). Why would LNG sellers want to dump their gas into the U.S. if gas prices are so low? Well, what if you make so much money from the sale of the natural gas liquids (NGLs) contained in the gas streams utilized to produce the LNG that the gas actually has a negative value?"

>EIA projects that storage will be exceeded in October
>and new all-time high storage records will be set.

**in 2004 max design storage was 4 tcf, and peak working was est. @ 3.6 tcf; however, they found out that when it actually got to 3.3tcf the pipeline pressures got to high and they declared storage filled 10% earlier than expected. I wonder if the same thing can happen now. That is, 3.9 tcf is supposed to be "conservative", but the problem is that the salt mines are probably full and the gas will have to go into the very slow filling reservoirs, which will cause higher pipeline pressures. I wonder if the OFO's already seen are an early sign of this. I read they normally lift OFO stop orders after Labor day, so if I see more OFO's I'll be thinking pressures are building faster than expected and peak storage may actually be less than expected. Thus, a NG sell of in Oct.

>They do have a 100 Bcf designed capacity addition to storage
>coming available, but that should add (roughly) 1.3 weeks net

**I've read that b/c of the credit crisis many storage projects were killed this year and are already loosing big $. Is this fabled 100 bcf capacity done and being tested (which takes a while)?

>NG rig count has now gone up 8 consecutive weeks and is now at
>705 (+6 this week) and at last is slightly above 2003 levels.
I've read a report that says the new norm (due to LNG) could be 800 rigs for the next several years. So, beware of NG service sector stocks. If true, then the current rigs are plenty for '10 demand. Also, check the #'s and you'll see that the majors are pumping much more with less wells/rigs. Also, not all well die so fast and they cap pop new wells in days. I have a stock (DBLE) who said in the last earnings call that there wells are lasting much longer than the reported norms. The shale plays have only been drilling since 2003 so not enough data!

>Based on what I've learned so far (I'm new and learning)
>I don't see the prices rising as much as normal for this time of year

Hey, re that $2.3 NG Oct # you quoted from the EIA, when reading their weekly report I noticed that was for the *spot* market price, not NYMEX. The spot market is the 'wild, wild, west" on steroids. Spot prices on the Colorado Interstate Gas pipeline hit an intraday low of 15 cents on June 4. Spot gas prices at Chicago Citygate have ranged between $5.75 and $7.75/MMBtu during that time. When those OFO's bar a producer from injecting into storage, they have to dump into the spot market at what ever price they can get.

Now, the big question I have is what are the mechanics of the spot market causally dragging down the NYMEX front month. I'm currently researching this, but no time yet to dig. I can tell you the mechanism is call "gas on gas" competition, but I don't know the mechanics yet. Can anyone explain? As storage begins to fill this will occur in various regions before the last of the storage system is actually filled and all production gets dumped into the spot market- likely at sub $1. GS must be very plugged in, but right now they look either like hustlers or crap shooters. I'm thinking the former.


<snip>
>through this year so far. So a substantial percentage
>of those wells should be in the first year of useful life.
I tend to agree.

>Since they keep drilling, I presume that they
>are taking advantage of the higher prices
>available on futures contracts. If that is so, they
>have no reason to stop producing as long as there
>is a place to store the gas.

Exactly! Storage = money in the bank so there should be a race to be the first to fill it up. The fact that injections were below expected (while being much above the EIA's assumed # of 57 bcf/wk until end Oct) makes me think that filling storage is being limited by high pressure problems in the system (which should slow down injection rates), and not demand outstripping the ability for producers to pump enough to generate cash flow so they can survive. Did you know that for producing wells, marginal operating costs (excl. overhead and interest) are approximately $2/Mcf. So, they will for sure keep pumping down to $2, and likely down to $1 for cash flow needs. Thus, as far as I can tell, it is a race to fill storage until the music stops and rest of the producers are left without a chair in this game of musical chairs.

Any bulls out there that can factually shoot down my above fact pattern?

>My *gut* feeling is that those in the second year
>of life are more than adequately covered by the new
>ones that came on line and (apparently) will continue
> to come on-line as producers keep drilling.

*I agree. I just read a detailed agreement for Nat Gas land owners, which included an income analysis and quotes a comprehensive study that put horizontal well 1st year drop at ~56%, 2nd year @ 27%, 3rd yr @ 18%, and then ~8% drop annually until year 7 when they have to refrac it. Verticals were about the same. So, 50% of rigs will not only cover the 1st year drop but add 50+% production capacity.

<snip>
>The price disparity between current NG and
>coal price/btu will hopefully cause faster conversion
>to NG by utilities. But I presume that in some cases
>contracts may prevent conversion as early as desired,
>using what is already stockpiled, etc.

coal is pretty cheap now b/c of NG. It is my understanding that alot of demand in 09 is fuel switching from coal, which will evaporate once NG heads above $4/mmcf. However, for those who can buy/use NG off the spot market, they'll likely ditch coal.

BTW, I've heard Canada's storage is likely to fill before ours, and then they'll start dumping into the US. This all seems like a train wreck happening in slow motion.

Oh, for all the bulls out there, listen to GS and buy, buy , buy!

Cheers!
Ari

Why the Sudden Run Up in Natural Gas Prices?

HT:

re where you say "I think my call for no substantial sustained price improvement until summer nears will be the test I want to pass. That'll let me know if I've been learning adequately. The normal seasonal rise should be muted, but still occur."

My research tells me 2004 is a reasonably good model for today's situation. They hit max storage on Nov 4th b/c of steep contango, it ended up not getting worked down and while Nov/Dec were up, Jan crashed back down and the whole '05 strip was pulled way down from '04 futures pricing. Without a V-shape recovery '04, or much worse will repeat. GS is completely convinced of the magical V-shaped Unicorn, so no surprise they predict $6 NG this winter and $7 for '10.

re "NOAA projects warmer than normal winter in middle 50% of U.S. and warmer than normal in the northeast (although that has been disputed by the Farmers Almanac, another SA article today reporting an analyst's call, and anecdotal observations of animal behavior)."

I'll bet on NOAA. Out here in SF I'm not watching animal's behavior, but the fog patterns tell me everything. I believe NOAA's El Nino b/c the fog on the coastal ocean has been clearing before that on land, which I've notice for the past many years only happens in winter. This has been going on for weeks now. NOAA says many of their sims predict strong El Nino, the "moderate" call was an average of all the sims. They say that the warmer southern air periodically will frequently push north and moderate (kill) Canadian cold air. On average, warmer winter days. A soft winter and high storage killed Jan '05 NG. The bulls are betting on very cold weather! Vegas slot machine odds are better!

Why the Sudden Run Up in Natural Gas Prices?

UNG is a ponzi scheme. Why do you think they had to issue those new shares on Sep 28? B/c otherwise, UNG would go to zero NAV in 2-3 rolls if the new money did not buy Nov contracts for them to make up for the roll yield lost money of those owning the Oct contracts. This is exactly how a Madoff ponzi scheme works. No more new money coming in to keep things looking good the scheme collapses! UNG = ponzi scheme, esp. in steep contango.


On Sep 17 05:06 AM indeolie wrote:

> Apart from the fact that every investor knows the roll costs money.
> It's there on the screen, if you're surprised by this you shouldn't
> be in the commodities markets at all &amp; stick to stocks. Comparisons
> with Ponzi schemes, Madoff, etc are rediculous.