basehitz

Nibbling on Natural Gas, Concerned about Atlas Pipeline Partners

Sub $3 NG. Tough to lay off, but a lot of questions.

UNG is at 14% premium to NAV. So far, new units recently allowed by SEC have not been issued. Then there’s the potential CTFC new position limits. And finally, UNG managers are hedging potential new regulations by selling futures and buying swaps, which carries it’s own risk.

NG defies many attempts to call a bottom and continues to drift lower.

On storage capacity, I built an offline application to try to project future storage. Weekly updates from EIA are fed in, and the 3-week avg injection projected forward. It currently predicts peak storage of 3.789 Bcf as determined by EIA will be reached Oct 23rd.

Weather.com doesn’t show any Atlantic storms currently. But it will get wild if one threatens the gulf.

The contango remains ridiculous at 16% as of Friday. The roll period was complete Aug 18th, so I would have thought it would back off. Instead it ballooned from 12% the prior Friday.

If the market corrects, typically energy moves with it.

That’s a lot of moving parts.

Last week I flipped GAZ a couple trades to avoid some of the above. Then they decided to stop issuing new shares also and their premium to NAV expanded to 7%. Also too high.

Two Natural Gas ETFs to Track the Rise in Gas Prices

I was surprised the tracking error of UNG to NG wasn’t much greater for that 6-month period. It gets a lot trickier now.

1) Contango had been 3-5% from April-July, but has ballooned over past 3 weeks to 11% currently. We are currently in the middle of the UNG roll period. If it stays this high, that’s an ugly negative roll yield to take each month.

2) Next we have the UNG fund currently not issuing new shares despite recent approval. Instead, managers are currently examining investment alternatives, such as swaps and soon-to-be-regulated futures contracts.

3) There’s the ongoing CFTC debate over new regulation, likely in the form of position limits.

4) NG storage at 3.152T vs estimated storage capacity of 3.789T (per EIA). If injection rate avg of past 3 weeks continues linearly, it is expected to exceed storage limit in mid Oct, which is not the end of typical injection period.

5) Energy prices in general are influenced by the general market, which looks tired.

6) Finally we have a trio of storms heading across the Atlantic.

Regarding playing FCG instead of UNG. . . Charting OIH vs FCG over 1 year period. is a good correlation. OIH holds a large component of international and deepwater oil drilling, which is attractive and my preference.

Long term, it seems beyond question there will be stronger NG prices next year given the depletion rate characteristics for active shale fields coupled with reduced drilling. Short term, is a tricky call. You know traders will be jockeying for position with these storms Monday.

The Bullish Case for Natural Gas

From XTO's comments:
"We do have the next 90 days will be very interesting as storage is relatively full at this point in comparison in history, and you may have some gas on gas competition as you get into the September and October timeframe. But I think we are setup as we've all talked about for a rebound in natural gas prices in '10"

From the EIA website, Peak working gas storage capacity as of mid-2008 is 3,789 Bcf.
www.eia.doe.gov/pub/oi...

Friday's storage was 3,089Bcf. I built an offline application to project where this could crest before extraction season begins using recent injection rates. It projects storage will exceed this limit by mid-October, which could trigger the scenario XTO talked about.

Added complication for those who use UNG is that contango breached 7% Friday, a nearly 3% increase in 2 weeks. The roll date in July 15-20 for UNG.

Summer cooling season so far has been moderate and with 10-day forecast highs generally in mid-80s for NY which is normal. No help there.

The last wild card is hurricanes.

Finally, energy prices have gotten help from the stock market rally. Any pullback there would be a negative.

From above XTO quote “a rebound in natural gas prices in '10.”

Seems most everyone agrees on above. The question is do you take a position now given the variables in play and hope for the best, or wait for a final washout? As of this moment, I’m waiting.

Energy Investing: Natural Gas Looks Especially Interesting

I concur we'll have another swoon, and that I expect to be the buy opportunity. Given the negative roll yield, I'm not going in early to take a hit each month. The storage situation could create this final washout.

From the EIA website, Peak working gas storage capacity as of mid-2008 is 3,789 Bcf.
www.eia.doe.gov/pub/oi...

As of 7/10, storage was 2,886 Bcf.

NG commonly is injected into storage during April through October per EIA. There are 16 weeks from 7/10 thru end Oct. Assume 80 BCF injection/week throughout this period. Recently it has been running higher. Last year the slope was fairly linear. That would result in 1,280 Bcf additional injection before extraction season.

Adding 1,280 Bcf to existing 2,886 Bcf would result in total storage of 4,166 Bcf, which is more than EIA estimates can be stored. Even if you assume 4 weeks shorter injection period (i.e., ends Oct 2, which it won’t), there would be 960 Bcf added for total storage of 3,846 Bcf, which is probably manageable but assumes an unrealistic end date to injection.

And in spite of dramatic drill rig count reduction, the storage slope remains fairly typical.
www.eia.doe.gov/oil_ga...

Houston, we have a problem.

Natural Gas: The Next Big Thing

If I were a cynic, I would look at the recent massive volume coupled with the recent promotion by professional traders, and draw certain conclusions. Look, the momentum traders can push it if they want. From a fundamental perspective, the old rules of equating oil to NG are in question. And the oil/gas ratio I think more likely relates to these same speculators pushing oil beyond fundamentals, rather than NG lagging. Anything can be a trade. Investors should be aware of the change in rules here. Many articles have been written. Here's just a few.

community.investopedia...

blogs.wsj.com/environm.../

seekingalpha.com/artic...

I won't chase this up. I may buy puts when Da Boyz have had their fun.

China, Shipping and the Great Commodity Carry Trade

Lotta food for thought and follow-up research. Commodities have been my primary area of interest after reading Jim Rogers books, as well as interviews with him and Marc Faber. These were 2 guys who got this mess right long before most were even discussing it. Neither likes stocks here. They both predicted a lot more pain to come. But they both really like commodities.

I am relatively new to commodities and misjudged the oil move. I had a substantial position plus the drillers. Regret taking profits. Missed the big picture. Fortunately, the market gives second changes. I bought a large Nat Gas position yesterday after the storarge report came out. Day before bought DBA and will look to add there.

I will research your other further. Thanks.

On Egregious Executive Compensation and Morgan Stanley's Uninspiring Stock Action

Regarding Goverment Sach's suspicious antics, I recently spent some time on this website and referenced links. If this is even close to accurate, GS a disgrace.

www.goldmansachs666.com/

Why Is Oil Trading at $53 When Supply and Demand Is So Bearish?

Oil did what it did for the same reason the market did wht it did. Da Boyz wanted a rally. So they grab whatever they think they can sell on CNBC and repeat the mantra until they get enough sheeple to support what they already own. Da Boyz then sell to the sheeple and do the reverse knowing the sheeple will eventually drive it back down for them.

On fundamental, I suggest reading the following:

For NG: 3/19/09 AP article entitled "Natural Gas: Weakness Borne of Strength". Interviewed J. Marshall Adkins, Director of Energy Research and Managing Director of Equity Research for Raymond James. He predicts a long term bull but near term disaster by this summer. $3 or even $2 he thinks is possible.

For Oil: a book entitled "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy" by Matthew R. Simmons (Paperback - Jun 5, 2006). He makes a compelling case that the world misconceptions about the true amount of reserves in OPEC leave us vulnerable.

With all the natural resources in the US, we seem to be determined to screw ourselves. Unwillingness to drill for our oil, plus Obama's war on coal, it seems we are really screwed. Then add the building storm between Iran's nukes and Isreal's tenuous position. And for good measure Obama's blindfolding the US on the war on terror.

Eventually, we are really, really screwed. And we will have done most of it to ourselves. In the meantime, Da Boyz will decide prices.

The Case for Natural Gas

Good post. Your comment "Few investment themes in this day and age have such compelling fundamentals."

We know supply oustripped demand, therefore the buildup in reserves and price decline. And that is all the popular media emphasized for a year. Then there was the fall off of demand. So let's break it down.

Industrial consumption makes up 30%, primarily chemical. That hit has been largely taken. Old news.

The next 20% (year round avg) is home heating. A last resort for cutbacks for most.

Power generation, primarily as peaking units. This plays into your theme on Obama favoring green energy. Obama has been critial of coal consumption and we know his stance on oil. So it seems the downside has been taken here and upside not yet counted.

Now for the good news. BHI rig count shows a reduction in gas rigs from 1606 in Sept to 1148 last week. Allowing a few months to impact supply, this has got to be having an effect. And it drops every week. The effect will grow. But NG storage is already comparable to last year and 5 year avg. So it seems to me that the media has been so focused on the old news of supply/demand imbalance, that they've (almost) all completely missed supply/demand is approaching balance while the rig count is being dramatically reduced.

SLB is considered a good indicator for this group. In their recent earnings report it (AP story) was noted.
"The recent years of increased exploration and production spending have not been sufficient to substantially improve the supply situation," Gould said in a company release. "The age of the production base, accelerating decline rates and the smaller size of recently developed fields will mean that any prolonged reduction in investment will sow the seeds of a strong rebound."

Commodity traders are notorious trend traders. I think they should spend a little more time looking at the change infundamentals that is occurring now and will drive the next rally.

As you said, it is hard to find investments with this kind of compelling valuation.