LDL And Natural Gas Statistics: Where Do We Go Now?

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Includes: AR, BOIL, CHK, COG, DCNG, DGAZ, GAZ-OLD, RRC, UGAZ, UNG, UNL
by: Steve Frechette
Summary

Weather drives near term trading, but the price range is constrained by the fundamentals. They're still bearish leading to a flat price curve.

Price churn occurring in the low $2.70's. Buyers are being cautious despite supportive weather. This is a BAD omen after a big slide.

Update on the latest Baker Hughes drilling report, and the EIA DUC count for the key shale basins.

The nat gas price curve has stabilized this week after a rapid descent. The front month is churning in the low $2.70's as of this morning.

CME price curve Many are questioning the "flatness" of the curve given the lack of premium for the winter months relative to the refill months. The flatness makes a lot of sense to me if you think forward 200 days and consider the massive midstream upgrades coming online during this period. The Henry Hub is feeling the gravitational pull of low cost Appalachian production while anticipating additional supply from the Texas/Oklahoma/Louisiana shales including the Permian, Eagleford, Haynesville, Scoop/Stack, etc. WTI remains above ~$55 making associated gas a clear and present danger to the fragile 2018 post winter supply/demand balance.

Weather forecasts have been largely supportive of the bulls which makes the price level puzzling to those hoping for a big rally. In my mind, bulls continue to overemphasize the perceived EIA storage deficit vs. last year instead of looking forward to where the "puck will be" in late March 2018. It's clear the market wants to send the STOP NOW signal to the gas producers. The price level indicates the market is uncomfortable with all time high L48 production and the prospect of more production enabled by the new pipelines.

In my last article, I brought up the idea that ~$2.50 is not such a crazy price level with L48 production near all time highs and future production indicators hinting the E&P's have no plans to cut back anytime soon. I'll go one step further: natural gas can not have a meaningful rally and higher price range until the E&P's cut drilling and harvest the massive DUC inventory specifically in Appalachia and the Permian. Weather plays a part, but the market is reacting less and less to the threat of cold forecasts. Mother Nature would need to deliver an epic cold winter for the next 16 weeks to change the discussion. The probability of this occurring is low at the moment, but never stop watching the weather.

If you think natural gas will rally when we get the first "blizzad" of the season (said with a Boston accent), you have not been paying attention, or have started listening to Joe Bastardi too much.

Baker Hughes Rig Report breakdown:

L48 Oil surprised with a loss of 4 rigs, but still up to 747 vs. 510 year ago. Oil drilling could be labor limited at the moment as E&P's struggle to find qualified frac teams. Certainly not a big enough loss to be viewed as bearish, but at least it wasn't up.

Nat gas gained 3 rigs to 183 total vs 126 year ago. +57 y-o-y. The E&P management teams should be taken out back and given a Code Red by Jack Nicholson. This does not send the right message to the market.

Cana Woodford has been an active drilling region in the SCOOP/STACK play. They lost 4 rigs, but are still at 69 total, up 35 y-o-y.

Haynesville gained 1, Marcellus gained 3, Utica & EagleFord held firm. Not bullish.

The Permian lost 3 rigs! Unfortunately they went from 400 to 397. That's not bullish when the count was 258 last year. It's better than an increase, but sort of like putting a band aid on a gun shot wound to the chest. Keep in mind the Permian is important because of it's proximity to the gulf coast and Mexico, and because of the associated gas production. Oil & NGLs are the main targets for Permian drillers with dry gas coming along for "free".

EIA Drilling/DUC report:

ducs Drilled Uncompleted (DUC) wells are a must follow statistic for projecting future production potential. The EIA released the monthly update on 12/18 and the data shows another increase in the key basins.

Appalachian DUC's rose by 1 which isn't a big move, but it's still net bearish given the ATH output and the relatively high level of DUC's @ ~75% of the last peak.

The Permian was up strong AGAIN @ +96, Eagle Ford was up again and maintained a high level. Haynesville tacked on 2. There was harvesting in the Bakken and Niobrara, but these basins are low relevance compared to the Big 5 (Appalachia, Permian, Eagle Ford, Haynesville, Anadarko).

Conclusion:

Future production indicators moved slightly more bearish in the latest reports leaving weather as the only salvation for the bulls. I continue advising extreme caution for nat gas investors for all time frames, and I would not be a buyer of gas focused producers yet. The chart technicals look bad and this is with relatively supportive weather after a big drop. Any hint of less cold temps could draw the bears out of their caves for another mauling. Consider the famous Leonardo Dicaprio scene from the Revenant.

bear attack The title for this series of articles was supposed to be "Lies, Damned Lies, and Natural Gas Statistics." The SeekingAlpha editorial team had different ideas. I'll leave it at that.

Thank you for reading and enjoy the weather! It's the only weather you got.

Disclosure: I am/we are long LNG, AAPL, DIS, FOX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.