I don't agree with the bloomberg headlines. Oil is up because of the fall in the dollar, and NG is only up because oil is up. NG storage levels are very high compared to last year, so the spike today was just part of the usual games that get played each week. Great if you were long. http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html
Thought I'd post an update. We are at 1039 rigs now... 810 of those are drilling for natural gas. 1606 were drilling for natural gas in September 08. http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
Papa, if you are seeing anything for May and the summer months your comments would be appreciated. It will be interesting to see if power generation demand moves the price much. Thanks.
I am not at the office today, so not in my all-in-the-game mode, but on a macroview here is what I am seeing. The last few years of energy, the trade has been focused on the demand side, and the money flows chased the macro commodity bull. The production side responded not only with increased drilling, but drilling in unconventional shale plays that turned out to be very prolific. In fact, just over a year ago (January 2008), you could have still found leases in north western lousiana for a few hundred an acre. That same acreage leased as high as $30,000 an acre only months later as they discovered the most prolific shale play to date in the Haynesville shale. Add that to the success of Barnett shale and discoveries of other highly touted plays, and all of a sudden supply was rocketing higher to meet the demand. Now enter the breakneck breakdown of the economy. Just as all these new plays are being put into motion, the demand side of the equation comes under attack at a very fast pace. Now the trade is focusing on the sudden loss of demand at a time when supply is soaring. The funny thing about natural gas wells is that even when prices get below a breakeven production level, producers usually do not want to risk shutting in, as many of these resevoirs can be damaged doing so. That is why you sometimes see rockies gas and occasionally other points trade at bargain basement prices. I sold gas on centerpoint pipeline a few months ago for .19. that's right, nineteen cents! And it not all that unusual for rockies gas to trade sub $1 on the spot from time to time. There is much more to these economics than just what I am writing. Producers usually recover most of their costs in what is called "flush gas" or early on. So even with low prices, it is profit and cashflow. I gotta run to pick up my daughter, I will finish this later.
Thanks Papa. I read a report out of Goldman Sachs yesterday by an analyst that covers the E&P area and he is more bullish on NG than on Coal for a number of reasons. He felt that the production/supply of NG was peaking right this very minute, and that the underlying gas supply/demand is improving via better petchem demand, coal-to-gas substitution, peaking production from the sharply lower rig count, and temporary voluntary curtailments. He believes that the US will see below-expected LNG imports, and fears of ~$3/MMBtu gas are overdone. Feels that prices will be range bound for the next 2 quarters, averaging $4.75 for the rest of 2009. Expects gas drilling to return in 4Q of 2009 and expects prices to increase. Claims that lower well costs due to rig and service cost declines means gas markets can balance at a lower price in 2010. Says that fore the core horizontal shale plays, a 25% reduction in drilling costs reduces the gas price needed to achieve a 15% IRR by about $1/MMBtu. Coupled with slightly lower demand estimates, this is why he is now assuming $6.50/MMBtu NG for 2010 vs the $7.50 MM/Btu previously expected for Henry Hub gas. He likes CHK in the group We shall see.
Hey Landis I remember reading on here somewhere that you were a floor trader? Is that true, if so what did you trade?
Comex Gold for one year. Stock-Index futures for 10 years. I've been off the floor for awhile now, though.
Alright, part II now. After a little thought about where we have been, let's look at where we might be going. As I have previously written and is widely well known, natty is very oversupplied at the moment due to a combination of higher production and fallen demand. In fact, if we didn't have the winter we did, we would be trading alot lower now than we are. We were lucky to have good heating demand which has left us almost matching the record storage carryout of winter from a couple of years ago (1,695), rather than carrying out at or near 2 TCF with a milder winter. The prodution level will peak in the next few months, if we are not already there now (which we won't know for a couple of months due to data lag). Common thought is we are over-supplied by roughly 5-6 BCF a day. LNG is thought to uptick a good bit later in the summer as well which would offset any declines in production for several months. So fundamentally we are on a course of major glut if everything stays static. What could change and is absolute key, is demand. That is much more of a bitch to forecast than supply. This part ties in partially to the global and moreso to the domestic economy. If equity markets start to rally with a look that is more than just short covering, natty will find inflows of not only return of demand, but return of capital flow to the buy side which would drive us up a bit. I still stick to my argument however, that for the balance of this summer, natty will have to compete with coal for power generation, which should mute any rallies. Older inefficient coal just starts to get offset at the 3.75ish level based on current coal pricing (which can fall if natty steals demand). I feel that the crude complex can deviate again like last year and leave natty cheap as all switching has already been done, there is no additional capacity really to speak of. I hate the whole BTU parity trade that so many talk about, it makes sense on paper, but really has little bearing from a realistic operational standpoint. It's like saying corn is cheaper than wheat so lets make bread out of corn (YUCK). Natty and crude are as interchangeable as corn and wheat, yet many that have no clue beyond paper love to attempt this trade. It does worry me how short the market is and the complacency of that short position, a powder keg if you will. But it will take something large to ignite that, either a sudden shift in fundamentals or a shitpile of capital on the buyside to come in. It is hard to enetr new shorts at these levels with all that in mind, however, it does seems likely that prices will fall further to buy much needed demand. I would suggest buying puts rather than selling futs, you'll sleep at night as natty is well known for violent moves that can clean out your account in no time. I still feel we trade sub $3 soon as it makes more sense to buy that demand early to avoid a glut, rather than wait till later in the summer which truly would be too little too late. Nuke re-fueling has peaked and capacity will be ramping back up over the next few weeks just as we lose any late season heating load and too early for any real cooling load. I know my favorite billionaire still has a negative bias and for now he still runs the show though sheer market size. My gut tells me when we finally turn, it will be in the early part of a new month as the last expiry cleaned out a large players shorts, thus giving them a clean pallete to start a rally with. My favorite trades at the moment are spreads, betting on widening contangoes to develope through the summer. I currently am short Q/long U, and short V/long X. Not looking for a big move in the former, but think the latter could widen out really good. I am also just playing in and out of the prompt spread for small profits as it is already trading decently wide, but it can get wider. Hope all this helps.