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Tastylunch (99.54)

Natural Gas starting to Look a Bit Risky

Recs

20

September 29, 2009 – Comments (15) | RELATED TICKERS: ERF , BBEP , ATPG

Long term I still like Natural gas for the same reasons better outlined by more talented investors

but after a pretty quick runup (driven by speculation and seasonality)

massive new finds in the US(and raised estimates for the Marcellus Shale)

Rig counts holding steady according Baker Hughes (and in some cases expanding!)

and most importantly Storage has now for the first time to my knowledge completely topped out

It's going to take something extraordinary to avert a bunch of nat gas being dumped on the market in short order I would think. That's not out of the realm of possibility but I can't imagine the odds favor that outcome.

or as Stephen Schork put it in the Bloomberg article

 “I don’t know where all of this gas is going to go,” said Schork, a former natural gas trader on the New York Mercantile Exchange, who in June forecast inventories would reach near 3.8 trillion cubic feet. “We’re a month away from significant heating demand. Something’s got to give.”

Normally I'd like to hold at least into mid-October but given the unusual supply situation, I'm taking some gains here with the hopes of getting back in at a much lower price.

Hopefully I'm not bailing too quickly here as Nat Gas could really run if the winter is as cold as expected.

Full disclosure: I own shares in CEP, ERF and ATPG and will be selling some tomorrow

15 Comments – Post Your Own

#1) On September 29, 2009 at 9:15 PM, JakilaTheHun (99.93) wrote:

I still have a lot of concerns about natural gas, as well, even though I've been green thumbing a lot of companies in the industry. I think we're seeing a paradigm shift in oil and gas, with oil becoming increasingly costly to extract, while conversely, increasingly frequent natural gas finds have been making it a cheaper commodity.  A similiar thing happened with silver a few centuries back and it became permanently cheaper as a result.  

I find myself more worried about natural gas (the commodity itself) and the nat gas ETFs than individual companies (which also have risks, but long-term, should either realize greater pricing efficiencies - or - prices will rise agai - or more likely, a combination of the two).  

This also screams out to me that the US should be using more natural gas than it does right now (particularly given how much cleaner it is than coal).  

 

Good blog as always, Tasty!

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#2) On September 29, 2009 at 9:15 PM, binve (24.73) wrote:

Excellent post Tasty, I tend to agree that Natty looks due for a pullback. That was a really nice run recently. But I am with you, I too like it as a long term investment.

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#3) On September 29, 2009 at 10:02 PM, Tastylunch (99.54) wrote:

JakilaTheHun

hey thanks!

That's a solid thesis and one that the nat gas lobbyists adn T Boone Pickens are definitely trying to make a reality.

Given the poltical nature of it (nat gas production being heavily domestic and hard to export) I think they could be successful.

You might be right re: oil and nat gas, to my recollection when whale oil started getting really expensivein the late 1800's as well eventually we shifted into petroleum production. Nat gas might be an intemediary step in between Oil and alt-e.

find myself more worried about natural gas (the commodity itself) and the nat gas ETFs than individual companies (which also have risks, but long-term, should either realize greater pricing efficiencies - or - prices will rise agai - or more likely, a combination of the two).

Good point, equities aren't really reflecting the whipsaws we are seeing the futures and they ahven't all summer. It's been a werid disconnect. And perhaps they won't mirror a tank here either. However since I think we are potnetially right at the cusp of a probable marketwide pullback in equities of some size as well, I think that makes it doubly dangerous for nat gas equitie should stocks and nat gas tank in concert.

RE: ETFS I think FCG is much safer than UNG due to the rollover  and CTFC issues. I'm closing my FCG long tomorrow.

the good news is I'm hoping to buy back in cheap at some panic lows like I did when gas went below 3 bucks. :) But it doesn't always work out that way :(

3-5 years out though US Nat gas equities should be a huge win I would think as you seem to as well.

binve

ditto my man. At least with natural gas I think we may see much more than a pullback. That much gas coming on market could cause a new low I would think (especially if the season doesn't get off to a robust start). We could ahvea  couple days where prices get real nuts.

Should be interesting.

Copper looks troublesome as well.

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#4) On September 29, 2009 at 10:39 PM, Tastylunch (99.54) wrote:

Hmm there was a major tsunami today in American Samoa. Might hold off on selling until i see how the energy market takes the news of the tragedy. :(

my thoughts and prayers to the victims. 

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#5) On September 30, 2009 at 10:12 AM, leohaas (99.27) wrote:

My 2 cents:

1) Running out of storage capacity is the biggest threat to the nat gas price short term. If we indeed run out of capacity as some predict (since nat gas is not easy to store in large amounts), prices will collapse. I am speculating (see disclosure) that that will not happen.

2) With winter upcoming, demand will go up significantly. That will drive prices up. This is the flipside of the coin: the relatively small storage may be dangerously near depletion soon in this scenario.

Longer term (beyond the upcoming winter) I am not sure where the demand/supply curve will take us. A double-dip recession or a depression, or new large gas field discoveries will keep prices low. A recovery combined with a lack of new large gas field discoveries will drive prices up significantly. Who knows?

The tsunami is sad news indeed, but it won't impact nat gas prices: no significant demand or supply is affected.

Disclosure: long UNG calls.

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#6) On September 30, 2009 at 10:25 AM, brettbishop (< 20) wrote:

gas prices are going extreamly high again. befor long want no one will be able to drive

 

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#7) On September 30, 2009 at 10:51 AM, kirkydu (99.29) wrote:

Hey Tasty

I sold CHK, APC and UNG recently as I can't see nat gas not setting a ten year low sometime soon.  Was recently in South Dakota talking to some guys who work in nat gas in Canada and also talked to a bud in Dallas who's wife works for Baker Hughes, there is so much gas right now that can be got for under $4 mmbtu that prices will be near that number for at least a year or two.  Also, with inventory so high, and companies not wanting to stop extracting unless they have to (per none other than Mr. Pickens), we will clearly see burn off soon, with prices falling precipitously.  I can't see anything else highly likely. 

Also, people need to keep in mind that Mexico is loaded with nat gas, it just burns off with at the head.  If the U.S. doesn't mandate that bus fleets move to nat gas we are just stupid.  Fortunately, a client of mine who owns a company that has a part in building buses says we are already moving that direction in some cities.  While nat gas will have downward pressure on prices short run, there should be a gradual move to about $6-8 mmbtu as the equilibrium price in several years. 

I'd like to get back into APC and DVN as I think I want the oil exposure soon (after this round of price/bbl drop), may even get into uso, though if all commodities drop in unison, I like RJI.

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#8) On September 30, 2009 at 2:46 PM, Tastylunch (99.54) wrote:

leohaas

The only problem I see with that scenario is that I think the amkret has already priced in the cold winter demand scenario which means it's discounting a dumping.

re: longer term

That's a bit tougher to call. I'm a bull since I figure as long as Oil is so far above nat gas, nat gas will be too attractive for other uses.

I do think rig count needs to go down for a real sustained rally though. Considering the fact no one seems to be willing to cut we could see a violent shakeout in some of the weaker players. I guess we'll see how it plays out.

Re: tsunami tragedy

I know it shouldn't but anymore the quants treat such events by trading all of one commodity class as correlated entities. We've seen some weird action the last couple years.

brettbishop

maybe. But if you are right about demand it should cause gas prices to level out. 

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#9) On September 30, 2009 at 2:51 PM, Tastylunch (99.54) wrote:

oh and thanks for the thoughts.

kirkydu

Hey thanks a lot for the great input! I didn't consider Mexico's potnetial impact.

 "Was recently in South Dakota talking to some guys who work in nat gas in Canada and also talked to a bud in Dallas who's wife works for Baker Hughes, there is so much gas right now that can be got for under $4 mmbtu that prices will be near that number for at least a year or two"

That's quite a bit more beairsh than I've heard/guessed. It makes you wonder if CHK is about to really hurt themselves by getting so aggressive as they are.

what you say makes a lot of sense. Still it wouldn't surprise me if the market continues to ignore such a reality given some of the weirdness this year.

But yeah I agree short term risk is very high but long term the trend looks to be up.

 

 

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#10) On September 30, 2009 at 3:46 PM, skeptic86 (51.35) wrote:

SEC Proposes Rule Changes to Modernize Oil and Gas Reporting Requirements

Do you guys think this rule change will effect NG prices or companies? Proved reserves are going to grow by quite a bit.

 

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#11) On September 30, 2009 at 3:52 PM, Tastylunch (99.54) wrote:

skeptic86

that's a very very good question. I'll have to study that.

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#12) On September 30, 2009 at 5:20 PM, dwot (99.98) wrote:

There is massive expansion of natural gas right now.  I took my students to visit a refinary for natural gas and they suppy enough for a large city and have plans to double capacity.  They are big enough to dramatically affect the market.  There is huge natural gas work happening here in the north.

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#13) On October 01, 2009 at 9:58 AM, skeptic86 (51.35) wrote:

EIA/DOE

 

I have a question. In the link above there is a chart in the top right corner of the page labeled "Average Consumer Price of Natural Gas." First off, NG prices for residents peak during the summer months and valleys during the winter. This is counter intuitive, because we all know we use more NG during the winter. Whatever though, it looks like its a normal thing. My other question, why is gas price for residents look like it is relatively uneffected by NG price. I am assuming its bc the cost of transporation is much greater than the cost of the NG. 

Wow. the US uses 23 Tcf per year! wow, i had no idea and im in the industry. Honestly NG doesnt even look like a viable alternative energy.

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#14) On October 01, 2009 at 12:47 PM, Tastylunch (99.54) wrote:

dwot

Hey thanks for chiming in. I always appreciate your perspective.

Yikes,  that's what worries me the most the NG execs are so confident that these prices are an aberration that they've kept expanding production. Sounds like a recipe for disaster to me.

skeptic86

the one I've been watching from that is Nat gas storage report

http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html

Re: "Average Consumer of Naturla Gas" I think that's due to how consumers are sold gas. Most sign contracts  that limit how much their rates can flucutate up or down wregardless of what the commodity does.

There's a big controversy here in Columbus , Ohio now that Columbia gas is phasing out their retail division and many are going to thrid party providers. A lot of these third party guys have very self serving clauses written into the fine print that allow them to lock consumers into a high rate if the price should fall a lot.

That's precisely what happened here and several suburban municipalities got burned by signing long exclusive contracts in 2008.

First off, NG prices for residents peak during the summer months and valleys during the winter.

Right that is normal to my knowledge. My understanding is The NG providers are who drives the commodity price higher on the market in the winter to keep up with residential demand. Most state agenicies have provisions that prevent them form jacking up consumer rates much in the winter. As as result they try to pass cost increases along in the summer months.

My other question, why is gas price for residents look like it is relatively uneffected by NG price.

The trasnportation costs you mentioned plus state agency regulation to my knowledge (PUCO here in Ohio). Nat gas providers can't just charge whatever they want.

Honestly NG doesnt even look like a viable alternative energy.

I'll trust your opinion more than mine but it does lok to have stopgap/gateway potential to me. I wouldn't expecta  wholesale replacement ofOil but I could see it supplementing it until we reach grid parity.

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#15) On October 11, 2009 at 7:20 PM, Tastylunch (99.54) wrote:

http://www.cnbc.com/id/33240784

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