Sunday, July 12

Short Natural Gas $2.90 September Call @ $0.128 credit

Short Natural Gas $2.90 September Call @ $0.128 credit. This allows a nice profit as long as Natural Gas remains below $2.90 by end of august.

The probability of Nat Gas breaking $3.00 is low given the abundance of the commodity, with the latest injections being higher than historical norms. Latest build was 91 vs. 75 historical (last 5 years). 

The moderate summer is helping to push up inventory build. This is on top of a larger than normal supply rush  from all the wealthy 2010 - 2014 drillings.

Selling Oil Futures ITM Call Options for a high probability bearish trade.

View on Oil: Bearish for next few weeks due to supply concerns from Iran and increasing rig counts.

The short term resistance is around $56.53 as drawn out on the chart below. In order to reduce risk on our bearish position, I am looking to short the September $53 in the money (ITM) call option which is trading at around $3 at the moment. This would limit our losses which will only begin once the contract trades above $56. 

Meanwhile, we will be able to capture strong delta from this contract and earn $3 if the contract closes below $53. 

Should oil continue to slide below $50, I will look to short the then current futures to maximize our profits in the downtrend.

Chart: Crude Oil Chart

Friday, June 28

Natural gas, a gamble on the weather.. Forecast $4.50 this summer, $6 end of the year

Since my call for a rally in natural gas, the commodity has smashed downwards instead...

This commodity is indeed a gamble against mother nature. This year, somehow, summer is not as hot as it needs to be. While it is warmer than usual, it is not warmer than the 5 year average.

Nevertheless, this week we will see California and Arizona suffering from a scorching heat wave that might lead to record breaking high temperature. This might help revive hopes of a bullish rally.

The fundamental reason behind my natural gas gamble is due to a few reasons which I would like to list down again.
1. Natural gas rig count has been declining and is now hovering at 350, much lower than the peak at above 1,000. This week's rig count showed a slight increase but horizontal gas rig continued its decline. This means that we will be seeing production decline really soon.
2. It is uneconomic to drill for natural gas at this level. While many of the marcellus operator claims IRR of 20% at $3.50, this is unproven as the shale area has only been in existence for 4 years. The Marcellus wells have extremely high decline rates. A suggested break even level is $5 - 6 as noted by industry experts in my earlier posts.
3. Nat gas demand has been rising as industrial activity picks up in the US. More coal plants have been decommissioned permanently and is substituted with natural gas plants. The coal-to-gas switching will be permanent by 2016
4. Obama's support for natural gas and impending export of the commodity in 2016
5. Increased export to Mexico with 7.0bcf capacity by 2014 vs ~3.5bcf today
6. Easy-to-drill wells have been exploited, leaving the harder ones behind which might lead to higher drilling cost in future

All in all, we will see a decline in production very soon while demand continue to rise. This is a great set up for a natural gas spike just as it has happened several times in the course of its trading history. This will be a report of the 2001 natural gas spike.

I see $6 as a potential target by December and $8 as an optimistic target.

I suggest to long UNG and UGAZ. I have positions in these ETF as of this writing.

Sunday, June 16

Leaked Documents Featured in NYTIMES on why Natural GAS is uneconomic at this price level

Take a look at the major disconnect between prices and drilling. This is why rig counts will not pick up until gas prices jump to $6 and beyond.

My forecast: $6 spike by end of the year. (a bold forecast but 75% possible)

Many people have been betting on a spike since 2010. It has been 2.5 years, I think it will happen this year.

Buying Natural Gas here... $5 during the summer

Update: Week of June 17, 2013

Natural gas declined last week due to anticipation of above average injection. The injection numbers came in at 95bcf which resulted in a sharp short covering. However, bears continued to dominate on Friday, resulting in a ~2% drop.

I see this a short term test of the downside and possible due to the cooler weather outlook which translates to above average injections again.

Nevertheless, I continue to be bullish on Natty due to these reasons:

1. Shale gas production decline (very soon), other than the marcellus region, all other shale plays are experiencing production decline. 
2. Low rig count 353... there is usually a lag of about 6 months from rig count to injections number. 6 months ago, rig counts declined... so we are going to see production decline starting to kick in soon.
3. Increased permanent coal - gas switching
4. Summer heat is coming... natural gas is pressured to rise