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

Thursday, May 30

BULLISH - China, Natural Gas

I am currently bullish on China, Natural Gas and USA in general. I think the QE fears have been overblown by the markets. The FED will know how to ease their QE and continue to pump the markets.

China is trading at a steep discount to other emerging names including Indonesia, Vietnam, thus I am recommending to buy into Chinese Markets.

ETFS to consider are YINN, CHIX (China) and UNG, UGAZ, BOIL (Nat Gas)

Monday, February 11

Natural Gas Short, Crude Oil SELL

Natural gas could go below $3 due to the surprisingly warmer than usual winter. many trades thought that the temperature was colder than last year, resulting in strong bullish support in previous months. However, it is very much clear now that there's a huge oversupply of natural gas.

Demand of oil is not picking up as thought by many analyst. This is a good opportunity to continue shorting Crude Oil. We should see it dive down to $90 from here.