Natural Gas Outlook 8/15/2013

Sorry for the long delay in posts.  I want to get back to posting on a weekly basis but not sure when/where I will find the time.

Here is a quick view of Natural Gas.  I have been very bearish and for the most part been right.  I was wrong in my last post calling for a 2 handle before a 4 handle.

I think we still can get to a 2 handle, however it is more likely that we trade in the low 3s.  When comparing NG in November at 3.56 and December at 3.74 (as I write this), that is a major decline.  I believe that in 1-2 months time the natural gas market will start seeing reports of storage getting full or worried about getting full etc.  I base my opinion on the excel chart / picture below.

The purple marks the low of the season and then any additional draws after a build.  The orange is opposite and marks the high of the season, along with any additional builds after a draw.

In the right bottom corner are the estimates for where I think storage will end 4.14Tcf to 4.29Tcf.  Those numbers are close to the estimates working gas storage number that was released on 7/24/2013, although there is a 9 month lag.

In 2012 when storage reached 3.929Tcf we saw an intraday low of 1.902.  Working storage was closer to 4-4.2Tcf.  In 2011, we saw a low of 3.086 intraday which seems reasonable and within reach in November or December. 

If anyone would like a copy of the excel file, please let me know.  The information in the file was downloaded origianlly from EIA.  I kept the original data in a tab and then created a new tab that I could make estimates and calculations.

Based upon my outlook, I decided to trade a risk reversal.  I sold NG December 2013 $4.00 calls for 0.128 and used a little more than half the proceeds to buy NG December 2013 $3.25 puts for 0.066.

At some point, I will look to sell the $3.00 puts (to create a vertical put sperad), especially if we move down dramatically and I can sell the $3.00 puts for the price I paid for 0.066.

For traders that only trade stocks, I am short October UNG calls and looking to buy puts when December options are available.     

Natural Gas outlook

Over the weekend I thought more about my Natural Gas trade.  I felt that there would be another cold spurt or two that would push Natural Gas up.  At the time of my trade (here), my plan was to hold the trade to expiration.

With Natural Gas in the outer months trading near 3.40 I said to myself, do I think Natural Gas trades with a 4 handle or a 2 handle first?  The conclusion I came to is that Natural Gas will trade at a 2 handle and exited my trade Monday morning (you will see in the comments section).  It also helped that I was way ahead on the trade.  

1.  Every report I read on drill results, companies are producing wells (such as Utica Shale) that are 2/3s gas and 1/3 oil.  These companies are happy to drill these wells just for the oil and any natural gas is a bonus.  Some companies are being very aggressive such as GPOR with their release here.  (Even though this report is dated, I just read it over the weekend).

2.  We see more efficiency (lower costs) with drilling being done.  NBR is feeling the effects of this with utilization rates down as well as earnings estimates.  You can also see this in NFX presentation on December 5th (page 8).  A greater then 50% gain in efficiency and cost/lateral foot YTD 2012.  Even though these wells are less 'gassy', efficiency will drive lower costs and higher values to encourage further drilling.

3.  There are also plenty of leases where you need to drill in order for the lease to be held by production.  It is either use it or lose it and wells are being drilled, even if only marginally economic, to hold the production for better times.

So the new trade is take the rally today and sell at the 120EMA of 3.41.  I sold the March 3.40 NG calls for 0.075.  I expect to hold the trade til expiration but will update on the comments section if needed.

I am net long NFX and net short GPOR.  The quick story is that I believe NFX is valued for its oil assets and any increase (even though I am arguing against it in this post) in Natural Gas pricing will help lift the stock.  I am short GPOR on valuation as I believe that hype from their 'big' well in Utica (discussed on seekingalpha) is already priced in. 

I am also net long NBR (and been wrong), which I will detail in another post shortly.  

"At no time in history have we had more people harm others, without paying the price" Nassim Taleb

I found Taleb's speech very informative.  His books are always on my to do list but I never seem to get to them.  The most important takeaway for me is at the 33 minute mark (which is also the title of this post).  "At no time in history have we had more people harm others, without paying the price."  Taleb then goes on to give examples of bureaucrats in Washington, economists on television.

My takeaway is that on this blog I am always going to make comments of how I exited a trade so that the information is no longer stale.  You can see this in my last post where I traded Nat Gas and exited the trade at a profit.  

Here is the speech in its entirety

http://youtu.be/S3REdLZ8Xis