As can be seen in the previous post, the model predicted storage numbers based on a storage build season of 35 weeks. I have been looking at my model constantly as I am higher then anyone else then I am aware of. I've been checking and checking and thinking there was an error but could not find one.
Today I realized that predicting a storage build for 35 weeks is incorrect. While it could technically happen, because of the late start of build season, the build season is more likely to be 32 weeks. I have updated my model and the numbers come in a little lower.
My numbers are still higher then anywhere else that I have seen and are still dramatically bearish in my opinion.
The new projections are for 4.05 Tcf, 4.20 Tcf, and 4.12 Tcf. Not dramatically different, but about 0.1 Tcf or 100 Bcf difference.
Normally supply and demand works over time. Natural Gas is the exception for three main reasons (a few minor reasons too). The first reason is that oil is expensive. E&P companies are minting a fortune drilling for oil. Even when oil wells come in 1/3 oil and 2/3 gas, these companies are making a lot of money (IRRs are easily 25-30%). Some of these wells have IRRs in the 50-60% range (depending on how much oil is being produced, differentials from WTI/Brent, and pipeline vs rail transport). Supply is not going down, and has increased over the past twelve months.
I am not saying that supply will increase forever, supply will not decline dramatically until oil prices decline. The bulls have been arguing for the past year that supply will come down. Eventually they will be right, the question to me is it now, 1 year away or 2 years away. (I am in the camp of 1-2 years away but that is more about when demand starts to catch up, and not supply going down).
The second reason that supply and demand is not working is because of how leases are structured. From 2006-2012, a lot of shale plays were leased and usually have a 5 year contract.
Because of the characteristics of leases, there has been plenty of drilling done to hold acreage, so heavy natural gas wells were drilled to hold production. Some of the earliest leases are held by production and will not be drilled further until Natural Gas rises. There are still leases signed that will need to be drilled, regardless of price.
The third reason I cite is the higher price of Natural Gas in further out months. (Contango) is stopping major users from increasing their demand for natural gas. Lets argue today (at spot of 3.45) that a utility is (financially) better off generating electricity from natural gas vs coal. That is fine and great, but natural gas 3 months out is $3.81 or over 10% higher and is over $4.00 12 months out. If there is a high switching cost for this fictional utility, the utility that would use Natural Gas today does not make the swithc, since they cannot lock in the low price for very long.
Showing posts with label Natural Gas. Show all posts
Showing posts with label Natural Gas. Show all posts
Thursday, August 22, 2013
Thursday, August 15, 2013
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.
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.
Thursday, January 10, 2013
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.
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.
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