Quote from PAPA ROACH:
Alright, part II now.
After a little thought about where we have been, let's look at where we might be going.
As I have previously written and is widely well known, natty is very oversupplied at the moment due to a combination of higher production and fallen demand. In fact, if we didn't have the winter we did, we would be trading alot lower now than we are. We were lucky to have good heating demand which has left us almost matching the record storage carryout of winter from a couple of years ago (1,695), rather than carrying out at or near 2 TCF with a milder winter.
The prodution level will peak in the next few months, if we are not already there now (which we won't know for a couple of months due to data lag). Common thought is we are over-supplied by roughly 5-6 BCF a day. LNG is thought to uptick a good bit later in the summer as well which would offset any declines in production for several months. So fundamentally we are on a course of major glut if everything stays static.
What could change and is absolute key, is demand. That is much more of a bitch to forecast than supply. This part ties in partially to the global and moreso to the domestic economy. If equity markets start to rally with a look that is more than just short covering, natty will find inflows of not only return of demand, but return of capital flow to the buy side which would drive us up a bit.
I still stick to my argument however, that for the balance of this summer, natty will have to compete with coal for power generation, which should mute any rallies. Older inefficient coal just starts to get offset at the 3.75ish level based on current coal pricing (which can fall if natty steals demand).
I feel that the crude complex can deviate again like last year and leave natty cheap as all switching has already been done, there is no additional capacity really to speak of. I hate the whole BTU parity trade that so many talk about, it makes sense on paper, but really has little bearing from a realistic operational standpoint. It's like saying corn is cheaper than wheat so lets make bread out of corn (YUCK). Natty and crude are as interchangeable as corn and wheat, yet many that have no clue beyond paper love to attempt this trade.
It does worry me how short the market is and the complacency of that short position, a powder keg if you will. But it will take something large to ignite that, either a sudden shift in fundamentals or a shitpile of capital on the buyside to come in.
It is hard to enetr new shorts at these levels with all that in mind, however, it does seems likely that prices will fall further to buy much needed demand. I would suggest buying puts rather than selling futs, you'll sleep at night as natty is well known for violent moves that can clean out your account in no time.
I still feel we trade sub $3 soon as it makes more sense to buy that demand early to avoid a glut, rather than wait till later in the summer which truly would be too little too late. Nuke re-fueling has peaked and capacity will be ramping back up over the next few weeks just as we lose any late season heating load and too early for any real cooling load. I know my favorite billionaire still has a negative bias and for now he still runs the show though sheer market size. My gut tells me when we finally turn, it will be in the early part of a new month as the last expiry cleaned out a large players shorts, thus giving them a clean pallete to start a rally with.
My favorite trades at the moment are spreads, betting on widening contangoes to develope through the summer. I currently am short Q/long U, and short V/long X. Not looking for a big move in the former, but think the latter could widen out really good. I am also just playing in and out of the prompt spread for small profits as it is already trading decently wide, but it can get wider.
Hope all this helps.
