Natural Gas going to 0?

[smilingsynic]

Quote from BlueHorseshoe:

Rise in US nat gas production has actually well outstripped rising demand - in a nutshell not only are storage tanks flush, but excess production is flowing. Everyone and their uncle openned the taps after Katrina/Rita and then left them open ... completely different dynamic from crude.

Now the interesting question: WTI/Henry Hub ratio has been hovering around 13 when it typically is near 6. So, is gas going back up or is oil gonna get chopped in half? (Or has the long-term ratio permanently changed?)

Absolutely. NG, compared to crude, is as cheap as it ever has been since futures on nat gas began trading in the early 90's.

There are many reasons to be fundamentally bullish in the long term on natural gas. Cheaper than oil, and less connected to geo-political strife, plus clean-burning. Many utility companies have plants that can burn both gas and crude. If gas remains cheap, utilities will shift to gas.

Of course, I am simply reiterating the basic bullish case for gas that has been presented in any number of industry publications.

I am long natural gas and short crude and plan to roll until the ratio gets to 10 (two natural gas long for every crude short). Although no one knows the future, I believe in the old dictum that the cure for low prices is low prices. Of course, natural gas is notoriously volatile, and one hurricane warning can drive it up one or two bucks just like that.

So far this has been my most successful play in 2006. Knock on wood.

 

[scriabinop23]

Quote from smilingsynic:


I am long natural gas and short crude and plan to roll until the ratio gets to 10 (two natural gas long for every crude short). Although no one knows the future, I believe in the old dictum that the cure for low prices is low prices. Of course, natural gas is notoriously volatile, and one hurricane warning can drive it up one or two bucks just like that.

So far this has been my most successful play in 2006. Knock on wood.

With this position for 2006 (that makes sense), you must have taken a beating so far. What type of contracts are you trading? qm and qg?

 

[smilingsynic]

Quote from scriabinop23:

Thats an opportunity - build a storage facility as well as pipeline to hook up to the hub - and merely do as you prescribe. Sounds almost silly to ask, but are there any players out there that do this?

There must be a catch.

I would argue that Aug natural gas would be lower than it is if not for the fact that many traders are doing just that: selling December, buying August, among other months.

Building a storage pipeline is expensive and, from what I understand, time consuming. That is the one drawback of natural gas--storage. You just cannot stick it in a barrel.

Of course, technology is constantly improving. As it does, contango should decrease.

 

[smilingsynic]

Quote from scriabinop23:

With this position for 2006 (that makes sense), you must have taken a beating so far. What type of contracts are you trading? qm and qg?

Not that bad a beating--I just put on the position this week. I am short crude at an average of 74.50, and long gas at an average of 5.91.

Note that this is NOT a trade, but a position that might require rolling (and not just once).

 

[YMsystemtrader]

Quote from smilingsynic:

Sure you can. Buy current futures, sell winter futures.

Take delivery!

aug nat gas 5.50
sept nat gas is trading 5.80

they can only store so much in the caverns & thats it.

my question is, when we do have a hurricane that threatens the gulf.. just threatens, what does it jump to? it jumped over $1 on tropical storm Alberto alone.

15% of the gulf nat gas is still shut in from last year. most of these new huge homes that have been built in the last few years are hooked up to nat gas...thats a reach now, but how can the housing boom not be thought of for future drawdowns.

the power plants that can switch from crude/nat, to fuel these plants with the WTI/nat ratio will all be using the gas.

how can the sept contract not jump $2 on fear alone when one of these starts to roll thru?


look at the COT chart on nat gas..the commercials are just insanely short. its pegged off the chart. thats what leads me to believe that the actual natural gas companies are shorting the hell out of the futures contracts as a hedge to takeovers. if there is such a glut, and plenty of it still coming , why are these companies paying huge buyout premiums (40%) ?

look at the $XNG.X still near its highs during all of this

 

[scriabinop23]

Quote from YMsystemtrader:



look at the COT chart on nat gas..the commercials are just insanely short. its pegged off the chart. thats what leads me to believe that the actual natural gas companies are shorting the hell out of the futures contracts as a hedge to takeovers. if there is such a glut, and plenty of it still coming , why are these companies paying huge buyout premiums (40%) ?

one thing i don't quite get, so please spell it out for me, as I don't understand your logic: why would nat. gas companies short as a hedge to takeovers? They stand to lose so much more if they're wrong..

I took a look at the COT reports -- 50k+ short contracts amongst the producers. wow. It is off the charts. Perhaps its as simple as the producers seeing they're being little real reason for upside, even with gulf shut ins from hurricanes. Even if gulf production were entirely shut in again, this year's excessive reserves could probably get us through the season without too much missed upward price opportunity - and they probably know this. Look at my production stats. Something like 8bcf/day is what we'd stand to lose. Realistically, 4bcf/day (last year's worst month from the gulf showed production at 4bcf down from 10bcf). Mainland nat.gas is something like 55bcf. So when we have a few hundred extra bcf in storage over previous years' averages, 120bcf/month lost production for 6 months is really not that big of a deal.

Of course possible hub and pipeline damage from hurricanes is altogether another problem. So forget my point..

 

[volatilitypimp]

I found an interesting Natural Gas treatise of sorts as it relates to supply and demand and other issues associated with it.

EXECUTIVE SUMMARY
BACKGROUND CONTEXT OF THE STUDY
This report examines the factors underlying the recent upward spiral of natural gas
prices. It paints a very different picture than the one we frequently see on television, read in
the press or hear in testimony at legislative or regulatory proceedings. The easiest way for all
parties to avoid responsibility is to blame tightness in the physical market and invoke Mother
Nature – the weather and geology:
• Demand is soaring or skyrocketing.
• Supply is constrained by nature and public policy.
• Financial markets send efficient price signals to balance supply and
demand.
This is a simple story, which is often repeated because it is easy to sell; unfortunately,
it is, at best, half true.
The reality is much more complex (see Exhibit ES-1). Many factors in natural gas
physical and financial markets have interacted in an upward spiral to raise natural gas prices to
far higher levels than they should be. Although the simple explanation/excuse is easy to tell,
the more complex story is just too important not to tell. The frenetic, upward spiral of natural
gas prices deeply affects household budgets and economic activity. Consider the following:
• The wellhead price of natural gas in the six-year period of 2000-2005 increased by over
$400 billion dollars compared to the previous six years.
• Winter heating bills in the Midwest this winter are projected to be up by $250 per
household, or 28 percent, compared to last winter, despite a 5 percent decline in
consumption. They are up by over $600 compared to five years ago.
If we do not look behind the half-truth, half-hype smokescreen of the headlines,
consumers will continue to pay a lot more for natural gas than they should. The public
discussion must be expanded to include the other factors that have been powering the upward
ratchet of natural gas prices since the start of the 21st century. We must do this not simply
because high prices are harmful, but also because specific policy mistakes made in the past
have helped to cause the current problems. There are policy measures that can and should be
taken in the future to reduce the upward spiral.

If the summary interests youl, here is the link for the 115 page .pdf file.

http://energyhedgefunds.com/ehfc/modules/articles-4/content/NaturalGasReport.pdf

 

[scriabinop23]

Quote from volatilitypimp:

I found an interesting Natural Gas treatise of sorts as it relates to supply and demand and other issues associated with it.

http://energyhedgefunds.com/ehfc/modules/articles-4/content/NaturalGasReport.pdf

great post. so if this guy is right, then why are these nat. gas producers paying premium in buyouts (ie anadarko and wgr/kerr-mcgee)?

He's on the side which claims energy is run up by overtrading and overspeculation. I can agree on one hand, but he brings up another issue which makes nat.gas price more volatile to temporary events: inelasticity in supply/demand, and realizing heat in the cold is a basic human need (right after but inclusive of shelter, food and water).

Its interesting to see energy trading volumes shoot up while metals were relatively low still. I assume gold and copper are a different story.

So the bottom line: would a more heavily regulated trading industry contribute to lower prices? Producers and actual consumers being the only ones allowed to trade in relatively large quantities --- or more practical, somehow limit total possible open interest in the market to some practical multiple of actual total amount of commodity to be delivered.

 

[smilingsynic]

Quote from smilingsynic:

Not that bad a beating--I just put on the position this week. I am short crude at an average of 74.50, and long gas at an average of 5.91.

Note that this is NOT a trade, but a position that might require rolling (and not just once).

Position closed. Rolled only once.

 

[scriabinop23]

Quote from smilingsynic:

Position closed. Rolled only once.

nice trade. we could just be getting started on a gas runup though, with the latest EIA report and heat.