Natural Gas

[kennynah]

I basically eat sleep work also think about Nat Gas for the past 3 months. So this is my last try. I will quit trading if I can't make money this time.

would you care to share all the significant details that you have come to understand about Natural Gas in the last 3 months?

[lithium]

Natural Gas Production Cost:
$4 MMBtu. Current Aug future price is $3.8, this means producers are selling gas at below cost. Producers can only hope to make money by keeping stock now and hopefully able to sell at higher price during Winter months (Dec~Mar). Is there any other reasons to produce if selling price is below cost? So producers with no cash flow to keep stock now will have to close down at current price. Any businessman want to sell things at below cost?

Supply:
Average supply is 2.18 Tcf/mth. I believe this supply will reduce due to more producers are going to close down if current below cost selling price continues.

Consumption:
Average consumption is 1.9 Tcf/mth. There is a seasonal consumption in Natural Gas. During Winters (Dec~Mar) is 2.5Tcf/mth, other months are 1.7 Tcf/mth.

Inventory capacity:
Maximum 3.7~4 Tcf. There is a limitation in storage of Gas. Current inventory level is 3.4 Tcf. With current supply and consumption, Storage capacity will hit limit very soon, that means by Nov2009, if there are no additional rigs closing down. So when there are no more storage space, producers will have no reason to produce gas anymore if selling price stay below cost. Producers will have to close down more rigs. But last few weeks rig counts are actually going up??

Rig startup time:
3 months. If you want to startup a rig today, it will take 3 months time.

Contango in ETF:
Currently HNU 10% per month, UNG 4% per month if price continue to stay low. This contango effect so far happened every end of month. So you can trade a bit to avoid this.

Target price by Dec2009:
Pessimistic: $5.4 (Current Dec future contract price)
Reasonable: $6.0 (A price that make business sense to continue making stock now)
Optimistic: $8.0 (Back to normal 8x price ratio with crude oil)

HNU target price with contango effect by Dec2009:
Pessimistic: $7.5 (50% return)
Reasonable: $9.2 (83% return)
Optimistic: $14.2 (194% return)

[lithium]

This is from my trading buddy, but he quit trading Natural Gas already.


Here is the pros and cons for buying Natural Gas ETF (Not the company).

Natural gas can be traded in the form of futures contract. It can also be trade in the form of ETF e.g. UNG & HNU (x2). It is more convience to trade the ETF for me here in HK.

Introduction
=========
Natural Gas future contract price is currently at $4.2. Down from peak of $13 July 2008. The mean is about $6-$8.

http://futures.tradingcharts.com/chart/NG/W

The price of natural gas is determine by demand and supply + a bit of speculative factor from people.

The reason we are seeing such low price is because supply is currently high and demand is low (due to low economic activity in the U.S).

Inventory Level
============
Inventory level usually rise during the summer and fall during the winter.
Therefore you can not say inventory is rising and therefore price should go down. You need to compare the inventory with same last previous year.

You can see the weekly inventory report from IEA.

http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html

At the moment, inventory level is 30% higher compare to previous year.

Demand
=======
Natural gas is mainly used for industrial use and for generating electricity. Closing down of factory from GM causes a fall in demand.

It is worth to note that electric plant can substitute coal with natural gas depending on the price. They choose which ever is cheaper. Natural gas is a greener energy and will be used more in the future.

Supply
=====
Gas are extracted from rigs. Recently people have found ways to extract gas from shale field. Making gas more easy to extract. Currently Supply is above demand and causing the imbalance and depress price.

Oil Gas Ratio
==========
Normally Oil price div Gas price is approx 8 - 1. However currently the ratio is 20 - 1 i.e. $70 oil price div $4 gas price = approx 20.

People believe this ratio will return to normal eventually. This can be due to people switch from expensive energy to cheaper energy.

Shutting down of active rig by 50%.
===========================
Because gas is so cheap company aren't making any money from producing natural gas. So they have already shut down 50% of the rig. People are expecting this to be reflected in decrease supply.

It is expected that gas supply will decrease by %1 in 2009 and 2.5% in 2010.

[kennynah]

lithium...thank you for sharing the above info..

i think it is safe to say that these info are quite known to most who trade in Nat Gas...

why would you think that obvious will become reality; ie. that Nat Gas will rise above this current price?

afterall, it is no rocket science to logic that it will have to go up from where it is now, since inventory should deplete in the months to come, with lesser rigs around harvesting Nat Gas...and the current deviant 20-1 Crude Oil to Nat Gas ratio ... so why aren't people borrowing from loan sharks and plonking their houses into this commodity?

your thoughts, please..

[iam802]

here's a thought on Natural Gas.

How do one manage the risk of weather?

What if the winter is 'not as cold'?

Won't that make consumption lower?

[kennynah]

therefore, as in all forms of investing...it begins with fact finding....and then ultimately, it comes down to our own opinion .... there's just no way to ever know what will happen with any significant level of certainty....hence there will always be risks...

[lithium]

Natural gas trading volume are at all time high and increasing, until CFTC is considering to apply trading limits.

Actually I'm not suprised that what you mentioned is already happening, people are borrowing and plonking their house into this commodity. Some might have loss their homes already last few months if they are holding leveraged ETFs without stop loss.

If storage really hit limits next month, Natural gas price can really trade at sub zero levels. And these gas producers can still make money since they are hedged?

[lithium]

here's a thought on Natural Gas.

How do one manage the risk of weather?

What if the winter is 'not as cold'?

Won't that make consumption lower?

Yes, but this is not my main concern, because I never met a hot winter, meaning that no matter how, heaters must be ON during winters.

My main concern is the storage capacity, if it really hits maximum, Natural gas will be given free...... Gas are not like Oil, you cannot store them easily.

[kennynah]

if Nat Gas is given away "free"....are you suggesting that this commodity will have a $0 trading value?

[lithium]

if Nat Gas is given away "free"....are you suggesting that this commodity will have a $0 trading value?

I really don't know. Any input from you? Since you are quite familiar with futures.