Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Doomsday for the Natural Gas Market?

Commodities / Natural Gas Sep 19, 2009 - 06:42 AM GMT

By: Joseph_Dancy


Best Financial Markets Analysis ArticleThe bearish story for natural gas is becoming very well known. Lots of bearish natural gas analysts are around - rightfully so. With record levels of natural gas storage and weak industrial and generation demand spot prices have dropped to seven year lows (see chart, courtesy Bloomberg).

September and October are historically the months with the lowest total natural gas demand as the heating season has not started and demand from electric peaking plants is subdued with the end of summer’s heat and air conditioning loads. Natural gas drilling activity, measured by the rig count, has fallen to under 700 from 1,606 rigs running last year – a drop of 56% from year ago levels.

Short term we have no argument with the bearish view of natural gas. But over the longer term, six to eighteen months out, we have run across some interesting - and very bullish - forecasts.  A growing number of companies have also dropped hints during quarterly conference calls that they think natural gas markets will improve in 2010. If so, the natural gas equities in our opinion will run further and faster than the commodity.

Here is some of the recent commentary on the natural gas markets:

  • An interview on Bloomberg radio mentioned that the “Mother of all contangos” was in place in the natural gas futures market. This means the price for natural gas to be sold next year is much higher than the current spot price. Over the last two decades the  gap between the12 month forward contango price (the price you can get for natural gas futures sold a year from now) and the spot price has never been higher. The incentive is to store the natural gas according to the commentary, and sell it later when prices are higher – which explains the full storage facilities.

Bloomberg noted that when the contango was anywhere this steep in the past twenty years the natural gas spot price increased in value on average by 74%. The best play will be natural gas stocks according to the commentary, not the natural gas ETF investment vehicle.

Supporting this viewpoint is the fact that the current contango in natural gas is reminiscent of the "super contango" in crude-oil futures that occurred about half a year ago. At that time, crude contango helped push inventories at Cushing, Oklahoma to a record high. The price of crude oil since rallied by more than 50% while inventories are down 15% from their peak.

  • Canadian natural gas producer Fortress Energy presented their market assessment in a report that was included with the company's recent second quarter earnings release. Fortress believes many industry analysts are misreading the size of the potential decline in natural gas production. Fortress management submits that the lack of drilling activity, the massive decline rates of many shale formations, and a recovering economy point to a “very alarming supply shortage about to hit North American natural gas markets.”

The company’s study concludes that “without question some dramatic supply issues are mounting. If rig counts remain at 700 for any length of time, and North American producers continue to focus on drilling shale wells, those wells’ robust initial production rates are clearly insufficient to offset declines.”

  • Tudor Pickering Holt also is forecasting a major decline in natural gas supply by year-end. They take their 2010 forecast “to $7.50/mcf” which “pushes gassy names to top” of their “near-term list of trading opportunities”:

Gas supply model thoughts - Maintaining high confidence in direction and magnitude of gas supply at year-end (steep ~10% year over year decline).  Our forecast model was built to predict overall US gas production based on rig count and well quality. . . . Our bullish gas 2010 gas call is predicated on a pretty steep drop off in production by year end.  This is supported by improving trends in gas storage over the summer and our analytical work . . . [they go on to note some modeling issues with recently released government data]

  • FirstEnergy Capital Corp. is taking a decidedly more bullish stance than many of its brethren when it comes to its natural gas market outlook. The firm is confident that natural gas storage withdrawals in the United States this winter will approach record levels and a price spike will soon follow. "We see the Street as being far too conservative on estimating U.S. cumulative gas storage withdrawals for the upcoming heating season, and expect that such withdrawals will be close to or at record levels," FirstEnergy analyst Martin King said in a recent note. King said this will set the stage for a rapid price rebound in the early going of 2010, and likely make FirstEnergy's current $7 (U.S.) per million Btu price forecast for 2010 "appear too conservative."
  • Bill Powers had some interesting comments last month in his Powers Energy Investor report on the  natural gas market:

“. . .  the U.S. is heading towards a gas deliverability crisis that will be very damaging to the economy. Today’s conventional wisdom will only make the crisis worse. . . . I believe we are about to experience a big mismatch between U.S. reserves and gas deliverability due in large part to long-lived shale gas reserves.”

  • The number of drilling rigs drilling for natural gas remains below 700. Industry consensus is that 1,200 rigs are needed to keep North American natural gas production even. The natural decline rate on conventional wells is nearly double what it was two decades ago, and the decline rate on unconventional shale wells is well above 50% - the initial production rates are very impressive but decline quickly.
  • Canadian natural gas production is down considerably due to the lack of drilling and low prices but imports have not declined as severely. Canadian producers have exported excess gas this summer to storage facilities in the U.S. as Canadian natural gas storage facilities near capacity.  As the Canadian winter heating demand revives the decline of exports to the U.S. could be substantial, and surprising in their magnitude.
  • An unnamed hedge fund has made a large bet last month that natural gas prices will triple by winter just as the spot price of the commodity slid to a seven-year low. Traders took notice when the fund spent millions for the right to buy US natural gas at $10 per million British thermal units in January and February, well above the spot level of just over $3.
  • EOG Resources noted in their latest conference call that “we've become more bullish regarding 2010 and 2011 gas prices. We still expect North American gas prices to remain quite low through year-end. As you know, we've historically devoted a lot of work to developing domestic gas supply models and we think our current model is the most granular and best we've ever built. It's telling us that December 2009 domestic production will be 4.8 Bcf a day lower than year-end 2008 and this deficit will deepen further throughout 2010. When added to the Canadian supply drop of at least 0.8 Bcf a day, we expect the gas market to turn sometime early in 2010 almost regardless of what happens. . . “
  • Declines in Canadian natural gas production will set records this year as low prices keep the lid on drilling for new supplies, industry observers said last month. Volumes from Western Canada, where the bulk of the country's natural gas is produced, will drop by one billion cubic feet per day on average this year down from an earlier estimate of 750 million cubic feet per day, First Energy Capital Corp. analyst Martin King predicted. "This . . . will be the largest single year decline for natural gas production on record in Canada," King said in a supply update. Projected production rates will be "the lowest average natural gas production rate seen in Western Canada since 1995." King also noted exports to the United States likely will fall to 15-year lows.
  • The peak of the hurricane season is September 10th. While we have only had 4 named storms as of August 31st (five named storms as of this writing). In the past decade we have had three years when only 4 storms had formed by August 31st: 2000, 2001 and 2002. The following are the final statistics for each season – reflecting substantially increased activity near season-end:

2000 – 10 named storms, 6 hurricanes
2001 – 11 named storms, 9 hurricanes
2002 – 8 named storms, 4 hurricanes

Keep in mind that roughly 20% of U.S. natural gas and crude oil is produced in the Gulf of Mexico and in coastal areas, and roughly one-third of the nation’s refining capacity is on the Gulf coast. While any hurricanes that form over the next few months may not make landfall in the Gulf, when they have they have tended to severely disrupt operations and natural gas markets (note the ‘spikes’ in natural gas prices in the chart above, courtesy of hurricanes Gustav, Ike, Rita and Katrina).

  • Some weather forecasting services are providing a preliminary glimpse at the upcoming 2009-10 winter -- and many of them indicate the patterns are setting up for a cold outlook in the Midwest. Some forecasters see the potential for the coldest US winter in a decade. "We do think there are opportunities for a potentially colder than normal winter coming up, one of the coldest we've seen in the past decade," suggests former EarthSat meteorologist Matt Rogers, now with the Commodity Weather Group.

Demand for natural gas is very cyclical. Winter demand for space heating increases total demand by over 90% from the low levels  seen in a typical September or October (see chart). A cold winter in the Midwest and Northeast directly impacts demand for natural gas, and prices.

AccuWeather Senior Meteorologist Joe Bastardi is also seeing some similar historic weather trends that he says could herald a bitterly cold winter, particularly for the Northeast and South.

"The closest comparison we’re using for this upcoming winter is the 2002-03 winter season," Bastardi said. "Then you have the extreme case of the 1977-78 winter, which is also a possibility." The latter winter held the record for subfreezing temperatures for an unrelenting 51 days. Even a possible repetition of the milder 2002-03 season has some gas traders anxious. That was seven years ago, and the US population has grown by an estimated 26 million people, notably increasing natural gas heating loads.

We remain optimistic that over the next 12-18 months we will see higher natural gas prices as supply and demand realign. Profitable and well managed companies in the most inefficient part of the market – the small capitalization, publicly traded, firms – should outperform the commodity and their larger brethren.

As Berkshire Hathaway Co-Chairman Charles Munger has said, when the risk/reward ratio is tilted heavily in your favor invest heavily – good long term investment ideas are rare, act when they present themselves.

By Joseph Dancy,
Adjunct Professor: Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter


Copyright © 2009 Joseph Dancy - All Rights Reserved

Joseph R. Dancy, is manager of the LSGI Technology Venture Fund LP, a private mutual fund for SEC accredited investors formed to focus on the most inefficient part of the equity market. The goal of the LSGI Fund is to utilize applied financial theory to substantially outperform all the major market indexes over time.

He is a Trustee on the Michigan Tech Foundation, and is on the Finance Committee which oversees the management of that institutions endowment funds. He is also employed as an Adjunct Professor of Law by Southern Methodist University School of Law in Dallas, Texas, teaching Oil & Gas Law, Oil & Gas Environmental Law, and Environmental Law, and coaches ice hockey in the Junior Dallas Stars organization.

He has a B.S. in Metallurgical Engineering from Michigan Technological University, a MBA from the University of Michigan, and a J.D. from Oklahoma City University School of Law. Oklahoma City University named him and his wife as Distinguished Alumni.

Joseph Dancy Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Marvin Anderson
20 Sep 09, 08:27
Natural Gas Prices

Until the retailing of natural gas is simplified i.e. sold at avery rest stop along every interstate highway those of us who whould like to use it for transportation. If rest sltops can sell soft drinks and candy bars in vending machines, why can'

can't gas vending machines be set up at "every" restop? Of course, the Interstate Highway System should get a cut of the profits as they probably are in the snack sales. I understand that a small gas vending machine may only cost about $10,000 to install. When this happens truckers, RV's, and autos will feel secure about the availability of natural gas.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in