Hello!
On July 1st, I announced to all my friends to get out of HNU.TO/UNG and stay out
Now, I am slowly advising people it may be a good time to slowly buy.
Thank you.
Picture of the Day:
We are now trading the October contracts!! 6% sell-off today.. yikes.
Technical Analysis for the Day: (bullish wedge)
It is clear where we are heading.
This chart speaks a million words. When this bullish wedge breaks, I believe natural gas will have bottomed.
News Recap:
Buy Gas
There's no way that gas can trade so cheaply compared with oil on a long-term basis. In the oil patch they use a six-to-one ratio to calculate equivalent barrels of oil. Gas is measured in mcf - thousands of cubic feet. Six thousand cubic feet of gas is treated as a barrel of oil when describing production and reserves.
Why 6,000? Because that's roughly the energy equivalent of a barrel of crude oil. To an energy user, then, they are roughly equivalent, so why should one be so cheap compared with the other? Natural gas is about $3/mcf while a barrel of oil is more than $70 (U.S.). Let me give you an analogy as to why this has to change. Take a Canadian stock that's traded in both New York and Toronto. Assume the U.S. dollar is worth twice the Canadian dollar. The stock should trade for half in New York - i.e. in U.S. dollars - what it changes hands for in Toronto, right?
But let's say it trades for the same amount, call it $10. Traders will immediately buy the stock in Toronto, sell it in New York, convert their greenbacks to Canucks and pocket the difference - risk free. That's an arbitrage, and arbitrages are rare and fleeting because they are quickly resolved by trading pressures. In this case, the excess buying in Toronto will drive the price up while selling in New York will drive it down to the point where the shares trade where they should on the respective markets.
I figure there has to at some point be an energy arbitrage, where oil goes down or gas goes up or some combination of the two. Of course, a share is a share, no matter where it trades. It's identical regardless of market.
A barrel of oil is not the same as a barrel equivalent of natural gas even if they do have similar energy content. Such price differences on an energy basis aren't new, and they don't go away quickly like an arbitrage in the stock market.
But, over time, that price differential has to close, because energy consumers are rational and to the extent that they can switch, they will. That extent is limited to a point, but given time for attitudes and technology to adapt, it gets bigger. The crude to gas ratio is exceptionally high.
That alone is reason enough to suspect a change. But as I've argued here before, there are other factors at play, notably the greening of the grid. The Obama administration wants to reduce greenhouse gas emissions by 80 per cent by 2050. That's clearly not going to happen, but if they are serious, they will have to substitute gas for coal and oil. Yes, natural gas warms the Earth too, but not as much. Talk of any other fuels on a widespread basis is silly. Tens of billions of dollars have given wind and solar a fraction of a per cent of market share in energy consumption.
So is the United States serious? Seems that way. In April, the Environmental Protection Agency withdrew an air quality permit it had issued for a 1,500-megawatt coal plant, effectively putting a stop to the project. Another plant was cancelled in Michigan the next month. Since 2001, 97 proposed coal plants have been shot down and nine so far this year alone. Not all will be replaced by natural gas, but my guess is many will.
There's no question that new technology and new finds are flooding the market with lots of gas and that prices aren't likely to spike up to where we've seen them even this decade. But just about everyone I talk to in the energy business says gas prices are unsustainably low and have to rise substantially before new production comes on stream. Meanwhile, Barclays Capital says, U.S. production has been falling since February. "At this point," the investment bank says, "declines in production have only begun."
There are lots of good deals in gas. Shares of companies with good balance sheets are available. And, more discreetly, I know of some desperate producers trying to auction off big pieces of themselves to the highest bidder.
So buy gas.
Super Contango:
Late last year and into early 2009, West Texas Intermediate crude prices entered what was dubbed "super contango." The spot price for oil was far below the futures price, guaranteeing a huge profit for anyone who bought and stored barrels of oil and sold an offsetting futures contract.
The reason for the extremely low price was because storage was maxed out at the Cushing, Okla., delivery point. Previously high prices led to a demand reduction that was exacerbated by the global financial panic. Oil was "too cheap," but there was nowhere to store it and that caused prices to crater. Eventually, investors filled supertankers with oil, parked them offshore, demand picked up and prices recovered.
Natural gas may be headed into super contango as well. The spot and near-month futures contracts sell for less than $3 per million BTUs, but October 2010 futures can be sold for $6. Buy the gas today, store it and next year earn a 100% profit less storage fees. One problem --where are you going to store it?
Natural gas storage is 18% above five-year averages and, according to the Energy Information Administration, regional storage may max out. Unlike oil, natural gas is much more of a regional energy source because it still mostly moves from producer to consumer via pipelines. Liquefied natural gas may change that in the future. Local storage facilities may run out of space in another month or two, and then the gas has nowhere to go -- unlike the price, which will rapidly drop.
Many people think it's easy to switch between natural gas and oil, but in fact they serve different markets: 70% of crude oil goes towards transportation, whereas natural gas is split three ways between residential & commercial, industrial and electric generation demand. Switching from one to the other is a lengthy and expensive process and most of the switches have been made.
The international nature of crude oil means if people in Ulan Batur demand more oil, the price may change in New York. But a natural gas shortage in Mongolia will not raise American prices because there's no easy means to transport it. There were major discoveries of natural gas last year and New York Governor David Patterson is pushing to open up the Marcellus shale to drilling, with environmental concerns taking a backseat to the need for tax revenue.
On top of that, renewable energy currently is aimed at electricity generation, not transportation (though that may also change depending on the popularity of electric cars).
Natural gas has abundant natural reserves, excessive supply and reduced demand and is a competitive threat -- it was one of the hottest ETFs in the past three months, based on money flows.
External Factors that may affect natural gas.
Mild weather is forecast for most of the U.S., with normal to below-normal temperatures, MDA Federal Inc.’s EarthSat Energy Weather of Rockville, Maryland, said in a 10-day outlook yesterday. Cooler weather cuts demand for electricity, which accounts for about 29 percent of gas consumption, as air conditioners run less.
Rebuilding Period
The gas overhang and suspect demand will keep prices depressed at least through October and the end of the inventory rebuilding period, said King. Supplies begin to decline in early November, when cooler weather spurs demand for heating.
Natural gas futures based on the contract closest to delivery rose 22.9 cents, or 8.2 percent, this week to settle at $3.033 per million British thermal units in New York. The futures declined in each of the previous two weeks, by 13 percent and 12 percent. The September contract expired yesterday.
Support/Resistance for October Contracts
$3.72-3.776 Resistance
$3.482-3.524 Resistance
$3.15 Resistance
$3.10 Resistance
$3.00 Support
$2.90 Resistance
$2.75 Support
$2.70 Support (tested once on august contracts on 27th.. will it hold on the oct contracts?)
$2.64 Support
$2.50 Support
Natural Gas 101
Q: Where are prices now?
A: Futures, based on the contract closest to expiration, fell below $3 per million Btu for the first time in seven years on Aug. 20. Prices have dropped 46 percent this year. Gas reached a low of $2.692 yesterday on the New York Mercantile Exchange, the lowest intraday price since Aug. 8, 2002. .
Q: Why have prices fallen so much?
A: It is Economics 101. There is little demand, and new drilling technology has made easy pickings of huge reserves of natural gas that was once out of reach.
The Potential Gas Committee in Golden, Colo., reported in June that estimated U.S. reserves are 35 percent higher than just two years ago, thanks to new technology that has allowed producers to drill for gas in shale rock. Energy companies can now drill downward, and then sideways, for miles.
As a result, reserves are at their highest level since the group started tracking the information 44 years ago.
The natural gas-backed American Clean Skies Foundation said a year ago the U.S. has a 118-year supply of natural gas at 2007 production levels.
Meanwhile, the recession has crippled demand for gas. The federal government expects consumption to decline by 2.6 percent this year, driven by a huge drop in demand from the nation's factories. At the same time, summer weather for much of the country has been mild, reducing the power plant-taxing use of air conditioning, and there have been no hurricanes so far to disrupt key production areas in the U.S.
Storage levels for gas headed into the heating season are at record levels and gas has become so cheap that it has become competitive with coal for generating electricity from big power plants.
Q: With prices so low, I should get a nice break on my heating bill this winter, right?
A: Right, assuming you are in one of the 60 million homes heated by gas. The price of gas makes up about two-thirds or three-quarters of a typical gas bill. Gas prices already have started to moderate from the winter, but how much of a break you will get depends on when your distributor locks up prices.
Columbia Gas of Ohio, which adjusts prices monthly, says its prices for September will be about half of what they were in September 2008.
Q: What if I heat my home with electricity?
A: You may still be in luck. Utilities generate about a fifth of the nation's electricity with gas, so those prices figure to come down. How much they'll fall depends on a whole host of factors, including whether your utility is fully regulated or deregulated, how much your utility relies on gas for power generation and how far out they locked into power contracts. Also, some utilities have been raising rates to cover costs for new power plants and pollution controls.
Q: How long will prices remain low?
A: That really depends on the wind, both economic and meteorological. Winter is on the way and the recession won't last forever. Still, most weather forecasters expect a relatively mild winter, and we are still struggling to recover from the economic downturn. Odds are, a substantial rebound in prices is not going to happen soon.
But it's not out of the question.
In the summer of 2002, as the country recovered from the last recession, natural gas cost $2.66 per 1,000 cubic feet. Then it got really cold. By February, prices had doubled, and then they quickly spiked to nearly $11, in part because of one-time events — like a huge fire at an oil and gas storage facility in New York caused by an explosion of a barge carrying propane. It is difficult for energy companies to ramp up operations, but once they do, prices tend to fall — natural gas was back to $5 by August.
The difference this time is the size of the recession (a lot bigger) and the size of our reserves (also a lot bigger).
"The fundamentals weigh against the potential for $10 gas," said oil and gas trader and analyst Stephen Schork.
Q: Given that there is an abundance of natural gas, why aren't we using it to power cars and everything else? Can't we become more energy independent?
A: Natural gas is already used extensively. It heats our homes, makes our water hot and dries our clothes. It is used by industries that make, among other things, steel, plastics and chemicals, and utilities rely on gas to generate electricity.
Some people would like to see natural gas used more extensively as a transportation fuel, beyond its limited uses by some public bus systems and corporate vehicle fleets. As of yet, the infrastructure does not exist for more widespread use.
Airports and cities have built facilities where natural gas-powered buses can return for a recharge, and there are companies trying to build more natural gas stations for everyday use. If new climate regulations are enacted by the U.S., there may be an even stronger push for more such stations because natural gas produces nowhere near the emissions of gasoline.
Poll
59% of people were bullish for the week of August 24th
27% of people were bearish for the week of August 24th.
Natural Gas dropped -13.40% for the week.
Technical Analysis Charts:
1995-1998 charts
1998-2000 charts
2000-2002 charts
THE BOTTOM LINE:
For the first time, I believe the bottom is extremely close now. We may have one less leg down of 3% and that's it. . Caution.. if natural gas breaks $2.70 and $2.64 breaks. Expect hell. If U.S equities start to fall. Expect Hell..etc.etc ..
$2.90, $2.70 and $2.64 are 2 key levels on the downside that has to break for the downtrend to continue
$2.90 and $3.15 are 2 key levels on the upside that has to break for a rally to commence
Disclaimer: All prices discussed in this post are natural gas october futures.
Futures are available at: http://www.cnbc.com/id/15839171/
Thank you..
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