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1 Apr 6 2011 @ 10:58am by Matt Smith in Global Energy, Natural Gas, risk management

Reasons For A Rally, Factors For A Fall

As Naturalgasworld™ enters the shoulder month season (=April / May), I’m going to play devil’s advocate at this time of transition. As we shuffle away from heating demand and towards the call for cooling, here are a number of considerations which are providing reasons for a rally…or factors for a fall:

1) Predictions for hurricane season. It’s that time of year again when estimates come out for the hurricane season ahead. Accordingly, Accuweather released their numbers last week, calling for fifteen named storms (average = ten), eight of which are expected to be hurricanes (average = six). Colorado State University has just released its update today, calling for an above-average season with sixteen named storms and nine hurricanes. Conclusion: consensus for a potentially active season adds an element of trepidation to prices, but as we know (given last year’s whopping 19 named storms) even if we see an overtly active season, it doesn’t mean production (ergo, prices) will be impacted.

2) CFTC data. This one is really intriguing. The chart below plots bearish speculative futures positions in natural gas (the ‘proper’ name = CFTC natural gas non-commercial short positions futures and options combined). We looked at this not too long ago here on the burrito, as the shorts (bearish positions) were charging higher; now what is interesting is the sharp reversal seen from a 30-month high in the previous month. Rather than indicating a further sell-off in prices as it did in 2008, is seems to reflect a sea change in attitude towards natural gas, based on news flow in the last few weeks; see point 5 for more info. Conclusion: a move away from an extreme level indicates a change in the mood in the market – in this case, less bearish.

CFTC Natural Gas Non-Commercial Short Positions (combined)

3) Japan and LNG. This one isn’t as much intriguing as it is aggravating. Here’s the facts: Japan accounts for more than one third of all global LNG imports. Japan will likely rely on LNG to meet approximately 50% of the shortfall caused by nuclear outages (due to spare capacity and the cheapness of LNG). In the US, LNG makes up approximately 1.5% of total natural gas supply. The US provides no competition for spot LNG cargoes, when pricing is at a paltry $4/MMbtu. US supply is made up predominantly of long-term obligations in place. Conclusion: to say that Japan’s increased need for LNG is a bullish impact on US natural gas is incorrect – it is not a direct factor.    

4) Rig counts. Despite all the concerns of a limited total rig count, natural gas continues to reach record production levels, with more efficient horizontal rigs accessing unconventional production. That is not to say we will see production going gangbusters forever (…with prices at $4/MMbtu…), consensus is that we will see production finish the year below current levels. But it is not going to fall off a cliff. Conclusion: a fall in the rig count does not mean a fall in production does not mean a rise in pricing.

Total Natural Gas Rig Count (source: Bloomberg / Baker Hughes)

5) Energy Policy. I’m not going to harp on about President Obama’s public address last week (official release is here). The fact is that – in conjunction with the Nuclear Regulatory Commission conducting intensive reviews on six nuclear plants – the address has had a supportive influence on longer-dated prices, as increased emphasis on natural gas as a fuel for the future is seen as positive for demand, and hence price. Conclusion: the address was positive for both demand and supply, as the government looks to incentivize production through ‘leasing and royalty structures’ as much as it looks to boost demand through the’ development and deployment of natural gas vehicles’.

Ultimately, these five points provide fodder for both sides of the trade – bulls and bears, and also over varying time periods. But with so much conjecture, one thing is for sure: natural gas is going to play an increasingly more prominent role in the energy complex over the coming decade.

1 Comment on this post:

  1. This really answered my problem, thanks!

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