Natural gas is unsustainable at these low prices

I’m not saying we’re going to hit the $10/mcf environment of the past, but what do you think of gas being oversold? Rig count is lowest since the 90s; shale gas wells aren’t really economic on a reasonable IRR; legislation is starting to push natural gas power generation. it also helps that natural gas is still very much a segmented market so there is at least some predictability to it. What’s your take?

I don’t think its anywhere near oversold as of yet. Major players are still shutting in a lot of gas production that they can easily bring back on. Add in weak industrial demand, low power prices, and the wild card LNG imports and you still have a glut of supply. Hopefully it can at least crack the $5/mcf level this winter if its cold.

kcin, what’s your take on LNG imports? I haven’t been following activity lately, but I presume LNG and regasification terminals have been delayed.

Sempra has a few LNG terminals (some built, some permitted) and a recent WSJ article stated LNG can be landed in the U.S. for $2. I don’t see much reason for prices to climb much over $5 in the near term. The bigger item of interest is that power can now be generated less exensively with ng than coal.

Really, $2? I have a hard time believing that. Did the WSJ article have a source? Deutsche Bank

I think the LNG is so cheap because in some places the ng is essentially a by-product of the oil production. So the marginal cost is only the liquefaction, transport, and regas costs. Short term, we’re looking at completely full storage in Oct. Not good for prices. Long term, you will need to see some sort of fundamental shift in consumption patterns for a sustained rise in price. Total consumption hasn’t really changed in the past 10 years. The increase in electric power consumption is offset by the decrease in industrial consumption. On the supply side, with the shales, there’s no more “E” in “E&P”. I think this is why you see guys like Pickens proposing massive changes in energy use—without such changes, those guys might be in trouble. That said, it will likely still be a cyclical industry with its ups and downs.

Thanks for the article, Sponge_Bob. It looks like someone is going to lobby hard for natural gas vehicles…

where is goldenboy for this discussion?

Spoke to a few commodity hedge fund managers over the past few months who all share the same view that there is massive, massive oversupply of nat gas in the market.

The switch is already creeping in AliMan …it will start with commercial fleets, but given enough time and assurance that supply is available (and thus prices stable) you’ll see massive changes. The low hanging fruit is power generation, but ng offers all sorts of conversion possibilities from retrofitting engines to burn it or using Fischer-Tropsch techniques to produce diesel fuel.

I’m betting gas will dive below $3 later in the summer on gas on gas competition, ultimately, reaching full storage which we are bound to do will be a good thing given that US storage capacity is capped (~3.8 tcf) and then, only then can we begin to see inventories deplete as a likely supply response takes hold

no comment phillip

Regardless of production costs and rig counts and all that other stuff, the simple matter remains that when there is too much gas, there can be no rally. Prices must go down or remain flat. How can they go up? This is the best place to monitor gas storage:

goldenboy09 Wrote: ------------------------------------------------------- > no comment phillip wow - so no more long natural gas for you?

My oil guy in Houston says that there is still short term downward pressure on gas (no pun). New deposits, fears of LNG, large amounts in storage, and the lack of industrial demand. Longer term he is bullish. The new deposits have a pretty steep fall off rate. In a couple of years, they will not be pushing out anywhere close to the volume that is being pushed today. Baker Hughes rig count numbers have fallen dramatically with no bounce yet. LNG is small percentage of supply, the marginal cost is higher, and there is no where close to the number of terminals needed. Industrial demand is a function of the economy and GDP. In the short term, one hurrican that moves through the gulf could cause prices to jump regardless of the true impact. My guy in Houston said that he would be a buyer at $3 and below. Personally…I bought UNG a couple of weeks ago before the fund ran into problems with the number of shares it can issue. I was able to get in before the fund esentially turned into a closed ended fund and started trading at a premium to NAV. I am still very concerned about the large percentage of outstanding forward contracts UNG owns. Not only does the fund move the market, but it gets traded against when it rolls to the next month. I am also very concerned about the contago effect in UNG. The same contago effect that has impacted returns of USO vs. the widely quoted spot price (which is actually just the current month’s price). I also did not want the K-1 that UNG kicks off, but decided to just deal with that. I am up 11% since purchase. My orignial plan was to wait for $5 gas. Due to all of these other concerns, I may not wait that long to exit. I have also considered moving to an ETF of gas producing companies instead. I have held positions in MLPs for a couple of years. No direct impact by gas prices. More impacted by volume flows. Regardless, the closed ended fund I own has a 10% yield of which 9% is tax deferred due to the depreciation pass through. If you were to gross this up at the 28% tax bracket, the pre-tax equivlent yield is close to 14%.

Here is my take and what I am hearing from some of my industry contacts. Industrial demand is poor right not and improvement in the near term is unlikely. The supply from shale overwhelms the decline in rig count. Bulls say the opposite really. Essentially saying that the decreased drilling will start to take a dent in supplies. The contango in the prices seems to be hinging on the “green-shoots” in the broader economy. The Obama Admin, isn’t particularly friendly to the oil & gas industry so this could hurt the sector.

I don’t know about you guys, but it’s almost August and summer weather hasn’t even started here yet. I haven’t even touched the a/c in my house or in my car.

Yeah, I don’t understand why UNG is so popular given the huge negative roll yield…isn’t it something like -4% a month? Ouch! What about options on the NYMEX contracts? I know there’s existing puts and calls available on the monthly contracts—can retail investors buy these options?

no comment