Maybe this post is considered a "troll" post, I don't know. I have been reading various posts on here for a while, but never comment. However, working in the industry I just had to put my two cents in here. For full disclosure, I am currently long UNG using January 14 $20 calls. The fighting over the short term weather forecasts makes me laugh the most. While I know weather is an important factor in the price of natural gas, it is not near the only thing and definitely not based on the 15 day forecast. If all you do is day-trade, then I guess I get that. Here are my thoughts:
1. Nat gas has seen its low for the decade. It won't go any lower than it did last May. Why? Simple supply and demand. Oil and gas companies won't produce gas at a loss, at least not for very long.
2. Nat gas is cyclical. Look back at 1999 - 2000. Prices where roughly where they are now...and that is when the Barnett Shale was being discovered. Granted the reason prices were lower then is not the same reason they are lower now, but it is still cyclical.
3. Major oil and gas companies are not patient. When prices go sky high, they run out and drill the hell out of everything. Prices come crashing back. When prices are low, they stop drilling, prices recover. Granted, the recovery this time will be a bit slower because the new forays into areas of the country that aren't used to drilling (or at least major drilling activity) were leased up in a hurry at insane prices. The majors are now stuck with these leases and have to drill them up or risk losing all that least bonus money. The marcellus HAD to be drilled in the last few years, despite prices. Going forward, there will be less and less forced drilling. Other plays such as the Bakken and Utica have a lot more liquids/oil, so they will not be the prolific gas producers like the marcellus. Also, the shale plays have a very STEEP decline curve. This means they make the bulk of the gas they are ever going to make in the first year or two. Production declines significantly after this. When the music stops (aka the drilling), supplies will get crushed.
4. Utilities do not switch fuel stock on a whim nor at a very specific price point. Most plants, until recently, were not equipped to burn nat gas. That was an investment for the utilities. Do you think they will just switch back to coal after that investment? Also, nat gas, just like coal, is purchased on a contract. That contract price, if not hedged already, is then hedged in the futures market so that the utility knows exactly what they will be paying for the fuel for a given time period. Why wouldn't a utility lock up prices for 3-4 years out at the current futures prices? Doesn't matter what supplies/price does, they get the fuel at their hedged price, keeping their cost constant.
5. Perfect storm. The last few years were the perfect storm of a bad economy, new shale plays, and a non existent winter last year. However, this past summer already started catching us up and this winter is at the least a normal winter, so that bodes well for higher prices. Add in the extra usage from utilites, transportation, industry, etc. and things will be better very soon.
I feel prices won't approach $6 or higher again for at least several years due to the shale drilling, even if they cut back. However, as stated above, they won't go back to $2 again either. The majors won't tell us, but they cannot make money at $2 gas. They say they can, but they NEVER include leasing costs when they say that. The shareholders will force their hand at some point. They need $4 gas.
Just my two cents.
Oh, and by the way, it was supposed to be clear here today....its snowing.
Thought nat gas was going to recover for about the last 5 years and one day i will be right about that. Agree nat gas has seen its bottom for this decade and longer. 2013 should see a rebound in the price of nat gas but then it could really take off. Once more of the infrastructure for transportation fuel gets set up, more engines made to run on nat gas, and more lng terminals are built nat gas should start to really go higher. Dont know if the 6:1 with crude happens again but its going higher from here. just needs patience. for 2013 or near term one might do better in a nat gas investment that has some yield, but toward the end of 2013 ung might really do well.
You ask; ;maybe this post will be considered a troll post , well ,, A troll post according to some of the self appointed elite all knowing shorts that inhabit this board is any post that favors the long position, A couple of the , eh, perma bears, dote on every minute warming detail written in Paragraph 3 chapter 2 , verse 5 in the Gospel according to NOAA.. LMAO!
But because I am a kind and generous humanitarian, for the benefit of those with "shorts that are warming" : ""Coldest Air of the Season Arriving "" The Weather Channel says : Bitter Cold Has Arrived" They ask you : Are you ready to freeze yur a *s *s off?
First i agree NG will go up due to the cold snap that came in, but i think i people who hold on to long they will be left holding the bag. Next you are incorrect about lease prices, the Marcellus is the lowest price in leases and the highest in producing in NG that they have a 1000 wells already drill and ready to go once the pipelines are done which should have been done already. Producers can make a profit in the Marcellus area at 2 dollars, that just blew away what you said. Next coal production cost has dropped tremendously and once NG hits 3.40 its cheaper to switch back which is expected.Heres my proof to back what i stated, now i hope you can back what you stated with recent news on Cost of leases, production amount of NG and what you stated about coal,,, By Matthew Philips on January 10, 2013
Six weeks ago, natural gas bulls were riding high. By Thanksgiving, prices had more than doubled since hitting a decade low of $1.90 per million BTUs in April. Heading into what was supposed to be a cold winter for the U.S.—at least compared with last year—the consensus view was that natural gas prices would be higher in 2013, since about half of all U.S. households heat their homes with natural gas. By the end of December, the median forecast of 22 analysts surveyed by Bloomberg was that natural gas would average $3.75 for 2013.
A few weeks of warm weather later, and a lot of those forecasts look way too optimistic. Prices have fallen more than 20 percent since peaking at $3.90 per million BTUs in late November. With the National Weather Service predicting above-normal temperatures over the next 10 days for the eastern third of the U.S., that downward pressure is likely to continue. “We’re going to see a lot of guys coming in and changing their forecasts,” says Laurent Key, an energy analyst at Societe Generale (SCGLY) in New York. Key expects prices to bottom out around an average of $3.16 in the second quarter before climbing.
“If we end up repeating 2012, those expectations need to come down by about a buck,” says Scott Hanold, an energy analyst at RBC Capital Markets (RY) in Minneapolis. Goldman Sachs (GS) just lowered its 2013 price target by 50 cents, from $4.25 per million BTUs, to $3.75, still above the current price of $3.12.
Natural gas is notoriously volatile, so prices could surge if the weather turns cold and people crank up their heat, but it’s hard to see that demand making up for what’s already been lost. Even if there is a February freeze across the country, that cold snap probably wouldn’t be sufficient to compensate for a mild December, Goldman analyst Johan Spetz wrote in a Jan. 7 research note. Bloomberg News reported Wednesday that Mike Fitzpatrick, editor of the Energy OverView newsletter, thinks natural gas prices could drop as low as $2.20 if the weather stays mild.
The more likely scenario seems to be something akin to what happened last year, when prices fell through the spring and didn’t rise appreciably until people started turning on their air conditioners in May. Part of what helped lift natural gas prices off their lows last April was increased demand from utilities switching from coal to natural gas to generate electricity. But that effect might be more muted in 2013. After getting crushed by cheap natural gas over the last few years, coal appears set to recapture some of that market share in 2013. “Coal has become more competitive against natural gas,” says Lucas Pipes, an analyst at Brean Murray, Carret & Co. Coal prices have gotten so cheap that if natural gas rises to just $3.40 this year, Pipes estimates that would cause 50 million tons of coal demand to come on the market as utilities fire up their coal plants.
The Department of Energy is forecasting that coal will account for 39 percent of all electricity generated in 2013, up from 37.6 percent last year. Meanwhile, natural gas’s continued run of increasing its share of the electricity market may be over. The DOE predicts that natural gas will lose ground this year and next, falling from 30.3 percent of all electricity generated in 2012, to 27.9 percent in 2013, and 27.5 percent in 2014.
On top of that, natural gas production is set to rise by 0.5 percent this year, according to the DOE. After spending the previous 15 months reducing the number of rigs drilling for natural gas, U.S. producers finally started adding to that total in November, spurred perhaps by the prospect of sustained $4 prices. While production has slowed in some places, the Marcellus Shale in western Pennsylvania is still attracting new investment. “Marcellus is an animal. There are still 1,000 wells that haven’t been put online yet,” says Hanold. “That’s going to push production even higher.” Marcellus is also more immune to lower prices. The geology is so good, and the royalty rates so low, that producers can drill profitably even at $2 natural gas prices, he says.
In the end, the fundamental issue that’s kept natural gas prices so low for the last few years—too much supply, inadequate demand—appears here to stay for the foreseeable future. ”Natural gas prices will be dead for at least two more years,” says Fadel Gheit, a senior oil and gas analyst at Oppenheimer (OPY). By dead he means well below $4. “The industry shot itself in the foot by overdrilling,” he says. “Now anybody and their brother can get gas out of the ground and into the system.”
The attraction to the Marcellus is not what I would consider new investment at all but reallocation. It is rigs taken offline from other parts of the country, which are nearly completely dormant to new investment.
"•Natural gas working inventories, which a record-high level in early November, ended 2012 at an estimated 3.5 trillion cubic feet (Tcf), slightly above the level at the same time the previous year. EIA expects the Henry Hub natural gas spot price, which averaged $4.00 per million British thermal units (MMBtu) in 2011 and $2.75 per million MMBtu in 2012, will average $3.74 per MMBtu in 2013 and $3.90 per MMBtu in 2014.
•EIA expects the coal share of total electricity generation to rise from 37.6 percent in 2012 to 39.0 percent in 2013 and 39.6 percent in 2014, as natural gas prices rise relative to coal prices. Lower-than-projected natural gas prices along with the industry's response to future environmental regulations could cause the coal share of total generation to fall below this forecast. "
That is a direct quote from EIA as of Jan 8. I see prices going up in that forecast. That last line is also very interesting, especially w/ Obama in office.
On the Marcellus, here is a copy and paste from what Anadarko released back on Oct 30:
"Anadarko Petroleum (NYSE:APC) updated its operations in the Marcellus Shale for the third quarter of 2012. Highlights:
•Average sales volumes of 33 million cubic feet of natural gas per day, up 140% year over year.
•Quarter end exit gross production rate of 1.3 billion cubic feet of natural gas per day from 385 wells.
•Spud 15 operated wells and 28 non-operated wells into the Marcellus Shale.
•Four operated rigs and 10 non operated rigs.
•Average cost to drill and complete a Marcellus Shale well was $2.4 million, with 60% of the wells costing less than $2.3 million.
Anadarko Petroleum also reported lower hydraulic fracturing costs in the third quarter of 2012, with the average cost down 40% compared to 2011. "
Notice they don't include land costs. Wells are drilled on 1,200 acre spacing, at $5k/acre, that is $6M. Added to the $2.4M drilling cost is $8.4M. Divide that by $2 and you get 4,2M mcf. Let's say 17% royalty, on average, so they need gross mcf to be 4,914,000mcf. Don't let the 1.3B/day full you, that is cubic feet and it translates to 1.3M mcf per day, over 385 wells, equals 3,376 mcf/day. That is slightly less than 4 years just to break even. And that doesn't include monthly LOE costs (lot's of water hauling to Ohio) nor pipeline costs or ROW costs to get the gas out. Stock market returns are better than that. Obviously, above $2, the return gets much better. They don't make money at $2, period.
They've slowed down dry gas drilling in the Marcellus and practically eliminated it everywhere else. You should read the company reports. They have gone on strike when it comes to drilling for dry gas. Vertical production has already collapsed. Without replacing the horizontal wells, now horizontal production will collapse. The rigs need to come back now, not in 2 years. In 2 years, we'll be using firewood to hear our homes.
Good points. Yes i think a lot of the typical posters here are day or very short term traders. We are more concerned w prices in the next 10 days as opposed to 3 years. I'm bullish for all the reasons you mentioned above (and a few you didn't like exportation and industrial recover and other uses of nat gas).
However, what attracts traders is its volatility. I, for one, would hope to get more of your insights on this board. You are not a troll. And I doubt others with substantive input would say so either.
I look at this board bc if you can skip the troll dung there are some nuggets of information that I would otherwise miss.
What do you think about clean energy's fuel stations, with the amount of oil being produced, no gov. Supplements for engine conversion, ng rising, liquid conversion cost, advanced battery tech. and etc.
i guess i was mainly looking at the stock with all the split inverses every year this stock should be alot higher.
The problem with this ETF is the fact it HAS to keep buying the next month's future contract. That can work against it. I don't trade with enough $ to play the actual futures market, so that is why I chose UNG. I don't normally buy/sell this ETF, but prices were so beaten down and the fact it happened in the shoulder season...I just had to get in.
Nice information .What surprises me most is the Supply that is coming in with the RIG count at record lows .The peak was around 1500 and now we are down to 450 ? .
I keep hearing NG is a bi product of oil production and most of the big drillers are burning off NG since the price is low . Once we hit the $4 range NG supply can go up in days ...My expectation is NG will never go above $5 in the Next 10 -12 year cycle .