05-03-2012: July Natural Gas: Glut in Underground Storage
Natural gas prices have gotten so low that some natural gas producers are starting to fail, others are forced to cut back on production, and the net effect of all this would seem to be to raise prices. The problem is that there is so much natural gas now in underground storage that until this glut of inventory is cleared out by some means or other, presumably lowering prices, there isn't much place for new gas to go. If prices on natural gas go much higher than where they are now, certain utilities will find it cheaper to switch from natural gas to coal for electric power generation.
We fed natural gas, crude oil, and heating oil into a neural network to get the following result:
July Natural Gas:
July Natural Gas:
Natural gas futures are at a two-month high. Traders have been hungry for a rally since natural gas futures dropped below $2/mmbtu last month. The Energy Information Agency (EIA) reported that natural gas production fell in February from January's record high and was at the lowest level since October, 2011. Forecasts for colder-than-normal temperatures in the U.S. Northeast helped spur further gains. Traders say the natural gas market has been heavily oversold in past weeks, but it may be over-correcting and could fall anew. In last week's report, the EIA said gas in storage was 55.4% above the five-year average. A vast market imbalance could be on the road to correcting itself in the wake of weak prices and production cuts. But some warn it is too early to make that call. An IAF Advisors representative said prices could further rebound to $2.70/mmbtu or higher, if the storage overhang doesn't continue to grow. Gains may be capped at that level as power generators would turn back to coal on a pricing basis at that level.] A Gelber & Associates representative said production cutbacks amounted to a tiny 0.6% or the equivalent of "missing one of three square meals in 58 days." A double-digit jump in cash prices has followed advancing futures. Spring nuclear power plant outages are running at about 21,900 MW or 22%, down from 31,000 MW a year ago at this time and a five-year average of 22,600 MW. Last week, Encana, Canada's largest gas producer, raised expectations about more supply cuts. Chesapeake and Conoco have also announced production cuts this year. Shell's CFO said the company would be switching the bulk of its gas drilling in the U.S. toward production of "wet" natural gas and away from "dry" natural gas, which means Shell's NG production is expected to be lower in 2012 but higher in 2013. The gas rig count fell to the lowest level in 10 years, sliding 18 to 613, as low prices continue to force producers to slow dry gas operations. The key factor in all this news appears to be a glut in underground storage, with underground caverns still filling up and seasonal weather demands fade. Chesapeake Energy Corp. (CHK), one of the biggest gas producers, has a $28 million loss before preferred dividends, pressuring the CEO to step down. They cut oil drilling but natural gas production remained flat. The full impact of this on the natural gas industry is slowly being revealed as the company provided a conference call on the day of this writing which sent its stock tumbling. Analysts are asking why, as the assets of the company alone would seem to support a higher share price. The impact of the preferred stock they issued, the opaqueness of development costs in the accounting methods the company chose to use, have brought its accounting methods in general into question. The company may be in much worse shape than its book value might indicate.Chesapeake has many investments and partnerships in the gas shale projects around the country and its fortunes provide some indication that may relate to others in that business. It may be forced to sell off some of these assets whose value is questionable. There are two ways to look at how that could affect natural gas price. We think it will increase competition. Others say it will encourage companies to get out of the business.
14.0I T 5/ 1
I NYME- Aug-12 Natural Gas Mini 2.5KmmBTU .c/ Cm.=0.01 Lim.= 0.4
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical low and a seasonal down period.
Our best-performing internal program is "Pattern." It is giving a buy signal.
Results of "Pattern" for Natural Gas (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $2,500 for the mini contract. Initial margin on a single contract is $3,078 for the mini contract. Use of options is advised.
Scale trade buyers are entering the market in this price range for the long term.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-short.
The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.
Our option trade recommendation is to Sell the Natural Gas October 2.6 Call @ 0.361 or better.
What the Aug. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at -6.30 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -7.50 or wider sellling the far as prices are falling and then buying the near.
Here's an intraday chart for the previous day ( 5/01 ).
Risk Versus Opportunity Report
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NGQ2 August Natural Gas
High Price: 2.71
Current Price: 2.53
Low Price: 2.16
Risk: -0.148
Opportunity: -0.304
(O/R) Ratio = 2.056
| Factors | Weighted Points |
|---|---|
| Inter-Market Analysis | - 1 |
| Parabolic Chart | + 1 |
| Nirvana Chart | - 1 |
| News | - 1 |
| Point & Figure | - 1 |
| Cyclicals | - 1 |
| Seasonals | - 1 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Historic Range | + 1 |
| Commitment of Traders | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | - 1 |
| Total | - 4 |
Place 4 August Natural Gas Mini Contracts on a Sell Watch with stoploss @ +0.54 above the get-in point.____________________________________________________________________________________________________________________________R.S.
