Wednesday, May 16, 2012

NG Up; CHK Down

The front month natural gas contracts were up roughly 5 percent today, with good performance across the entire curve. Tomorrow is the weekly natural gas storage report and people seem to be expecting more bullish data.

The futures prices are roughly back to their levels from February this year, before the complete absence of winter set off a market panic. June gas is 2.62 and December gas 3.43. CHK was at ~$25 last time gas was at these prices.


C. Fischer said...

So far so good on the UNG trade.

CHK is ridiculous at these levels. I'm willing to bet NG trades over $5/MCF by the end of the year. I think this inventory overhang gets worked out in short order, and it will take $5-6/MCF before drillers start drilling for dry gas again.

CP said...

Comment on TOD blog:

BTW - if the oil production data from the RRC is worrisome, the gas data is positively terrifying. From 17.5 bcf/day last February to 14.6 bcf/day this February (gas well gas), all this before the real decline in drilling over the past few months has taken hold. It wouldn't surprise me to see storage back in the "normal" range by sometime in July...

CP said...

Will be very interesting to see the storage # tomorrow.

C. Fischer said...

CP, did you miss a trailing digit of the URL?

Anyhow, so you're starting to get the basis of my trade.

Check out the EIA data: First look at the Weekly natural gas rig count and spot Henry Hub. Look how the horizontal drilling exploded in early 2010 and is just now in the last few months dropping significantly.

Also note that the well starts producing a few months after drilling is finished as it is fracked and hooked up to a pipeline, so there is a few months of lag here: see )/marcellus_shale_faq.html .

Next, look at how shale gas has exploded from 10 MCF/d to 25 MCF/d in the last two years.

Then, realize that the decline rate for these shale wells is something like 60-80% in the first year - Haynesville especially has very fast decline rates

A lot of companies have been drilling despite crappy economics just to hold their HBP leases. But I think the economics are so bad at 3 > MCF, that is stopped, and a lot of industry observes say most of the mandatory HBP production is nearly done.

By looking at the curves and decline rates, it starts to become obvious that you need an increased amount of drilling just to maintain production - and drilling has falled off a cliff.

So my thesis is that total Shale production starts dropping hard in the next few months, I wouldn't be at all surprised to see Shale production drop back into the 20 MBD range in the next 3-4 months and for the overhang of gas in storage to be back within normal range by July. (The glut seems to be a huge component of the bear case.)

I think when we really see supply drop, we get back into the high 3 / low 4 range awful fast. The contract for the summer months is fairly flat so the loss on the contango isn't too bad, so that's the trade I'm setting up.