Why Producers Aren't Hedging Natural Gas
Taking Their Chances in the Spot Market… Later
Natural gas prices in Canada are so low that end users are now trying to seduce producers to hedge, so they can lock in longer term low prices. But few producers are keen to lock in long term losses.
RBC, Canada’s largest brokerage firm, suggested in a weekly comment that producers still have many reasons to hedge at $3.27 a gigajoule (GJ) now, and $4.11/GJ in April 2011. For context, the full-cycle cost for new gas in North America is $5.60/mmcf and in Canada is $6.85/mmcf, according to independent analysts Ziff Energy. So producers would be selling at a significant loss.
But some quick calls to the energy desks of the major Canadian firms showed that few producers are biting, and even one of my contacts at RBC said these “hedging strategies are geared more towards the end-user market; the end users are trying to lock in really good prices. But nobody’s hedging.”
RBC lists several potential reasons for hedging, which often mirror the Ziff Energy white paper from June 2010 on the state of Canadian natural gas (a GREAT read – not too technical -www.ziffenergy.com/download/papers/cdn_gas_crossroads.pdf.)
1. Strengthening Canadian Dollar
2. US Production Growth
3. Reduced Canadian Imports
4. Heightened Pipeline Delivery Competition in the US
5. Abundance of Canadian Storage
6. Material Expansion of Canadian Shale Gas Production
7. Growth in Marcellus Shale Gas Production – Production has increased by over 1 bcf/d since January 2010
That’s a big list! And it’s not good news for producers or their investors – especially the junior ones who either have high gas weightings or are close to their debt limit.
But despite producers losing money on every mmcf out of the ground, some may be inclined to hedge, says Ralph Glass of AJM Consultants.
“The bigger producers are still drilling and they can afford to (hedge); it’s part of their long term plan and their economics of scale allow it. The only advantage I can see is that if you’re making positive cash flow at $3.50/mmcf, this gives you stability to hang in for one more year. But it’s not an investment strategy.”
He added even small producers may consider it: “A small producer that has limited cash flow cannot afford to pay for capacity costs without actually producing the volumes.” This means they may have “take or pay” like provisions, where the producer must pay the pipeline companies their transportation tolls even if they don’t produce the gas.
For producers, it comes down to the same issue it always does – are prices going lower or higher? By not hedging, major producers are saying that despite all the gloomy market data, they see prices stable or higher.
Long term dated future gas prices are now below $5/mmcf for a full two years out now. With such a low, and flat futures pricing curve, producers are saying they would rather take their chances in the spot market then, rather than lock in losses now.
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What is next for the Dollar, SP500 and Gold
The equities market reversed to the upside Wednesday posting a light volume broad based rally. Remember light volume tends to have a neutral to upward bias on stocks, But it was mainly the sharp drop in the dollar which spurred stocks and commodities higher.
Today’s bounce was not much of a surprise for several reasons… * Overall trend is up, one day sell offs are generally profit taking * Panic selling on the NYSE tipped us off that the market was oversold * I don’t think they will let the market fall before the November election * Intermediate cycle is turning up this week, 3 weeks of upward momentum…
US Dollar Index – 4 Hour Chart
The dollar put in a big bounce this week filling its gap window… Remember most gaps get filled with virtually every investment vehicle so when you see them remember this chart….
SPY ETF – Daily Chart
SP500 has been riding the key moving average up and Tuesday’s sell off tagged the 14MA along with extreme market internal readings telling intraday traders that a bounce is about to take place.
Gold Futures – Daily Chart
You can see gold has done much the same… A sharp profit/stop running sell off, which took the price back down to support. We took a long position to catch this bounce and hopefully a larger move going forward.
Market Sentiment Readings
Tuesday’s pullback was a great reminder of just how over extended the equities market was. These heavy volume sell offs are typical in a bull market. Without regular pauses in price, traders tend to place trailing stops moving them up each day. With traders chasing stocks higher bidding them up instead of waiting for a pullback we get a very large number to stop orders following the price up each day. Then, it’s only a matter of time before a key short term support level is broken at which point the flood gates open and everyone’s stops turn to market orders flooding the stock exchanges with sell orders causing a rapid decline and panic selling. This is exactly what happened on Tuesday which I show in the chart below.
Understanding how to read market internals provides great insight for short term traders looking to make quick high probability trades every week… Market internals are just part of the equation but very powerful on their own with proper money/position management. Both of these intraday extremes were bought on Tuesday in the advanced chatroom (FuturesTradingSignals.com).. We quickly booked profits and moved our stops up in order to protect our capital as the market surged higher.
Mid-Week Market Trend Analysis:
In short, the US Dollar is still in a down trend overall. The Fed’s I would think will continue to hold the market up into the election. It works well for them… they print money which devalues the dollar, and in return boosts stocks and commodities, plus they get trillions of dollars to spend… I’m sure its like kids in a candy store over there.
While everyone is trying to pick a top in this over extended market I think it is crucial to stick with the overall trend and to not fight the Fed. Using the key moving averages on the daily chart as shown in the charts above, continue to buy on dips until the market closes below the 20 day moving average at which point you should abandon ship.
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The Holiday Grind Is Here For 10 Days Only – Are You Ready?
It’s that time again when volume dries up and prices rise into the new year. A lot of individuals are scrambling to prepare for the holidays, even though we had a year to prepare. The big money has already done most of their year end shuffling and will be taking it easy until January.
The market is overbought and sentiment readings are at extreme levels which in the past have been the start of large sell offs and even bear markets. While I am keeping a close eye for a top, there is not much we can do but stay long stocks and commodities until the market tips its hand and distribution selling is in control. The U.S. federal government is the only wild card going into year end that should be on traders’ radars. They have been doing a great job boosting prices in the equities and commodities market, but can they continue to hold things up when the big money and the proverbial herd start unloading positions in 2011?
SP500 Holiday Grind – Daily Chart This chart shows the slow and steady grind higher that we have seen in the S&P 500. I expect this to continue into 2011 The market in my opinion is on the verge of some serious selling so long positions should be small going forward.
US Dollar On Pause For A Couple of Weeks This 4 hour candle stick chart of the dollar shows price testing resistance (a previous high). I am expecting to see the U.S. Dollar trade sideways or possibly move closer to the previous high as we enter the new year. A sideways dollar will allow the equity and commodity markets to rise.
Weekend Conclusion: In short, I think we could see an intraday pullback early this week and then a grind higher. The pullback would shake out some weak positions before the holiday march higher takes place. I typically don’t trade much going into the holiday season and new year. I may put on a small long position if I like what I see forming on the charts, but that would likely be about it. Light volume can be very dangerous to trade because sharp price spikes up or down can occur in a blink of an eye catching traders off guard.
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Heres the Place for Natgas
Natural gas is a broken global market.
For oil, there’s enough import-export capacity worldwide that global prices tend to align closely. In natgas, global markets are fragmented. Leading to disparate pricing in different regions. Just look at the comparison below, from PFC Energy.
One of the implications being: if you’re going to produce natural gas (or ship it as LNG), find the regions with the top prices.
Increasingly, it’s looking like this will be Asia. And specifically, southeast Asia.
By way of example, Vietnamese Deputy Minister of Industry and Trade Hoang Quoc Vuong said last Thursday that Vietnam will likely need to import over 800 billion cubic feet of gas annually by 2025 in order to meet demand.
The announcement came as part of the release of a World Bank report on Vietnamese gas sector development. In the work, the Bank estimates that Vietnam’s gas use will triple over the next 15 years.
The report also recommends that Vietnam move toward liberalized, competitive gas pricing in order to spur development of domestic gas resources. Exactly the kind of environment that will create opportunities for gas producers.
At the same time as gas demand is ramping up in nations like Vietnam and Thailand, the Asian super-powers are also hungry for supply. PetroChina said today that northern China (including Beijing) could face gas shortages of up to 300 million cubic feet per day this winter.
This is not a huge amount, relatively speaking. But it does underscore the point that Asian gas use is only growing, and supply (as well as transportation infrastructure) has lagged.
All the signs of a good gas market. I’m going back at the beginning of December to continue looking for projects that could capitalize.
Here is to the wide world of gas!
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On the Landfill and Recycling
For years I’ve been someone who never really finished the thought; when I throw something away it goes…
I’m fortunate because my children, who are early teens, have been taught about the importance of recycling and the importance of what we need to do to keep the world from being buried in useless trash. They have been paying attention to the lessons that have come their way, where as, I had to see it for myself before I could be motivated to change the way I do things.
The good news is, it only took one quick trip to the landfill, for me to come to my senses and make changes about the way I do things and about the way I think. If we are not thinking globally when it comes to waste, and what we’re leaving behind, we’re not being smart.
Let’s keep the environment safe from harmful chemicals
It’s not something we set out to do, at the beginning of the day; the thought isn’t, “Hmmm, how can I hurt the Earth today?” It probably sounds something much more like, “Gee, I need to clean today, let me reach under the cubboard and see what I have,” not realizing that whatever is done with the products I use to clean, once I’ve cleaned, can be harmful to not only the earth itself, but any living things that may come in contact with the wash off. We live in a sterilized world, where the idea of a clean home, clean work place and clean where ever we take our children is the first order of business. But we need to stop and think about what harm we may be doing in our quest for the cleanest living area.
There are so many options for safe-cleaning on the market today that you don’t really have to look much further than your local grocery shelf. Pay attention to the words that describe the items you are buying. Do they contain the words, toxic, poisonous, or dangerous? If they do, then keep reading the next product’s ingredients, there is a better choice out there.
How to prevent excess
A good way to utilize this kind of thinking is to buy in bulk. Buying in bulk cuts way down on the packaging and more often than not, it is a better buy just by the price. That’s a win-win, in my book!
A great way to curb the surplus in a landfill is to reuse things and an easy one to do this with is the plastic bags you get to carry your groceries home in. Rather than getting the bags home, emptying the contents and putting them away and throw the used bag into the trash, think about the different things you can use that bag for; in my house all of our home-lunches are carried to and from school in reused plastic bags. We even reuse the bags over and again, until we know that nothing will stay bagged but will fall out. Just by reusing items like this will cut down greatly on the stuff that is filling up our precious space-craved landfills.
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