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I was just reading this article from Andy Xie posted on a different thread and it reminded me to check into the crude futures curve.

 

Early this year, there was a huge disconnect between spot prices and future prices for oil. This corrected pretty quickly with oil for short delivery now at around $70. The inverse happened last July when spot prices were quite a bit higher than future prices. Again the spot price moved lower to stabilize the curve.

 

I am not saying that this is a 100% reliable indicator for the direction of spot prices since the entire price curve moves up and down over time, but when the price of spot is way above or way below the long term prices, arbitrageurs and producers will try to profit from it which will tend to close the gap. It did work perfectly to bet against oil in July of 08 and for oil at the beginning of this year.

 

Currently, there is a very large contango between natural gas prices for today's delivery vs next year or 50%. For oil it is now down to only 8%. Then if you look at the compounded rate between June 2010 and June 2017 for both natural gas and oil it is about exactly the same at around 3% a year. So market forces should move higher the spot price of natural gas to a level closer to its future price at some point. It also seems to make sense for future prices to be where they are based on regular demand and the now much higher cost to produce natural gas.

 

I found this article which I find explains well the mechanism.

 

http://www.getreallist.com/natty-dread.html

 

What do you guys think? Is there a solid opportunity here?

 

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Nice find - article and the website.  Thanks!

 

Yes, I think there is an opportunity.  Variety of ways to play it.  What I would do, am doing similar wrt oil, is look for a gassy production company stock that has long reserve life for natgas.  Hopefully the shares will be underpriced because stock price is not recognizing value of the LT reserves.  That is exactly my premise for holding lots of Imp Oil, whose Kearl project go-ahead has increased proved reserves substantially.

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You might want to keep in mind that gas pricing is largely regional, wheras oil is global (as the ability of a tanker to deliver wherever the price is highest permits arbitrage, which is a lot more limited if you're stuck at the end of a gas pipeline/collection system).

 

Re Alta/Henry Hub gas:

 

Almost 45% of existing gas production goes to tarsands; 'green' tarsands by 10% and you've just increased the supply on the local market by 4.5%. Lower prices.

 

Alta shale is relatively untapped & close to existing collection systems. The province needs the work/royalties, & the hookup costs are relatively cheap. They will get drilled sooner vs later, & that new volume will more than offset existing depletion rates. Lower prices.

 

There are few west coast LNG connections, far away, & you've still got to get the gas across the ocean. High frictional costs limiting arbitage.

 

Not terribly promising

 

SD

 

 

 

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SD,

 

For arbitrage, I had in mind that some NA players would buy and store gas, buy a put future 12 months out at a 50% premium price to spot and then deliver the gas next year pocketing the difference. Their cost is storage and premium on the contract. I would imagine that their is quite a bit of money to be made. The impact of their action should be to shrink the gap between spot and future prices.

 

The issue is that storage is getting full in NA and at that point pricing could drop in theory to $0 if supply remains much greater than demand. As you mentioned export/import don't work so well for nat gas. However, with lower and lower spot prices, producers will at least stop new drilling and possibly close the tap bringing supply in line with demand and eventually less than demand depleting inventories.

 

My point in general is that something is out of whack here. Either spot is wrong, future prices are wrong or a combination of both. This cannot last forever, something has to give and I am trying to find out if there is something in it for me.

 

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Short futures & go long cash; reverse when they rationalize again.

 

All those storage purchases are boosting spot, & were it not for todays ultra-low cash costs - the volume would not be as high as it currently is. When the buying stops - both spot & the futures should decline, & they'll decline faster if cash costs also increase (as everyone starts selling to take the gains & avoid the additional/alternative carry). Add to it new oversupply & recession driven demand destruction.

 

Interesting .. but risky

 

SD

 

 

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  • 2 years later...

Who knows, but I would say another year.  You are starting to get diesel, gasoline and coal users switching to natural gas, but the amount of supply is still significantly above demand.  At some point as the transition continues, that will start to get closer to parity. 

 

http://finance.yahoo.com/news/drillers-dropping-diesel-cheaper-natural-210751346.html;_ylt=Am.E3X2gu9NXVfAi72w7dN6iuYdG;_ylu=X3oDMTQ0ZGtyZmZzBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDZmRiNTg2OWMtMDMxYS0zYjEzLWI3N2EtMjk4Mzg0OWY5MTg2BHBvcwM2BHNlYwN0b3Bfc3RvcnkEdmVyA2RkYWI2OTQwLTg0MWEtMTFlMS1iZjNhLTg5MTJkMzIyOWNiNQ--;_ylg=X3oDMTFvdnRqYzJoBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

 

So I would guess we are at least a year from that, but you will start to see consolidation before that in the industry as exploration companies need to minimize costs.  Cheers! 

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Who knows, but I would say another year.  You are starting to get diesel, gasoline and coal users switching to natural gas, but the amount of supply is still significantly above demand.  At some point as the transition continues, that will start to get closer to parity. 

 

http://finance.yahoo.com/news/drillers-dropping-diesel-cheaper-natural-210751346.html;_ylt=Am.E3X2gu9NXVfAi72w7dN6iuYdG;_ylu=X3oDMTQ0ZGtyZmZzBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDZmRiNTg2OWMtMDMxYS0zYjEzLWI3N2EtMjk4Mzg0OWY5MTg2BHBvcwM2BHNlYwN0b3Bfc3RvcnkEdmVyA2RkYWI2OTQwLTg0MWEtMTFlMS1iZjNhLTg5MTJkMzIyOWNiNQ--;_ylg=X3oDMTFvdnRqYzJoBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

 

So I would guess we are at least a year from that, but you will start to see consolidation before that in the industry as exploration companies need to minimize costs.  Cheers! 

 

EEK!

 

Maybe December...2020?

 

http://www.cmegroup.com/trading/energy/natural-gas/natural-gas.html

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http://business.financialpost.com/2012/04/11/natural-gas-producers-pin-hopes-on-asian-market-as-prices-sink/

 

 

“a new export market for liquefied gas from the British Columbia coast is so close they can smell it. A consortium led by Royal Dutch Shell PLC seemed close Wednesday to a go-ahead decision on a $12.35-billion gas liquefaction terminal in Kitimat, while another proposed LNG project secured a federal export permit. The developments provide solid support for the takeoff of an LNG industry that promises richer prices for Canadian gas from Asian consumers...

 

BC LNG Export Co-operative, a partnership of the Kitimat-based Haisla Nation and Houston-baed LNG Partners, received a 20-year export permit from the federal government. The group intends to ship 1.8 million tonnes of liquefied natural gas a year to markets in Asia starting late in 2013 or early in 2014...

 

A third project, Kitimat LNG led by Apache Corp. with partners Encana Corp. and EOG Resources Inc., received an export permit last fall and expects to secure a major Asian customer before year-end. The project, estimated to cost $15-billion, is expected to start shipping gas in 2016 “

 

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Can anyone suggest how an investor can leverage himself against a rise in the price of natural gas, the commodity. In other words benefit from a future raise in the price of natural gas 2x, 3x, 4x, etc. Also at the same time minimizing the expense to do so. I would consider this a 5 year play. Anyone familiar with an ETF, etc. that would accomplish this??  No complicated hedges or options.

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Can anyone suggest how an investor can leverage himself against a rise in the price of natural gas, the commodity. In other words benefit from a future raise in the price of natural gas 2x, 3x, 4x, etc. Also at the same time minimizing the expense to do so. I would consider this a 5 year play. Anyone familiar with an ETF, etc. that would accomplish this??  No complicated hedges or options.

 

GAS.to

 

Not leveraged but simply rolls forwards

 

http://ca.ishares.com/product_info/fund/overview/GAS.htm

 

 

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I was looking at Encana's hedging on gas price, they have about 2/3 hedged at about $6 in 2012 and then the hedges drop off dramatically. Somebody did a good job here, but 2013 results could be alot worse. The $17 crashed price still looks too risky .

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I was looking at Encana's hedging on gas price, they have about 2/3 hedged at about $6 in 2012 and then the hedges drop off dramatically. Somebody did a good job here, but 2013 results could be alot worse. The $17 crashed price still looks too risky .

 

With rigs being pulled off gas every week and will not return until a better price is available I think this glut will be addressed sooner than later. I am wiling to bet we will not see a repeat of this winter. Yes could go lower but Ecana is hedged as you say. I do not think we will see 2.00 gas in 2013 and no not a dollar either. I am buying Encana as it falls and will take the dividend to wait. I hope to be part of a cheering thread like we had for BAC

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I was looking at Encana's hedging on gas price, they have about 2/3 hedged at about $6 in 2012 and then the hedges drop off dramatically. Somebody did a good job here, but 2013 results could be alot worse. The $17 crashed price still looks too risky .

 

With rigs being pulled off gas every week and will not return until a better price is available I think this glut will be addressed sooner than later. I am wiling to bet we will not see a repeat of this winter. Yes could go lower but Ecana is hedged as you say. I do not think we will see 2.00 gas in 2013 and no not a dollar either. I am buying Encana as it falls and will take the dividend to wait. I hope to be part of a cheering thread like we had for BAC

I have been buying ECA as well I have not done a deep dive however it is sitting on one of the worlds largest reserves of cheap gas and the balance sheet is strong enough to survive a couple of years of ugly prices. It is also a sitting duck as far as a take over is concerned.
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I think you guys are missing this key point. Kuppy on Gas.

 

Harris, good report. I agree.  I also think that natural gas is at or close to a bottom.  Naturally one cannot predict when that will change but I would like to have a trade that allows me to benefit from a future increase in the price.  I think its a 5 year trade. Simple and cheap is the type of trade I am looking for, and also one that is leveraged 2x, 3x, etc. to the price.  Are there any ETFs out there??  Any other vehicles??  I want to stay away from natural gas companies because the leverage inherent in these companies can bust them.

 

You’re a years early. Something like 30% of the nat gas in the US is now produced as a byproduct of liquids production. That ratio will increase in the future. These producers do not care about the price of nat gas. I’d really expect prices to drop from here and stabilize at a much lower level for a long period of time. You’ll eventually see most of the primary nat gas producers go bankrupt when their hedge books can no longer protect them. If I weren’t so focused on Mongolia, I’d be trying to find a way to play the bankruptcy of most of the US primary nat gas producers. Remember, in some cases, if they do not continue drilling wells, they lose their acreage. This will end with lots of bankruptcies. Only then, will we see higher prices, but not much higher than $3.00. The dynamics of the industry have changed for the longer term at least.

 

http://adventuresincapitalism.com/askkuppy.aspx

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"Wow!

On his call just now, Jeff Gundlach just unveiled his favorite investment idea: Buying up natural gas assets."

 

 

Read more: http://www.businessinsider.com/jeff-gundlach-buying-natural-gas-2012-4#ixzz1sLHC5kzr

 

While I disagree with some of Gundlach's opinions on the US being a tragedy waiting to happen, I believe he has the correct view on nat gas. 

 

Who cares what nat gas prices go to at this point?  Nat gas is likely trading at well below the marginal cost of production.  You want to be in a position to snap up nat gas assets from distressed companies.  Partner with the best to do that, I say.

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"Wow!

On his call just now, Jeff Gundlach just unveiled his favorite investment idea: Buying up natural gas assets."

 

 

Read more: http://www.businessinsider.com/jeff-gundlach-buying-natural-gas-2012-4#ixzz1sLHC5kzr

 

While I disagree with some of Gundlach's opinions on the US being a tragedy waiting to happen, I believe he has the correct view on nat gas. 

 

Who cares what nat gas prices go to at this point?  Nat gas is likely trading at well below the marginal cost of production.  You want to be in a position to snap up nat gas assets from distressed companies.  Partner with the best to do that, I say.

 

I think you have to differentiate between spot nat gas and longer dated nat gas, looking at the futures curve, you do see it upward sloping especially when you go longer out. At that point I don't see prices getting too below marginal cost

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