Morning Update Mach 11, 2020

I admit I’ve pushed natgas to the side a bit too far aside to focus on a bad VIX trade. I was too early. Now is probably a fair point of entry, but could still be much too soon if panic begins in the US. Once the panic is huge in the US and “blood is on the streets” so the saying goes, that is when you want to short TVIX. Rather, I’ve decided I think I should just go long on SPXL. I’ve traded UGAZ for over 4 years now and managed the decay quite well; SPXL is nowhere near the decay of UGAZ.

I’m purchasing 1 share of USO! at $7.03. That is roughly 0.7% of my account. This is not enough to disrupt my gas trading in the account, but I will be keeping track of the trade here as well. I will simply add if oil prices continue to fall. Looking at oil for 10 mins, if USO drops to $6.50, I’ll add 2 more shares. At $6, I’ll add 4 shares and so on. Oil can only go so far down before all global producers/exporters are really freaking out. Most of them are already.

Back to Gas, I’m going to read over the last free article by HFIR: Natural Gas Producers Will Receive The Biggest Benefit From The Latest Oil Market Craze

click the title to go to the article if you like. I’ll review this article and point out a few things later as soon as I get the chance. The biggest factor that should be pointed out now is production is falling, and that is key. Prices have tested bottom twice, held above $1.6. The gas market could test bottom again, but with production on it’s way down I believe there is little concern of sub $1.5. I mean UGAZ at that point sounds great… The boost from Oil is substantial, but if you can find your way to EIA website, look at 2014 to 2016 to see how long it took for oil production to stop rising after rig counts crashed. I will look this up later today. Gas production is already falling without the help of oil crashing, oil production will not just stop. Oil will not give gas a boost just yet physically, but gas will certainly be more bullish mentally because of oil crashing.

OK, as promised… Rig counts

Baker Hughes US Crude Oil Rig Count by TradingEconomics.com

With a quick search for “oil rig count chart”, this was the second match. Ycharts was the first, but they wanted me to sign up to look at a 10Y chart. bla… I remember from Christmas 2014 to somewhere early 2015, rig counts falling like crazy. I had gotten out of the industry in 2013, looks like I chose a good time to leave. anyway, lets compare this to Oil production.

Increase/decrease in US Oil production from Jan 2014 to June 2018 at EIA.gov STEO data browser

Zooming in on Rig count below. You see Rigs start falling off quick by the start of 2015 and drastically fall until around August 2015. Above shows Oil production maxed out in April of 2015, at least 4 months into rig counts falling. Now lets look at pricing as well!

Baker Hughes US Oil rig count from Jan 2014 to March 2017
US Crude Oil production vs WTI Spot pricing at EIA.gov

Now you see WTI spot pricing had fallen from over $100/bbl to around $50/bbl yet production continues higher.

My point is this, oil production will only slow following a cut back in drilling, by months. Taking 600 oil rigs offline, production still increased output. Operators (producing oil companies), again have to pay the bills. To do this, they must keep producing, while cutting back on drilling costs of new wells. Cash flow here on a grand scale seems pretty easy to me.

Today is different in a few clear ways to me. Permian wasn’t a consideration in 2014/15/16. Shale well efficiency has increased dramatically, 1600 drilling may never be in operation all at once ever again in the US.

Baker Hughes US Oil Rig count from Jan 2018 to March 2020 at TradingEconomics.com
US Crude Oil Production from Feb 2018 to Jan 2020 at EIA.gov

Clearly there is a repeat in this pattern of oil production trailing a drilling rig count decline by months. Of course, we see drilling rigs being reduced all of 2019, so production should have already slowed? Well there is always DUCs? maybe…. I’m really not sure, because I’ve just now dove into all this in the last 45 mins.

If you got to https://www.eia.gov/petroleum/drilling/ , along the right side is a DUC supplement PDF. In that PDF is a total DUC count. I’ll include oil and gas since they are there together. All regions have been on the decline and Appalachia has been on the decline for DUCs since before it was popular to increase DUCs, if that makes sense.

Back to my point. Just because drilling rig counts are falling, doesn’t mean production will fall. There is a lot of money tied up in DUCs, and they must be completed and brought online at some point. I’m sure most, if not all State have laws that say a well cannot sit dormant but for so long, it must be completed and produced, or plugged and abandoned. This would be in years, but many of these wells have already been setting for years; which may be why Appalachia has been completing wells faster than they have been drilling for some time. That and cash flow is more better when you flow production from a well, as opposed to letting it set there.

ok, I should stop here. I’ve shown that oil production will most likely not slow down immediately. I did not include pricing into that last EIA chart, but it’s been drifting around $60/bbl, which is apparently was the new norm, until now… Oil prices will more be affected by global dramatization between Saudi Arabia and Russia. That’s why I hate following oil. It can flip 20% over the weekend because two countries set it up for disaster. Nothing to do with real fundamentals. Fundamentals will still win out eventually; with gas, fundamentals show through in the price sooner and more often

I didn’t really read the HFI article, and now i don’t have time… Maybe tomorrow. I don’t even have time to read back over this and correct any errors. sorry about that.

This is from earlier and it’s still true: For now I’m still 50% in UNG and would like to see gas get to $2 for another reduction down to 30% holdings. This would be near $15.5 UNG. I’m not so confident the price will move on to $2 this week, and I’m certainly in no rush to add to my position right now unless UNG falls back to $13. Good Luck

Oldinvestor