Morning Update and Warning – March 18, 2020

Be full warned: I’m not here giving advice. I’m only sharing what I know and how I feel for myself on this site. The one bit advice anyone should ever give when trading, is this: Don’t chance money that you can’t afford to lose. Very well…

Natgas prices are heading for new lows and the market appears to be forward thinking. Oil keeps seeking out new lows, so this will continue to feel bullish for Gas. Keep in mind falling prices in oil now don’t translate to immediate changes in production, only in planning and drilling. Falling prices in oil to these drastic levels does, however, improve the mood of gas trading. Which may not be exactly what I wish to see. If oil were still going strong and weren’t declining, this would reinforce bearish mentality for gas and prices might fall to even $1.25 in a time of panic selling. Since oil prices have already fallen into the mid 20s (CLJ20 at $25.26 right now), gas traders have bullish fundamentals to look forward to and the price may never see the $1.25 panic.

With that said. True gas traders will not just be trading the prompt contract. I can’t say that; few gas traders will only be trading the prompt contract. Most will trade contracts and options “along the curve”. Sure, it is believed that potentially half the US will be sitting at home in the next couple weeks. So most gas contracts will fall, with the more prompt contracts falling the most. A more conservative trader might spread out their money over multiple contracts. Even though April contract is expected for fall more, December may not fall much. If traders expect production to stay on the decline, by December, this could become a problem for the physical market and we have a scenario where areas of the US could run out of gas. And the current demand destruction may have little effect on December contract because December delivery is 9 months away. There is still a lot of time to get deep into an under-supply situation by then.

As for trading UNG/UGAZ/DGAZ… I’m going to dial my strategy back again, and wait a bit longer. Just like there is this lagging timeline between drilling and production, there will also be a lagging period between the idea and the occurrence of actual demand destruction. Everyone has it on their minds that the country could just press the pause button for two weeks. Some businesses around where I live have already closed in support of the idea. I found what I was looking for.

Monthly Residential, Commercial, and Industrial Demand by EIA.gov at RonHenergy.com

This monthly data is behind, because EIA never produces monthly data faster than this. The image may be too small, but I’ve pointed to April of 2019 to show what to expect for a normal April. Average commercial demand for April of 2019 was 8.28Bcf/d. So if all commercial businesses turn off all sources of heat (grills, fryers, ovens, space heating, heating processes for anything that use natgas), the market would lose 8.28Bcf/d. That’s roughly 250Bcf per month. That’s a lotta gas. Will everyone, everywhere shut off everything? No way, but I’m expecting a drop of at least 10% at some point. That’s just commercial; luckily it’s not winter time.

My guess is industrial will not shut down unless enough employees don’t show up for work, or the government steps in. That’s for the immediate. Economic destruction could have long term implications that I wouldn’t even know to speculate how much demand would be lost. If we start hearing about government forced shutdowns of bakeries, like the one I work at, this will effect industrial demand. Also understand that no one in the industrial sector is shutting down unless told to or they lose enough employees or orders…. I should stop before I really start rambling.

I’m going to publish this; later I hope to have time to find some articles to share. We’ll see, best of good intentions…

I’ve considered getting out all together. I’m going to hold with my 35% UNG and 1.3% USO, but will NOT be adding… At this moment I’m seeing $1.643 for NGJ20 (April contract). I want to see this below $1.6 and any sign of it continuing lower, I will wait longer and not add much. Let’s say Gas gets to $1.58 and stalls, I’ll only add 10% there. I don’t want to get past 50% unless gas gets below $1.5.

I still stick with this idea: the lower we go, the more volatile pricing will get. If I layer in, I should be able to scrape some quick gains off and wait for the rest to recover. For now, I’m going to plan to see $1.25 and before I consider even touching UGAZ. Tomorrow that last idea may change, but that’s how I feel about this market right now. Good Luck

Oldinvestor.