A fundamental beginning – Step 2

I want to keep these lessons as short as possible. By doing this, you’ll miss out on some finer details that may be important down the road. I would like to think it is more important to just be aware of this info rather than to dive too deep and bore you to death.

When talking about natural gas and how it functions in the United States, gas will be referenced using the U.S. customary units of measurement. examples of these will be

  • BTU – British Thermal Unit
  • MMBTU – Million BTU
  • cf – Cubic Feet
  • MMcf – Million cubic feet
  • Bcf – Billion cubic feet
  • Tcf – Trillion cubic feet (yeah, you heard right)
  • Bcf/d – Bcf per day
  • Tonnes – I think I’ve only heard this in reference to LNG – Liquefied Natural Gas on a boat.

The two key elements are British Thermal Units and Cubic Feet.

First thing I’m going to mention is the MM in MMBTU. M is the roman numeral for 1000. So MM is 1000×1000 = 1,000,000. You may see someone write MBTU or MMBTU. This is not a typo, they should be talking in terms of Million BTU. Same with MMcf, this is million cubic feet, which you may hear about a lot. 1000 MMcf would be the same as Bcf or billion cubic feet.

Now, back to BTU – British Thermal Unit. BTUs are how we gauge how hot or lack of hot (cold) something gets. If you get into trading NG (natural gas) futures contracts, you are trading a quantity of 10,000 MMBTU. The current price for December contract (NGZ19) of natural gas is $2.856 per MMBTU. Multiply that by 10,000 and you have 1 full contract of NGZ19. That’s $28,560 worth of NG in one contract. A lot. Luckily there is margin that prevents you from having to fork over that much money just to trade one contract. Margin will be covered in trading lessons.

If you were to search NGZ19 on google, market watch, barchart, and yahoo finance are the first three sites listed and each will give a recent (usually delayed 10 mins) price of December gas contract. I recommend using Tradingview. I use it a lot, and it’s free to use.

Maybe you don’t plan to trade natural gas contracts, maybe you just plan to trade UNG, UGAZ, and DGAZ, then you still need to understand cubic feet. The following is not required knowledge but there are about 1000BTUs for every 1cf of methane (natural gas). This can fluctuate, but for simplicity sake, go with 1000. 1 cubic foot is between this size of a basketball and a beach ball and we will discuss gas by the billions most of the time. It shouldn’t take long to get used to seeing Bcf behind every number. Right now just understand MM is million, B is billion, T is trillion, B/d is billion per day. If you subscribe to a data service such as HFIR on seeking alpha, you’ll get daily updates of this data.

Next up… Production

Oldinvestor

A fundamental beginning… Step 1

  • Agenda
    • Basic understanding of what Natural Gas is
    • A fundamental beginning
Image provided by EIA.gov

If you are going to trade something, you should at least have a basic understanding of what it is and how it interacts with the world around it. Above is an image from EIA.org (Energy Information Administration), it shows a basic flow chart of stages of getting gas out of the ground and to consumers. I’ve shared a link below, it is set to open in a new tab so you can read about the basics of what gas is, and a little about the processes it goes through to get to consumers. It should take less than 10 mins to read. I would say this much info is vital. There are more articles on the EIA website to keep learning more if you desire.

https://www.eia.gov/energyexplained/natural-gas/

I don’t feel the need to review this article, if I get many questions, I’ll post them and my attempted answers on here. The EIA website has a lot of information for learning and they also share a lot of data. Now, on with the fundamentals.

A fundamental beginning

Supply and Demand is what it’s all about. With my limited knowledge of the world and its ways, I feel natgas fundamentals are some of the easiest to comprehend. No doubt it can get more tricky, but the basics are simple. Companies drill wells to supply gas to an infrastructure of pipelines. Some of that gas is processed for delivery to be used right away, and some goes into underground storage.

Companies will drill and collect gas in pipelines and transfer that to a processing plant to make sure it only has methane in the gas. These would be producers of gas, they are supplying the gas. The most basic idea here is as the price of gas goes up, this entices more people to go find and drill for gas because it pays well and is worth the effort. As the price of gas falls, it may not be worth the effort. That’s the first piece of the puzzle.

There are many examples of consumers of natural gas. Most people using gas simply burn it for heat. Without getting too deep, I’ll use the example of a power plant. They burn gas to heat water to turn a turbine that turns a generator and generates electricity. So if the price is low, they want to burn gas, if the price goes up too high, the same power plant may choose to switch to burning coal instead. All the details of demand can get very deep, such as the idea of a power plant burning coal or gas, they can’t just flip a switch and MOST power plants just are not equipped to burn gas or coal period. This is just an example of how the price might affect demand. Price of gas goes down, people want to burn gas, price goes up, people find something else to burn.

Balance – Anticipation – Greed

Some of you can already see where I’m going with this. As the price goes up, companies drill and produce more gas. At the same time, as the price is still going up, people use less gas and may find something else to burn. Residential areas can burn wood, use electricity, burn oil or coal. There comes this shift in the S/D (Supply/Demand) Balance. Producers are supplying more, consumers are using less. This will cause the price to fall, causing producers to slow down or stop drilling for more gas, and consumers will begin to use more gas; all this causes the price of gas to climb higher again. Major changes in how much gas companies produce or consume takes years. Right now it is important to understand the balance exists and is always changing.

Consuming companies and producing companies both study long term trends in the market to try and understand what might happen over the long term future. These companies try and anticipate how well a long term investment might turn out. Many times greed gets in the way. Human beings don’t always make the best decision, especially if there is chance of getting very rich from an idea. For example, producers might over supply the market with gas because the price is very high and it pays so well they want to get as much money as they can by supplying as much gas as they can right now! So these companies take on debt to buy equipment to drill more and produce more to make more money. This can catch up to them; once the market is over supplied, the price can drop low enough the producer is losing money. There is enough info just on this one subject, I could write a few more lessons. Consider yourself spared for now.

I mentioned some gas gets stored underground. The basics of this is important because without storage, we would run out of gas in the winter. I’ll share another link from EIA website.

http://ir.eia.gov/ngs/ngs.html

I mainly want to look at this chart. This shows total “working” gas; working gas is essentially the amount of gas we can easily store in the ground and get back out of the ground. US gas production is fairly steady throughout the year. Here is the key, in summer we use less gas than is produced so we store the extra back in the ground in specific, easy to access locations. In the winter we consume gas way faster than we can produce it, so we tap into the storage and get the extra gas that is needed. Why don’t we just produce more? My short answer would be because of the natural order of life and business of the petroleum industry. If you want to know more, start learning well dynamics, what it takes to produce gas from a well and keep it producing without killing the well and having to revive it. Right now it’d be best to focus on the chart. The chart shows how the storage changes year round over the last couple years. This chart also shows the 5 year average (the black line) for gas on the same timeline. Lastly, this chart shows the minimum stocks and the maximum stocks in the last five years, shown in the grayed fill area of the chart. Stocks is the EIA’s term for the amount of gas in the ground. Gas unit of measurement in billion cubic feet or Bcf which is common reference increment of gas. For example, 1 year in the last 5 years stocks got as low as 800Bcf.

So all this info is swirling right now.

  • Producers supply gas
  • Many entities consume gas, this is demand
  • The S/D balance governs long term movements in the price of gas
  • EIA is a source of free info, one we’ll explore more of
  • Bcf is one unit of measurement when referencing natgas

Oldinvestor