Morning Update Jan 21, 2020

  • Production is still stalling, but this is common until March-ish
  • EIA Drilling report today
  • Managed Money positioning is getting wild

Daily production data, which has been supplied by HFI Research in a free article here. I’m sharing the daily chart and monthly continuous chart from RonHenergy.com. This is to show how production can appear to be flattening out and look as though it will be falling soon. I cannot say whether or not that production is going to start falling. I can only warn that this flattening affect clearly happens every year. So do not get too excited that this may be a shift in the market. However, there have been many companies announce they will be spending less on exploration and shift their focus to cash flow. Many companies are already struggling to survive with NG prices at or below $2. Bankruptcies will happen this year. EP Energy is one. I read somewhere Chesapeake Energy is carrying $8 billion in debt. Just because I company files bankruptcy, doesn’t mean their productions ceases. It is, however, evidence that drilling of new wells will be slowed, and quite possibly take longer for another company to take over and start drilling new wells on those same leases. Eventually we will see production turn and trend down long term, as seen in 2016. It will most likely take much longer than you or I want to see that trend develop.

Daily Lower 48 Production at seekingalpha.com supplied by HFIR
Continuous Monthly production line graph at RonHenergy.com

The EIA will be updating their Drilling Productivity Report today. This is a monthly report, but I believe it is a good source to find which areas or production are still strong or weakening. The last report shows Appalachia with a reduction in overall production, we’ll see if that trend continues. There are other factors, such as DUCs, new well vs legacy well production, and rig count. One thing is certain, the efficiency gains (per well) that seems to save a lot of companies back in 2016 are no longer to be had. All these factors show signs of the pending turn for production, but also appear to not be ready for the inevitable fall.

The last few weeks we still see longs building a much stronger position. Also, short positions are at, I believe, an all time record for NG. The chart below shows through Jan 14th. As both long and short positions build, this could lead to more volatility in pricing. I hope so. I feel I’m positioned well for a big move in either direction.

Managed Money Positioning at RonHenergy.com

On to my positioning. I’ve already added this morning to UNG. I added 30% of my funds to UNG at $15.04 to put me 80% in, with an average price of $15.85. I misspoke, 100% in will come around $14.4 in UNG or near $1.85 for NG prices (I mentioned $1.75). Either way, I’m good with being all in UNG at $14.4. A further fall from there will lead to me converting 20% of my shares to UGAZ. I think it’s too soon to be talking about taking a UGAZ position, but that’s the plan. I will of course reduce back to 50% holdings if $15.85 is reached unless there is some profound reason to wait. I will go ahead and place a limit order to sell the 30% I just purchased at $15.85. Let me add that I’m not confident Natgas has hit bottom. In fact, I’m pretty sure this is going to be range bound in the area if not lower than this price range, for there is not yet a strong reason for prices to recover even above $2.2 yet in my biased opinion. Hence, my reason for leaving room to convert to UGAZ on a truly dire pricing situation.

Anyway, that’s where I’m at. Good luck

Oldinvestor

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