The Heller Angle – May 15, 2020

Let me talk a little bit about how I am thinking about the NG market heading into summer and fall. Covid-19 is making me trade much smaller. It’s tough to say how much demand is growing/shrinking, and how quickly. LNG demand is down from all time highs of 9Bcf to the latest reports of around 6Bcf. We also see some weakness in industrial and residential (2-4Bcf). This demand destruction is definitely bearish and a big reason we are trading under $2 NG. Offsetting most of this demand destruction has been that supplies have fallen a similar amount. The sources I follow show a decline of 7.5Bcf in supply in the US. I believe that the LNG decline will be shorter term in nature and will come back and make new highs in the winter. Yes it might not be a fun 6 months for NG bulls, but the longer term view is bullish (10+ BCF LNG exports). The difference here is that I don’t see supply coming back quickly. I’ve read all the latest conference calls from EQT, AR, RRC, COG, SWN, CNX, MR, GPOR, and CRK. All of these producers are focused on Free Cash Flow and the group will barely grow its production. This small production growth is not enough to offset natural declines elsewhere. Most of these names have debt / balance sheet issues that they are cleaning up. We can also confirm the decline in supplies as sustainable by the Baker Hughes Rig Count and Primary Vision Frac Spread Count https://twitter.com/PrimaryVision. I also use the EIA DPR Monthly report to confirm these views https://www.eia.gov/petroleum/drilling/#tabs-summary-2. The DPR report is showing NG production declining by 0.86Bcf per month and is accelerating from lower Rigs and Frac spreads (can confirm by looking at March report and seeing a decline of 0.19Bcf per month). I am expecting to see a decline of over 1Bcf per month in the next EIA DPR report in a few days on the 18th.

NG market pretty quiet today and I am content to let my NG put spreads to slowly decay. I am still looking for 2.04-2.10 to sell a call spread. While we wait, let’s look at the call side, just in case the market ramps next week (my view) versus making the trade today. NGN20 is 1.854 with a straddle price at 1.85 of approximately 0.34 (same as Wednesday). As always, I want to be out of the noise and be 1.5 straddles away or approximately 0.51. If we were to sell the 2.35 / 2.50 call spread today, we would expect to receive 0.014-0.015. That is a solid return but let’s just watch it. I feel more comfortable selling call spreads above 2.50 and ideally above 2.75 later this summer.

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