Morning Update – May 19, 2020

To extend thoughts on the big down revision in production this weekend, causing prices to gap up Sunday… Josh Heller shared with me that Equitrans Midstream reported it was notified of reduction of natgas (https://seekingalpha.com/news/3575651-equitrans-top-producer-customer-to-slash-natural-gas-output).

The article I shared is only a quick update, it’s not a full article. It does mention EQM pipeline and speaks of Pennsylvania and Ohio. This area would be part of the Mid Atlantic region as viewed by the EIA. I’m not well versed in regional pricing or their effects on NYMEX pricing of natgas, but one thing stands out; 3 of the main Northeastern regional prices listed on the EIA website look pretty rough. These prices I’m showing below, I believe are for yesterday trading, or possibly the weekend. Either way, it is recent pricing for the entire region and it looks convincing to confirm why a producer would want to shut in wells. Dry gas wells, in a region of strong production and large, high producing wells.

EIA daily spot pricing
Wholesale Electricity and Natgas by region at EIA.gov

This tells me producers are starting to weigh the cost of producing at these prices vs waiting out by cutting back production. I also believe other producers will follow this lead, and soon if pricing doesn’t reverse. This is not a matter of forced shut-ins as has been the case with oil. This is purely a decision by a company to reduce output in an attempt to force a shift in the S/D balance, allowing prices to trend higher.

This has a limited bullish effect on the market still, since these wells can quickly be brought back online and go right back to producing natgas. So while this is exciting, and it is a real cut back in production, it will be limited. When pricing returns to a high enough level, production can ramp up quickly, keeping a ceiling on the price of regional and NYMEX NG pricing.

My position

UNG – 30% in with an average of $12.36 – placing an order to reduce again at $12.95

I remain optimistic that pricing will creep up ever so slightly more and I will exit soon this go around. I believe I would like to reduce again at $13ish for UNG. This may be reaching, but any more news of producers cutting back in the Appalachia area, will be all that is needed. $2 Natgas is too cheap for producers; Dry gas has already begun to budge. May we see more cuts to come. I’ll go ahead with an order to sell down to 10% UNG holding at $12.95 now. Let’s see what happens. Good luck

Oldinvestor