Morning Thoughts – Oldinvestor

May 21, 2020

The big drop yesterday? What the hell happened. Josh had mentioned the weakness in the last three days. I noticed this as well, it was hard not to. UNG had pretty much gone to $12.5 and stopped each day. Yesterday was different; the 10:30 candle on 5 min chart is larger, it stands out. This was during one a very prominent surprise oil draw during the EIA oil report that normally is published at 10:30 est. on Wednesdays.

So my main focus here is that oil got a surprise bullish report, this is well received by oil of course, not so much for natgas. This is going to sound more obvious to most readers, but for now I want to sound obvious to most. When the pandemic was starting to have a major effect on demand, it was perceived that oil production was going to crash down all around us and the associated gas would be drug down with it. This did happen, but to what degree?

Daily production posted from HFIR

Natgas production was already on the decline due to horrible pricing for producers. I would say this is responsible for lowering production to 91-92Bcf/d; normal decline. Another 1.4Bcf/d, we just learned, is due to a dry gas producer (EQT) in the northeastern US. This brings the total production down to 90.6Bcf/d. Now keep in mind, everyone is still not totally clear on what the correct production numbers are, my self included (obviously). If production is as low as 88Bcf/d right now; it is possible the drop in associated gas is responsible for a reduction in natgas production by 2.6Bcf/d. That’s drastic…

Circle back around to now. If oil had one of the most bullish surprising days, at least in a long while, especially on the back of such bearishness and during a high volatility time with high running emotions…. And… we just rode a wave in natgas due to associated gas falling. It is possible that when oil reverses it’s mentality back to prices are climbing, the us oil market has quickly swung back to being under supplied; this is bearish for natgas. Now I think natgas seems to be, often, pulled around by the horns by big players. Not in a market manipulation kind of way, but just in a big influential kind of way. I don’t really know how to compound on that right now. plus I now have a call, I want to buy some UNG this morning, but I must answer this call first.

Back again. to recap, Natgas hit a ceiling Monday, Tuesday, and Wednesday. So maybe that is all natgas has in it for now to the up side. I still lean more to the bull side because of pricing and what it is slowly doing to the market. Oil did drag down associated gas, but we aren’t sure this caused a 2.6Bcf/d drop in natgas production. That number could be way over rated, there have been revisions since that chart above was posted. The drop in production was not as drastic. So the drop due to associated gas could be closer to 1 – 1.5Bcf/d. Also oil isn’t going to just jump back online. Let’s not forget, pricing for oil and natgas are both much to low to allow production a fast recovery. There are still bankruptcies to process and capex to cut even now.

I need to speed this along

My position

UNG – now back to 40% in with a new average $12.16

I’m interested in adding another 10% to UNG closer to $11 if we can get there today or tomorrow. July is again 15c below $2. It feels as though we are swirling the drain again. That, to me is a fair indication to buy. I’m betting there will be more dry gas production slowing/cutting soon enough to give natgas pricing another shot. Until I hear solid news of more LNG cancellations, I feel I’m being cautious enough of that for now. Report comes at 10:30 est time for natgas. the link well auto refresh at 10:30.

I will add during/just after the report is released on a sizable drop anywhere near $11 in UNG. I will also reduce if somehow UNG jumps to my average of $12.16. 10% to buy or 10% to reduce. Good Luck