The Heller Angle – July 2nd, 2020

My plan was to write at least once a week but that has obviously fallen off track. As far as fundamentals and price action, I’ve been dead wrong. I expected production to fall slowly by approximately 0.5Bcf per month, which I thought was conservative based on the EIA drilling productivity reports.

Instead, production has increased in the last month by 2Bcf from the bottom as oil prices came back faster than expected which caused more wells and their associated gas to come back. NGL prices stayed strong on a relative basis throughout, perhaps someone like EQT (even though they are mostly dry gas) and CNX (along with private company that uses CNXM pipes) kept more production online than expected. I know smaller company MR also said that their shut in due to low condensate prices was relatively short.

On the demand side, LNG demand is lower than I expected with more cancellations. Jeremy has covered this well and I have mentioned it that storage tanks are just too high across the world. The main reason that storage is too high is due to a warm winter across the world, obviously Covid-19 didn’t help either. When I look towards the winter months, LNG prices are strong enough to move demand back towards exporting 9Bcf that we were doing earlier this year. This will help the market tremendously, although some pricing is already expected by the NG strip. I continue to be remain bullish in the medium and longer term in part due to the market rebalancing. I am bullish short term too but continue to stay cautious due to unknowns around demand during Covid-19.

One of the reasons I am an option writer is that I can be wrong in the direction and still make money. Because the credit spreads I sold in puts in July NGN20 were far enough away, I was able to stay out of the noise and these options expired worthless. With the drop of NGN20 below 1.50, the August puts that are still open felt a little closer than I would have liked. The second advantage of being an option writer is that I already knew my risk going in as it was defined by the second purchased put. There would be no stop run or forced getting out by broker, I knew my max exposure. This positioning allows me to not worry about a current position and to think clearly if I want to make any new trades.

I think the large part of the drop on the +120Bcf storage number was due to a large number of traders and / or funds being forced to reduce risk at what looks like the worst possible time. Even though there was a large drop, I did not add any additional exposure. I wanted to see if the weakness in the storage report was a 1 week anomaly. With the storage report today, I view the last 2 reports as offsetting each other and view 6/25 as an anomaly.

While the MACD crossover to the green did not work when I posted on 6/11, MACD has now made another crossover this week. With the storage report and my view of the chart below, I am comfortable adding to my exposure to start replacing expired July NGN20 positions. With NGQ20 currently 1.729, the 1.72 straddle strike is being priced at 0.24. I am comfortable being 1.5x straddles away or 0.36 which allows me to sell another 1.35 x 1.20 put spread. The current bid ask was 0.007 – 0.009 and I was able to fill at 0.008 within about 10 minutes of placing the order. With 26 days to go and using commissions of $3.00 per leg, the total return is $74 / 1426 = 5.2% return.

Looking at the chart linked below, I see a MACD divergence with prices significantly below the 1.85ish level. If we discard the big break from the storage report, the chart looks like it may hold 1.65 – 1.70 level. Notice that the decline from 1.65 did not act as resistance on the way back up. That to me shows strength at these levels which is why I’m comfortable selling put spreads below the market.

On the call side, the market is too far away from the 50 or 200 day SMA to really interest me in selling call spreads at the current time. Since I started writing, I have not sold a call spread although I do like to be on both sides during injection season. I am watching now how the market acts at 1.85-1.90. I see a lot of congestion / resistance in March and then a smaller amount where the first yellow line I drew in mid May. If the market does not act well there, I might try to sell a call spread, especially if I feel like I can write above the 200 SMA pink / purple line. If the market acts well and does not seem to struggle at 1.85-1.90, then I would keep being patient and look to sell call spreads as the market approached the 50 day SMA. Since I’m bullish, I would be more cautious writing call spreads.

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