The Heller Angle – May 21st, 2020

NGN20 is back towards the previous lows of 1.802 on March 16th and the recent low of 1.822 of just last week. As I write, NGN20 is trading at 1.841. I’ve written mostly about supply so far and since my first post supply has fallen further to 87.0Bcf. With the decline in production and the price for the 1.35 x 1.20 put spread again at 0.011, I feel comfortable adding to this position and selling another credit spread.

The last thing I want to do is advocate adding to positions just because the price moved against my previous trades. By trading small and knowing the max risk with an option spread trade, we can think clearly and logically and say has my view changed, do I like the position better? This way we can add to a position from strength and not from weakness. Markets will move against you and a trader needs to maintain discipline by knowing the max risk beforehand so that he/she can trade with a clear mind.

If supply had increased, or if the storage report today at 81Bcf came in higher, by no means would I add to this trade. Frankly, I’d look to sell a call spread to help move more towards a delta neutral strategy. Since I am still bullish, I am content to wait on the call side. Hopefully the market gives us another opportunity in the future, but if not than so be it. I will take the opportunities that the market gives me.

Jeremy made some good points on why the demand side is probably causing the weakness in price. With oil prices rallying back above $30 WTI, more associated gas production that was shut in due to oil will come back into the NG supply. I’m not sure when but there are good arguments that the supply will be back closer to July vs June. The arguments I’ve seen discuss how physical commodities are nominated for transport on pipelines. Being a financial player only with no physical commodity experience, I cannot opine on the truth of this statement and will monitor.

The other bearish discussion coming out of the market are more LNG cargo cancellations. This discussion has been out in the market for a while, but the demand side seems to be getting worse. As recently as a month ago, the consensus seemed to me that LNG exports would bottom at 6 Bcf. There is now discussion that exports could potentially drop under 5Bcf and possibly as low as 4Bcf. I saw a twitter post saying the Europe gas was down big again today, but have not been able to verify yet with additional posts.

Trade 3 – Sell 1.35 x 1.20 July puts for 0.011 credit (filled).

I seek out all feedback especially push back if you are bearish on NG. I’d love nothing more than to change my view if I am wrong. Please send me a tweet publicly or privately @jrhngc

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The Heller Angle – May 20, 2020

NGN20 July did another test of the level reaching a high of 2.028 but not quite getting to the 2.04 – 2.10 I was looking for. I see that area as congestion with the first test in mid March, testing again the first week of April before breaking through later. Looking at the chart again, I’m surprised I didn’t notice it before, there is a big candle reversal on April 27th where the low is 2.025. Instead of 2.04, which was the 200 day SMA, I am now going to use 2.025 as to where I’m trying to sell a call spread. Also the 200 day SMA has now moved down to 2.027 since then.

Honestly, I feel dumb that I missed this before but I would argue that if the market doesn’t make you feel dumb a few times each week, you might be doing something wrong. Obviously we’ve seen 3 tests of that level and today seems like a solid rejection.

So I’ve moved the limit price of my call spread (2.50×2.65) down slightly in hopes I catch it if we get another rally and test this Thursday or Friday.

Fundamentally, I think we should be rallying so I’m not sure why the reversal today. Weather overnight was slightly bearish but almost a nothing burger in my mind. Supply continues to come down, the latest report I’m seeing now is 87.0Bcf. The NG producers are on our side in that low prices delays completions to later this year, choking back where they can, delaying repairs and workovers if it doesn’t damage the well.

We received confirmation of this view with EQT shutting in 1.4Bcf per day confirmed by an SEC filing with ETRN.

https://seekingalpha.com/news/3575651-equitrans-top-producer-customer-to-slash-natural-gas-output

Because I am still bullish and think this decline back below 1.90 is unjustified (1.885 low today so far, currently 1.911) I’m looking at selling another put spread. Same setup as before, 1.90 straddle is going for approximately 0.35 I want to sell at ~1.5x away (or 0.525) so I’m looking to sell the 1.40×1.25 for a credit of 0.011. After sitting between the bid of 0.010 and ask 0.012 for over 10 minutes, I moved my order to 0.010 for an instant fill.

In my first trade that I posted on our NGetf.com website, I accidentally only used 1 commission as I normally don’t do these calculations every time (oops sorry). This trade calculation is correct (thank you for the reader who pointed this out) $94 / $1406 is a return of 6.7%. Expiration is 36 days to go.

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The Heller Angle – May 19, 2020

We didn’t quite make it to 2.04 line this morning in July NGN20, so I continue to monitor.

On the EIA DPR report, there wasn’t any huge insights by me why the declines are modeled lower with less drilling. I think that a change in total production is the main cause as can be seen in the screenshots below. April DPR report models show May production at 83.16Bcf; May report models show May production at 82.25Bcf.

April 2020 Drilling Productivity Report for April by EIA.gov
May 2020 Drilling Productivity Report by EIA.gov

Remember that this is from 7 regions so total production is higher. I still think my argument of 1Bcf declines per month going forward is valid but even if we are more conservative at 0.5Bcf, supply is going to become a serious problem later in the year. Prices will need to go higher to reduce demand as supply keeps falling. The market is pricing this in on the strip and with oversupply from a warm winter this seems enough to balance the market for now. The market is relatively smart and knows this information, but what we don’t know is if the price increase is enough. I’m of the opinion no, because the strip and prices in 2021 and especially 2022 need to move higher. We will talk about the implications of this and the way to play it (NG producers vs futures / future options in future posts).

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The Heller Angle – May 18, 2020

Please forgive me for I am posting this from my phone with no edits, still the same great information.

NG rocketing higher today on a decent sized drop on production. The source I follow BlueGold Resources (no affiliation I’m just a subscriber of their service) is reporting a decline in supply of approximately 1.4Bcf. From what I’ve seen / heard, Point Logic (which also reports EIA data) reported a bigger drop, but that was in part due to them reporting a higher initial production on Friday. While the drop in supply is real, I think it is less and Point Logic (while very good) is lagging a little bit here. There are also rumors of supply shut-ins which make a lot of sense to me as well. Either way, supply is dropping. As I mentioned in my last post, EIA DPR is showing a decline of 0.89Bcf per day decline over the month of April. May is now out (https://www.eia.gov/petroleum/drilling/#tabs-summary-2) and I’m quite surprised that the report is only showing 0.78Bcf for May. I’m digging deeper now to see if I can understand why. I really thought the report would show >1Bcf.

As far as trading, I was also monitoring the 2.35×2.50 call spread for NGN20 (July) to sell as prices approached 2.04-2.10 with the current price of 1.966. The credit spread received was 0.014-0.015, with the increase in NGN20 that credit spread is now trading at 0.020-0.022. This is why I stay patient and wait for the market to come to me. I won’t always be right of course and sometimes waiting will be the wrong move. If you miss a trade, that’s ok the NG market gives a lot of opportunities. As I’m ‘preaching’ now, no trade for me, I’m hoping to get some follow through tomorrow that pushes the NGN20 to 2.04-2.10 and I can sell a credit spread above 2.50 where I feel that the market won’t move in 40 days.

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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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The Heller Angle

Joshua Heller is a personal friend of mine. I’ve been trying to drag him into helping me for a time now. I’m going to start including comments from him as often I as I can keep his attention!

5/13/20 around 3pm Est time.

Based on Price action at 3pm EST, it looks like margin calls have forced the last of the ‘weak hands’ out. NGN20 July low was 1.802 on 3/18 vs 1.838 low today and has already bounced back to 1.874 as I write. NGM20 June has already made a new low today. One of the things I like to look at for trading purposes is the straddle price ATM (at the money), in this case the closest to July is 1.85 and trading at a price of approx 0.34.

Since I’m bullish, I would look to sell put spreads below 1.50 at a minimum as this would get me below the low from June (so far). An even safer trade is 1.5 straddles away (0.34*1.5) 0.51 or approximately 1.35. That is where I would choose to sell puts. Note this is for summer trading, in the winter I would want to be more than 2 straddles away and would be especially careful on the upside. 1.35 / 1.20 put spread is currently trading for 0.011. Including commissions of $3 per contract, this trade would net $104 vs risk of $1396 or 7.4% if the trade expired worthless in 43 days. When I saw some strength, perhaps closer to 2.04 (200 SMA) and up to 2.10 is where I would try to sell a call spread to capture both sides.

5/14/20 update: 10:45 Est time

NG price action likes the storage report at 103. It is slightly bullish to estimates 106-110Bcf. I would continue to sell NG put spread like the one yesterday, I consider any spread above 5% worthwhile due to thought process of compounding on an annual basis (astronomical). Could potentially also move the strike up from 1.35 / 1.20 to 1.40 / 1.25 if someone felt the return from 1.35 / 1.20 is now too low. I still want to see July rally to 200 SMA around 2.04 (currently 0.15 away) before I would be interested in writing a call spread.

To be continued…