The Heller Angle – May 25th, 2020

I’m sorry I missed posting on Friday. I never want to write something if I have nothing interesting to say. I remain bullish on the market but am concerned about short term demand risk from shutdowns in the US. Even as the US opens back up county by county and state by state, there are many who will continue to self-isolate which hits demand.

Much to my surprise this weekend, it looks like natural gas supply is back above 89Bcf from a low of 87Bcf (from my preferred provider). I want to see a few more days of this production to confirm this data is true (and not something odd from modeling a 3 day weekend). If these production numbers are true, I would expect to be a little less bullish going forward. Another confirmation from a technical perspective would be to see price action drop below 1.80 on NGN20 July.

I also continue to be concerned about demand for LNG exports. Along with a surprise from the supply side, I am also watching a small bump in LNG exports back to the 6Bcf level. Just last week I was saying I was worried about demand going towards 4Bcf which I am still concerned about. One thing we know in natural gas land is that the market is always throwing us curve balls.

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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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