08-09-2017: September Natural Gas: Extreme Shale Production Optimism

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors

4     01
5     6
2     1


The news and fundamentals for natural gas prices have been very negative of late. The story is low consumption and high production. Despite this, our various indicators favor a rise in natural gas prices, which some analysts are predicting will be "more than just a little." Their reasoning includes over-optimism about the extent and economy of shale gas production. Shale producers are rushing to produce more and more, in the face of below normal demand and milder weather. Where it could all go wrong is historic volatility in natural gas prices which if it returns, could force a short-covering rally where speculators are way oversold.

Intermarket Analysis

We fed Natural Gas, Crude OIl, and Heating Oil into a neural network to get the following result:

Parabolic Chart

September Natural Gas:

Parabolic Chart

Nirvana Chart

September Natural Gas:

Initial Chart

News Analysis

Natural gas contracts appear extremely oversold. Classic fundamentals for both supply and demand do not provide incentive for would-be buyers to step in against the dramatic weakness recently posted. U.S. temperatures (degree days) are unconducive to increased natural gas usage and there are no mounting tropical storm threats yet. U.S. natural gas rigs declined by 3 last week in a potential developing trend. That should provide minimal support to both crude oil and natural gas. There is a large net short position in natural gas speculative positions. It increased by 50% in the past week alone. A planned 2-3 shutdown of a Norwegian facility will not offsset average U.S. cooling demand limitations.

Injections into underground storage inventories have been uncharacteristically slow heading into winter. Inventories are considered bullish. However, inventories are up 20 billion cu. ft. in the latest EIA Report. LNG has allowed the U.S. to become a leading exporter of natural gas to the world. The current level of historical volatility in the commodity is low when compared to the past where huge price variance was the norm, not the exception. Open interest in the natural gas sector is second only to the crude oil market when considering energy futures. The season of peak demand is about fifteen weeks away. Fracking and shale gas extraction continues unabated, even though Oklahoma is shaking. Inventories stand at 3.01 trillion cu. ft., 8.5% below last year's level but 3% above the five-year average for this time of year.

Prices for natural gas in other parts of the world are significantly higher than domestically, encouraging further development of LNG shipments. Electric utilities cointinue to switch over steam electric generating plants from coal to natural gas.

On August 2nd, a 4.2 Magnitude earthquake hit central Oklahoma. There were cracked floors and household items knocked off shelves. The event was one of seven in a 28 hour period. Earthquake activity in Oklahoma used to be rare, but the people running that state seem totally unprepared to deal with the problem caused by fracking in their greed toi exploit natural resources to the fullest.

A few analysts see $4 to $5 natural gas prices as possible during the coming winter season. Natural gas is now the mian source of electricity. Shale production has dropped the price from $.8.86 per MMBtu in 2008 to just $2.52 in 2016. Blue weather maps for the next two weeks signal a bearish market. Heatwaves on the West Coast haven't been prolonged enough to increase prices due to air conditioning demand. No single sector accounts for more than 35% of all gas usage utililized in electricity, industry, heating, and transportation. One example of optimism is MBF Clearing Corporation's Mark Fisher, a "renowned energy market trader," who sees the price breakout after a streak of warm winters. He sees temperatures returning to more normal cooler ranges.

The Federal Energy Regulatory Commission (FERC) has a huge backlog of unapproved pipeline projects. 6 Bcf/d of new takeaway capacity projects are scheduled to come on line in the critical Appalachian Basin between now and April, 2018. Form 2016-2018 the U.S. piped gas export to Mexico will double to nearly 15 Bcf/d. However, Mexico's de-regulation is about producing more, not importing more from the U.S., with a $640 billioni investment in its own infrastructure.

By 2020, more than 150 new natural gas power plants are scheduled to come online in the U.S. concentrated around shale basins. That would amount to 90,000 MW of new gas electric generation.

Pennsylvania is attempting to raise revenues by charging a fee on gas production, opposed by the Federal Government. Anything that disrupts Pennsylvania gas impacts all natural gas users around the world. The Marcellus is probably the world's largest gas field and now produces nearly 20 Bcf/d of gas, more than double the second-place Permian Basin in the U.S.

Mexico has eliminated its maximum price for natural gas, allowing PEMEX to realize the true market value of natural gas. Mexico is converting from state-owned to private production gradually, auctioning off state-owned fields. Thus a liberalized gas market in Mexico is now emerging.

In the Permian Basin, Parsley Energy Inc., one of its major producers, has a current position of 231,000 net acres, of which 179,000 are in the Permian and 52,000 in the sub-basin. This company recently raised production guidance there.

There is some question as to whether or not heavily indebted natural gas producer Chesapeake Energy Corp. will survive.

Certain university studies suggest that a rush to extract as much natural gas from shale leaves major formations with a possible limitation on the "unlimited" potential they were once thought to have. Increased drilling to support optomistic production levels may not turn out to be profitable, resulting in a giant fiasco regarding the potential for fracking operations. Poland is said to have the largest shale reserves in Europe, but recent calculations suggest ther region there holds less than 1/10th of an Advanced Resources International (consultancy in Washington) former estimate. There is a huge amount of uncertainty regarding shale gas potential in the U.S., with estimates ranging from a 65 year supply to much less than that.

All this seems to suggest natural gas prices are weak on high production and low consumption. The only near-term bullishness appears to be in tehnical considerations for a possible short-covering rally.

Point & Figure Chart

 45.0I                                                                  T  8/ 4
     I NYME- Sep-17 Natural Gas Mini 2.5KmmBTU .c/ Cm.=0.01  Lim.= 0.1
     I                                  X
     I                          X       XO
     I      X                   XO      XO
     I      XO                  XO      XO
     I      XO                  XO  X X XO
     I  X X XO                  XO  XOXOXO
     I  XOXOXO                X XO  XOXOXO
     I  XOXOXO          X     XOXO  XOXOXO
     I  XOX  OXO        XOX X XOXO  X  OXOXOXO
     I  X    OXO        XOXOXOXO O  X  OXOXOXO
     I  X    OXO        XOXOXOX  O  X  OXOXOXO
     I  X    OXOXO      XOXOXOX  OX X    O   OXOXO
     I  X    O OXO      XOXOXO   OX X        OXOXO
     I  X      OXO      XO OX    OX X        OXOXO
     I  X      OXO      X  O     O  X        OXO O
     I OX        O      X          OX        OX  O
     I OX        O    X X          OX        OX  O
     I OX        O    XOX          OX        OX  O
     I OX        O    XOX          OX        OX  OX X
     I           OX X XOX          O         OX  OXOXO
     I           OXOXOXOX                    O   O OXO
     I           OXOXOXOX                          O O
     I           OXOXO O                             O
     I           OX
     I           OX
     I           O
      11111                     1111111111
The above chart is giving a conventional sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "%R". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Natural Gas (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a longer-term buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $10,000, or $2,500 for the mini contract. Initial margin on a single contract is $1,937. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are remaining net short but are getting increasingly-long. We regard the latter as more significant.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to up is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Natural Gas November 2.8 Put and Sell (1) Natural Gas November 2.9 Put @ 0.048 to the sell side or better.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Sep. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go downat in the long run. This disagrees with our ultimate conclusion in this article. The best time to enter or leave the above spread is when it is at -2.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -2.87 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the sell the near the buy the far point, a strategy which would agree with our ultimate conclusion.

Level Table:

Level Table

The path of least resistance is down.
 43.4|                                                                  R  8/ 4
 NYME- Sep-17 Natural Gas Mini 2.5KmmBTU .c/ Cm.=0.01  Lim.= 0.1
     |[   <<<
 27.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.022
               1 1 1 1 1 1 1                                          
       8 8 9 9 0 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8           8
       0 1 0 1 0 1 3 1 2 1 2 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0           0
       8 9 2 9 3 7 1 4 9 3 8 2 7 0 7 3 7 0 5 9 3 7 1 6 0 3           4

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 8/04 ).

Intraday Chart

                 Risk Versus Opportunity Report

                 NGU7    September Natural Gas

                      High Price:  3.114
                   Current Price:  2.774
                       Low Price:  2.609

                            Risk:  0.115
                     Opportunity:  0.238

                    (O/R) Ratio =  2.061

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 1
Point & Figure - 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range + 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table - 1
Other Factors - 1
Total + 2
Place 7 September Natural Gas E-Mini Contracts on a Buy Watch with stoploss @ -1.39 below the get-in point when recent price is represented as "27.74".