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Call Summary and Replay: Outlook for Natural Gas Prices and Basis Differentials

On February 18th we hosted a guest speaker call with Keith Barnett of Asset Risk Management (ARM) on natural gas prices and basis differentials.  It was an excellent call, and we recommend you check out the replay and Keith’s slides, linked below:


Link to Audio Replay


Link to Slide Deck


Key Takeaways from the Call


1.  Near-term Henry Hub expectations……Not expecting a spring price crash similar to March / April 2012.  Expects prompt prices to be range-bound below $3.00 in 2015, with the market tightening in 2H16.  “We will trade lower in the prompt.  We are … prepared to see $2.25 in the prompt month with a lot of trading between $2.40 and $2.60, but ultimately … we think the range for settlement of prompt month contracts this summer will average closer to $2.40 / $2.50 with range between $2.30 and $2.75 on the settle, and $2.25 to $2.90 on the actual day-to-day activity.  We do not have to crash the market to solve for a reasonable ending inventory this year …  [Supply] mitigation due to price and rig activity actually begins to tighten the market in ‘16.  The damage carries over into the first part of ’16, but we’re quite bullish the second half of ’16, ’17, and beyond.”   


2.  Natural gas basis expectations……Marcellus/Utica pipelines going to the Gulf Coast and Midwest will pressure basis soonest; projects to move gas to the Northeast and Southeast are more prospective, and will pressure basis later…  General expectation: “The west will be relatively stable and uninteresting, and all the action will be at Dom South, up in New England and New York, and then back down into the Gulf Coast as gas comes down … through all the reversal projects.”  

  • Marcellus/Utica (Dom South) current weakness driven by local “gas on gas competition” for processing and pipeline capacity.  First LNG export could positively impact Dom South basis.  “Dom South is not the most mispriced, but over term, it will move the most for rational, foreseeable reasons.”  Assume tighter Dom South basis longer-term.
  • Houston Ship Channel (HSC) will most likely have a positive basis, especially in the summer due to high TX power burn.  HSC a very important market, it’s the largest concentrated gas market in the US, maybe in the world.  Exports to Mexico and new Texas industrial projects will be very important to the HSC basis.
  • Chicago will be well-supplied and should trade negative, particularly if there is a mild winter in the Midwest. 
  • Mid-Con will be stable for the next 18 – 24 month; “slight” negative pressure later as Marcellus/Utica gas“boomergangs” to the west and south; will be counteracted by Gulf Coast demand pull.  “We see [Mid-Con basis] being more stable than most places.”
  • Texas “won’t be a premium market, but it will be more insulated than Louisiana.”             
  • California is likely to sustain positive basis because it is the most-isolated, furthest trade point from the Marcellus/Utica. 
  • Opal (Wyoming) should be slightly negative and stable.  The Rockies are well-balanced.  Opal may come under pressure as Rex volumes get backed up …  at which case the supply will rotate west.  Will compete with AECO gas for market share in the west. 
  • AECO basis to be cyclical, mainly depending on short-term contracting on TransCanada’s mainline.  “Expect more of the same rhythmic, cyclical price action.”   Outlook for Canadian heavy NGLs is worse than it is for methane and ethane.  AECO basis is a difficult one to call due to TransCanada contracting and Loonie weakness.      


3.  US LNG outlook and price impact……6.7 Bcf/d of LNG export capacity is currently under construction.  “If the current pricing environment holds, only one of the Canadian projects will get done…  I don’t think that the Cheniere greenfield project gets done at these oil prices…”   At current oil prices an additional 3.5 Bcf/d gets built because the inertia behind some projects is so high.  At $75 oil, an additional 5.5 Bcf/d gets built; at $90-100, an additional 8 – 9 Bcf/d.  However, we won’t see that much gas actually getting exported, as some of the projects just provide optionality / trading vehicles.  Sabine Pass Train 1 is likely to come online early; some “test gas” may come in May or June 2015.  “This will affect the market psychologically …  Once we see that first cargo being made, being loaded, being shipped, I expect to see the back end of the market respond.  It’s not going to go up a dollar, but it’s going to respond.”



4.  Impact of oil price crash on US natural gas demand growth……Less exports to Mexico (weaker economic growth, less incentive to switch away from oil for some of their power plants).  “Exports to Mexico will continue to grow, but maybe not as fast.”  Less industrial demand (low oil prices and strong USD = lower margins and returns for US petchem plants).  Less LNG exports (LNG prices sensitive to oil prices, particularly in north Asia).  Before the recent oil crash ARM thought that “demand would definitively, on an annual basis, outrun production growth by 2017, and on a cumulative basis out run it for sure, by 2018.  [Now] that is still true … where 2018 cumulative demand growth does exceed cumulative production growth, suggesting that we will be tighter again by 2017 or 2018. However, 3 of the 4 “Pillars of Demand” are threatened by lower prices…”



5.  Marcellus/Utica takeaway overbuild?......”There is as close to 100% probability of overbuilding as you can get and actually still call it ‘probability’ …  This is America and that’s what we do, we overbuild …  We have such deep, liquid capital markets …  We arbitrage the heck out of things physically, particularly in the energy business.  It’s going to get overbuilt, we’re confident of that, and that does tighten in the Dom South basis.  It doesn’t tighten it as much as you might initially think, but eventually it does …  I don’t think you go premium to Henry Hub because gas is still going to be coming from Pennsylvania to northern Louisiana to satisfy the LNG and industrial projects, and there has to be a negative Dom basis to pay for that pipe …  The floor typically is fuel and variable cost on these new flow patterns …  at $3.50 Henry Hub … we saw the [Dom South] floor at $0.29 back of Henry, which is the fuel and variable cost on one of the legs that we’re confident that’s going to get done and going to be busy.” 



Ben Ryan


USD, Japan and Europe

Client Talking Points


Good #StrongDollar morning to you! +0.6% USD Index move to +5% year-to-date is good for plenty of commodity based inverse correlation moves (#deflation); WTI Oil -1.2% (after a -5.3% week), Gold -0.7% (after a -1.8% week) – Copper still looks like death. 


Japanese Nikkei all jacked up on weak Yen (vs USD) to 15 year highs at +5.8% year-to-date – and this is after plenty of headline news that Japanese Corporates (70% of them) see “no need for more easing” – we can’t imagine why… it’s only been 18 years.


Forget a +2.5% year-to-date return in SPX, European Equities is where the real fundamental asset price inflation is at! After a +3% week, Italian stocks are up another +0.4% to +15.4% year-to-date. Gotta love that. DAX still looks good, but only +13.1% year-to-date. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

You want to own the Vanguard Extended Duration Treasury (EDV) in this current yield-chasing, growth slowing environment. The trend in domestic growth continues to signal growth slowing, and the counter-TREND moves we’ve seen over the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is trending more positively (second-derivative positive).


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.


Hologic (HOLX), at this stage in their product cycle and in the current stage of the economic cycle, has some very impactful tailwinds emerging to their revenue growth and the implied growth in the future. A stock generally will perform really well when doubt about future growth turns to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows. A less-worse trend in Pap testing and rising patient volume can combine to get us close to flat for HOX’s Cytology (Pap) business. As the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more data points, we think a lot more investors will agree with us.

Three for the Road


Busy wk for the Bond market w/ Yellen speaking, and both CPI and GDP slowing reports



Much good work is lost for the lack of a little more.

-Edward H. Harriman


U.S. Healthcare Stocks (XLV) were up +2.1% last week to +5.6% year-to-date.

February 23, 2015

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investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: Surreal U.S. Dollar Correlations

CHART OF THE DAY: Surreal U.S. Dollar Correlations - USD correls


This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe.

*  *  *  *  *  *  *

Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:


      1. USD vs CRB Commodities Index -0.98
      2. USD vs WTI Oil -0.96
      3. USD vs. Gold -0.55
      4. USD vs SP500 +0.69


In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.


That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.


Rocking Returns!

“You are what your record says you are.”

-Bill Parcells


That’s how William Thorndike kicks off a solid history/investing book that one of my friends recommended to me titled The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.


Chapter 1 of the book, “An Intelligent Iconoclasm”, starts with another great quote from John Templeton: “It is impossible to produce superior performance unless you do something different.


In other words, if being long Europe with a concentrated position in Italian stocks was your big idea for 2015, you definitely did something different. And you’re getting paid for it. Italy’s stock market is +15.4% YTD!


Rocking Returns! - parx


Back to the Global Macro Grind


Yep, after 3 straight up weeks (on decelerating volume), never mind a +2.5% YTD return for the SP500, being long something like Germany’s DAX (+13.1% YTD) is where the rocking returns are at, baby!


After taking a -0.6% breather in the week prior, the US Dollar stabilized at higher-lows again last week and is ramping versus Burning Euros and Yens again this morning, +0.6% to $94.84 on the US Dollar Index.


Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:


  1. USD vs CRB Commodities Index -0.98
  2. USD vs WTI Oil -0.96
  3. USD vs. Gold -0.55
  4. USD vs SP500 +0.69


In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.


That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.


Will Yellen be hawkish or dovish on rates? I can tell you what I think she should do, but what she actually does is entirely another matter. Immediately following her lagging forecasts will be slowing inflation (CPI Thursday) and growth (GDP Friday) data…


“Hawkish” in currency terms = #StrongDollar, Commodity #Deflation.


On a mere +0.1% USD gain last week, here’s how that looked, in Global Macro terms:


  1. The Euro (EUR/USD) -0.1% to -5.9% YTD
  2. Canadian Dollar -0.7% to -7.3% YTD
  3. CRB Commodities index -1.9% to -2.3% YTD
  4. WTI Oil -5.3% to -6.4% YTD
  5. Gold -1.8% to +1.7% YTD
  6. Copper -0.6% to -8.2% YTD
  7. Coffee -8.2% to -9.7% YTD
  8. Wheat -4.2% to -14.7% YTD
  9. US Energy Stocks (XLE) -1.8% to +1.7% YTD
  10.  Latin American Stocks (MSCI LATAM) -0.8% to -3.7% YTD


Exactly! There are a lot of places (primarily USD/Commodity correlating) that you do not want your assets allocated during Global #Deflation. But you already know that. We’re well over 180 days into this, don’t forget.


Away from being long Italy, what else is rocking on the other side of this FX flow trade?


  1. European Stocks (EuroStoxx600 Index) +1.4% last wk to +11.6% YTD
  2. Japanese Stocks (Weimar Nikkei) +2.3% last wk to +5.1% YTD
  3. US Healthcare Stocks (XLV) +2.1% last wk to +5.6% YTD


Yep, in relative equity terms, US equity returns aren’t exactly rocking (Dow Bro 18,000 got you +0.7% last week to +1.8% YTD) this year. But they aren’t getting rocked like pie charts over-indexed to commodity inflation expectations either!


Seriously, who needs details about Greece when you can just look up YTD returns and see what your record is? Beating the market is the goal of the game, after all.


While I didn’t get beat telling you to be long commodities last week, I continued to get slapped around on the long-end of the Treasury bond curve. The Long Bond weakened (yield strengthened) with the UST 10yr Yield +6 basis points to -6 basis point YTD.


Consensus Macro (non-commercial CFTC futures/options net positioning) dog-piled me on that:


  1. Long Bond (10yr Treasury) net SHORT position ramped another 41,164 contracts last wk to -124,964
  2. Gold’s net LONG position dropped -23,800 contracts last wk to +110,164
  3. Oil’s net LONG position remained nauseatingly high at +328,656 contracts


#Dog-Piled. As in they bullied me, telling me what they’ve been telling me for 15 months (“rates are going higher, not lower, Keith”).


I don’t like (but I don’t mind) being knocked around. Especially when my team isn’t winning. We are what our record says we are. And there’s no better way to learn from that than by absorbing and learning from every mistake.


UST 10yr Yield 1.82-2.16%

SPX 2085-2125
USD 93.69-95.16
Oil (WTI) 49.02-53.70
Gold 1185-1220


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Rocking Returns! - USD correls

Storytelling Time

This note was originally published at 8am on February 09, 2015 for Hedgeye subscribers.

“Storytelling is probably the single most popular recreational activity after sex and shopping.”

-Tham Kai Meng


Do you agree with that? Would your grandmother? How about Wall Street?


Interesting questions from a book I’m reading called The Ape, the Adman, and the Astronaut, by Ogilvy & Mather’s Chief Creativity Officer who claims that “the neuroscientists are saying your grandmother may have been right all along.” (pg 11)


Since I got crushed on Friday thinking that the US jobs report could be bad, I’m wide open to any story you’d like to tell me this morning. While I still think interest rates are going lower – storytellers make a market, after all.

Storytelling Time - 55


Back to the Global Macro Grind


To be, or not to be crushed (by counter-TREND moves) … remains the question. With the front-runner on big macro moves (the US Dollar Index) whipping around last week (down, then up), here’s what drove macro storytellers right batty:


  1. USD Down – during the front-end of the week, drove Oil, Russia, and Energy Stocks Up
  2. USD Up – on Friday’s jobs report, drove Rates, Utilities, and REITS down


These two story lines are not one and the same thing. And to have been properly positioned for both of them (while not getting your rear-end handed to you for 3-6 months prior) was next to impossible.


Summarizing the Down Dollar (then up fast on Friday) week:


  1. The US Dollar Index finished the week -0.1% at $94.70 (still +4.9% YTD)
  2. Oil (WTI) ramped +7.2% wk-over-wk to $51.69 (still -3.7% YTD)
  3. CRB Commodities Index had its 2nd up wk in a row, +2.7% to -2.2% YTD
  4. SP500 had its 2nd up wk in the last 6, closing +3.0% to -0.2% YTD
  5. Energy Stocks (XLE) led SP500 gainers, +5.7% wk-over-wk to +0.8% YTD
  6. Utilities (XLU) led SP500 losers, -3.6% on the wk (falling to -1.4% YTD)


That last part (Utilities Down) all happened on Friday with the #RateRising move where:


  1. UST 2yr Yields ripped to +0.64% (+19 bps on the wk, but -2 bps YTD)
  2. UST 10yr Yields shot up to 1.96% (+32 bps on the wk, but -21 bps YTD)


And it wasn’t just Utilities that flashed an immediate-term TRADE oversold signal on that. So did REITS (VNQ) and pretty much everything that I’ve liked on the long side of Fixed Income for the last year (TLT, EDV, MUB, ZROZ, BND).


The MSCI REITS Index was -1.6% on the week, but is still up +4.9% YTD and my story-line is that looks a lot like the P&L of the Long Bond bull. One down week does not a new intermediate-term TREND make.


To be balanced, the other side of the storytelling remains that US GDP growth is going to magically accelerate to +3-4% year-over-year, and that we’re going to get rainbows and puppy dogs delivered in every late-cycle employment report, throughout…


To a degree, Consensus Macro bets still agree with that – here’s the updated CFTC Futures/Options net positioning:


  1. SP500 (Index + Emini) net LONG position = +66,335 contracts (vs. the 1 yr avg of -10,119)
  2. Treasuries (10yr) net SHORT position = -145,402 contracts (vs. the 1yr avg of -65,444)
  3. Crude Oil net LONG position = +324,181 contracts (vs the 1yr avg of +365,957)


For 2015, unless you bought the lows, being long SP500 and commodity related beta has been painful, but consensus has worn it the whole way down inasmuch as it has suffered the under-performance pain of not being bullish on the Long Bond.


But maybe the story is different this time? Could rates finally be ready to rocket to the upside? After oil and its related equities have had their counter-TREND bounce, could they continue higher and be the inflation catalyst big equity beta chasers need?


I don’t think so. If I did, on Friday I wouldn’t have signaled (in Real-Time Alerts) to:


  1. Buy Utilities (XLU)
  2. Buy Municipal Bonds (MUB)
  3. Short Banks (BAC)


Opportunities to go shopping for bonds and/or stocks that look like bonds have been few and far between for the last 6 weeks. So I want to signal that you take advantage of one of the two “popular recreational activities” that grandma would sign off on!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.64-1.95%

SPX 1987-2075
VIX 15.67-21.44
USD 93.52-95.44

WTI Oil 42.89-54.02
Gold 1234-1270


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Storytelling Time - 02.09.15 chart