Getting Bearish on Natty

Cold weather is good for the price of Natural Gas, we definitely get that.  We also get that the idea of cold weather is becoming a solidly consensus notion.  Consider the following headlines that are currently posted on the

  • Cold Stuns Floridians, causes deaths elsewhere;
  • Arctic air has invaded the south;
  • Cold kills 100,000 tropical fish in S Florida;
  • Chill Map;
  • Cold snap death toll rises across Europe;
  • Global cooling may set in for 20 – 30 years; and
  • Feds: December was 14th coldest in 115 years.

We get it.  It is abnormally cold out there.  And, undoubtedly, these headlines are largely priced into the price of natural gas, as news headlines are typically not a leading indicator.


On the storage front, there continues to be a surplus of natural gas in storage.  As of 1/10, natural gas storage in the domestic U.S. was 10.1% above 2009.  Natural gas stocks are also more than 10% above the 5-year average.  Importantly, despite these storage numbers, natural gas is, on a two week moving average, trading above last year’s levels.  In December of last year, natural gas averaged $5.87 per mcf and by January 1st of 2010 natural gas was trading above the $6 level.


In the past week, we have seen a correction in the price of natural gas, which is outlined in the chart below. This of course followed the massive rally from the ~$4.50 level in early December of 2009 (last month) to almost $6.00 by the end of the month.  Currently, our Buy Trade line is at $5.45 and Buy Trend is at $5.07. 


On the rig count front, which is leading indicator for future production, we have seen a steady build in rigs since literally the middle of 2009.  Conversely from mid 2008 to the end of 2008, we saw a decline of rigs.  Also for the first time since Q1 2009, rig count in the U.S. is above the 1,200 level.  Higher prices of both oil and gas are clearly driving rig activity and if these activity levels sustain, production will see a commensurate increase.


From a longer term perspective, Interior Secretary Ken Salazar announced some reforms last week, which appear to take direct aim at oil and gas companies and their ability to permit land for exploration.   According to Salazar:


                “The difference in the prior administration was that the oil and gas industry essentially were the kings of the world.  Whatever they wanted to happen essentially happened and the department essentially was the handmaiden of the oil and gas industry.”


On one hand, it is sad that politics is clearly entering the policy decision making of the Department of Interior.  Regardless, to the extent that the Interior makes it more difficult for oil and gas companies to acquire acreage to explore it will have a negative impact, at least on the margin, for future domestic production.


We are waiting for an entry point one the short side given the consensus view of weather and the well-above-normal storage levels.


 Daryl G. Jones

Managing Director


Getting Bearish on Natty - Natty


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