Thursday, September 10, 2009

Natural Gas

Since Meredith said Goldman has a lot of gas left in their tank, and I've talked about GAS (Grumpy Analyst Syndrome), maybe what really needs to be revisited is natural gas.

Remember when the whole world was buying oil to store it because the future prices were so much higher?

The same situation now exists in natural gas. Look at this article in today's WSJ:

Commodity traders and utilities have been stashing cheap gas in underground storage caverns during the past year. They have been locking in sales of the gas for future delivery at much higher prices on the futures markets or keeping costs low for electric power they produce in the future.

That is sparking a boom for companies that operate certain types of storage facilities, such as one controlled by Houston energy hedge-fund manager John Arnold.

And companies that turn natural gas into the raw material to make plastics, such as Enterprise Products Partners LP in Houston, are enjoying a boost, as crude-oil-based ingredients become pricey compared with gas. The opportunities in a cheap-gas world underscore how operators in the energy business have learned to adapt to a range of market conditions. Some companies are prospering even as natural-gas producers come to the conclusion their fuel may be far cheaper for the foreseeable future. Thanks to huge natural-gas finds over the past year and weak demand in the recession, natural-gas prices have fallen to seven-year lows. Natural gas for October delivery on the New York Mercantile Exchange settled at $2.829 per million British thermal units Wednesday, up 2.2 cents, or 0.8%, and off 79% from its high last summer. By November, most energy observers are predicting gas-storage caverns around the U.S. will be full...

Crude oil historically has cost anywhere from six to 12 times more per barrel than natural gas costs per million British thermal units, a measurement of energy. As of last Friday, Nymex crude closed at a price 37 times higher than a key gas spot-market contract, said Rusty Braziel, managing director of Bentek Energy, a natural-gas research firm in Evergreen, Colo.

Remember when oil was at $37? And the ten year rate was at 37 year lows? And Goldman was pimping oil down to $27.

This blog, on December 18, had a different take on oil:

Oh give me a break. Goldman Sachs says oil can hit $27 a barrel, and then they trot out their spreadsheet this morning that says we will have $1.8 trillion of credit losses, and now we are just halfway through.

Now we have oil with a 37 handle, with the ten year rate at 37 year lows, and no one is beating the drum to buy.... So what do you do with oil here? You buy it. You buy it now. You buy it in size. And you have one of these brokerage firms, who are so bearish on oil, sell you a swap to hedge your fuel costs, so at least then, for once they'll eat their own cooking. $1.8 trillion in losses have you scared? I guess that's a market. I'll take oil here on the 18th. After all isn't 18 the number of life? And there is life in the oil market!

The same situation that existed for oil then, now exists for natural gas. But the nattering nabobs of negativity on natural gas just can't get their handle on these lower prices.

And just like the same folks couldn't get a handle on the 666 bottom, they won't be able to get a handle on natural gas when oil is 37 times more expensive.

Because Wall Street just can't get their hands around wisdom!


Anonymous said...

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

Warren Buffet

Palmoni said...

It's a good comment, but valuations here are cheap.

The folks that stayed too long at the Cinderella ball were the bears!

Anonymous said...

why did MGOL get slammed?

also why is C moving down?

Anonymous said...

In your opinion, what's the best way to play the natural gas opportunity?

Palmoni said...

MGOL just trades thin, and I think GE and C have some pressure because of the expiration of the TLGP on Halloween, because GE and C are the biggest users of the program.

Anonymous said...

do you still think C will move to 7

Anonymous said...

'In your opinion, what's the best way to play the natural gas opportunity?'

I second that questions; what would be a good NG play. You think ngas moves up to at least 3 ???

Palmoni said...

Leveraged plays are CHK and DVN--both are great call option candidates I think NGAS can go to 3, but its a small spec stock I like options on bigger names better

Palmoni said...

I still think C goes to 7 by year end