Natural Gas Deconstructed

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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If you think logically, what is happening in the natural gas market will be difficult for you to understand. Markets actually always act rationally however, if you have all the facts available. When they don't seem to be doing so, it is because there is additional information that needs to be considered in order to fully understand what is taking place. In these circumstances you need to think about what could be taking place behind the scenes that could explain what is going on.

The natural gas storage report was released yesterday and it was bullish. Storage went up 52 BCFs and expectations were they would go up 55 BCFs. Natural gas has been declining for the last 11 days and is a heavily shorted market. So did it go up on bullish news? No, it sold off! The near term futures contract closed at $2.95. This in and of itself makes absolutely no sense and defies all rules in how markets operate. Even more surprising is that the cost of production for natural gas in the U.S. is somewhere around $4 to $5 depending on the source. It was already noted two months ago that 50% of U.S. gas wells had already been shut down because of low prices. Production should be close to collapse at this point.

The natural gas futures market is also in extreme contango (distant future prices much higher than the current futures contract), certainly the most extreme of any market in recent history. And the contango is getting even worse. The average price for natural gas futures between November and March is $5.32. Moreover, the oil/natural gas price ratio went over 24 yesterday. It peaked around 22 in 1990. This is also an historical extreme. When something gets way above (or below) its long term average, it invariably reverts back to the mean over time.

So who's making money off of this? This statement, which I found in an article for futures traders explains it all: "Traders on the future market are able to lock in the difference of over $2 per MMBTUs and cover their risk exposure by storing supplies until next winter." This is a particular boon to the large users of natural gas and these are the people profiting handsomely from the seemingly irrational behavior in the market. Furthermore, all of this has been made possible because of the CFTC (Commodity Futures Trading Commission), the government regulatory body which is supposed to be keeping the markets honest (and is doing as good a job as the proverbial fox guarding the hen house).

The CFTC announced in June they were planning on reigning in speculation in the market and have been holding hearings this summer. They specifically targeted the UNG ETF as a major source of speculation, even though it is a passive investment vehicle that only buys more natural gas futures in response to investor demand. UNG is also an investment vehicle used by small investors. Along with the SEC, which prevented UNG from issuing news shares for awhile and functioning as an ETF should, the CFTC has tried to cripple UNG's operations. This has allowed the big users of the commodity to drive near term natural gas prices to theoretically impossible levels - and make a killing. Like the SEC and its handling of $65 billion Ponzi Schemer Bernie Madoff (who was investigated several times over a many year period, but no dishonest behavior was ever found), the CFTC hears no evil and sees no evil when it comes to the big players.

As mentioned in yesterday's blog, there is an alternative to UNG. The ETN GAZ also represents the price of natural gas. While UNG lost 50 cents yesterday, GAZ was up 81 cents at one point, although it closed up only 16 cents. The trading volume on GAZ yesterday was enormous reaching almost 17 times the 200-day average. It looked like investors were dumping UNG to buy GAZ, which as an ETN is not affected by the CFTC's investigations. In theory, an ETF and ETN investing in the same commodity should move not only with the commodity, but by the same percentage amount. GAZ actually went up (and by a lot at one point) when natural gas futures were selling off and UNG was down. Just another indication that all rules of reality have temporarily been suspended in the natural gas market.

NEXT: U.S. Dollar, Stocks, Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest from Fantasy Land

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Disaster Stalks the Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Gold and silver were down this morning, while the U.S. dollar was attempting a recovery. The trade-weighted dollar fell back below 80 though and the precious metals started to recover. It must be requiring superhuman efforts on the part of the central banks to prevent a major drop of the currency at this point after the body blow struck by the Russians yesterday. The natural gas storage report was mildly bullish today. Oil trade remains listless although light sweet crude was above 72 earlier today.

As usual, the mainstream media is not informing the public about a major financial story that it needs to know about. Russia is the third biggest purchaser of U.S. treasuries. Yesterday it said it is reducing its holdings by not buying new bonds when the current ones expired. Put this together with China altering its holdings of U.S. treasuries from long term to short term bonds and this spells major trouble for the U.S. When our budget deficits were hoovering around $400 billion a year, we managed through great efforts to get foreign governments to lend us enough to support our proliferate spending. This year's budget deficit will be around $1800 billion. It is estimated that only 53% of U.S. federal government expenditures will be covered by taxes (when this number fell to 69% in Weimar Germany, hyperinflation devastated the country only 5 years later - the U.S. in is much worse shape currently). To cover our budget deficit, we need to borrow or print money to make up the difference. Just as our borrowing needs are skyrocketing, foreign lending sources are drying up. It is inevitable that U.S. money printing will be ratcheting up soon.

The Russian story is even more significant however. All the foreign bond holders know there is a lot of inflation on the horizon, but most haven't acted yet. The situation is analogous to a crowded theatre where everyone smells smoke, but is ignoring it because they are busy watching the play. Suddenly someone jumps up out of their seat, runs toward the exit and shouts fire once they get there. Is everyone else going to just remain in their seats or will there be a stampede to the exits? This is the danger the dollar is now facing.

Oil is drifting up today and natural gas is doing well. The natural gas storage report was mildly bullish with expectations for an increase of 108.5 BCFs and the actual increase coming in at 106 BCFs. Oil is getting closer to its Fibonacci retracement around 77. A spike up to or above the level would be a good sell signal.

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NEXT: Gold, Oil, Dollar and Market Update

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Gases Up; Bear Bites Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Week after week after week this spring the media reported a glut in U.S. oil supply. This blog and the New York Investing meetup had to debunk this view of the state of the energy markets more than once. The supply report today once again confirms that the only glut that existed was in the imagination of reporters working for the big media outlets. Storage was way below expectations across the board for oil, gasoline and distillates. This has yet to happen in natural gas, but the market is in super contango just as the oil was in January and early February of this year. Indirectly bullish for oil and natural gas going forward was Russia's announcement today that it is reducing its U.S. Treasury holdings.

Expectations for the EIA's storage report was for a drop of 500,000 barrels of oil and an increase of 750,000 barrels of gasoline and 1.5 million barrels of distillates. Instead, oil in storage fell by 4.4 million barrels, gasoline fell by 1.6 million barrels and distillates fell by 300,000 barrels. This is the third oil report in the last four weeks that indicated a large drop in storage. The oil markets barely moved on this incredibly bullish report, although light sweet crude has been trading today around 71, above the key resistance point of 70.80.

Unlike oil, which has been rallying since mid-February, natural gas has been in the doldrums and is the worst performing commodity this year. This may be changing soon. Natural gas futures are in super contango - the distance future contract are priced well above the near term contract. The July contract is currently priced around $3.80, but the December contract is priced above $6 or more than 60% higher. Oil had the same behavior just before it bottomed and then went up for four straight months. Pay attention to this.

Although it is not getting much play so far, the most important news to come out this morning is that Russia plans to reduce its U.S. Treasury holdings. Along with China, Japan, and the Gulf Oil States, Russia is one the 4 biggest foreign holders of U.S debt. Russia says that it is not selling its U.S. bonds, but will just not replace them when they mature (you should read this as: Russia refuses to buy any more worthless U.S. debt and help us fund our deficit, so we are going to have to print even more money than we were planning). While this may sound like a minor change, it could devastating for the U.S. Dollar. Once one of the major debt holders starts bailing, there could be a stampede for the exits. Did the dollar nosedive on the news? Of course not, it actually went up afterwards. We will have to see just how long central bank intervention can forestall the market's gravitational effects.

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NEXT: Disaster Stalks the Dollar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Fed Minutes Take Oil on Roller Coaster Ride

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

It would be easy to get whiplash watching the oil market these days. The news was grim early in the morning yesterday with blaring headlines of oil falling below $48 a barrel in anticipation of a bad news oil storage report at 10:30AM. Storage however turned out to be below expectations and oil started rallying immediately. NYMEX oil got to over $51 a barrel mid-day, rising above the key breakout point around $50.50. Then late in the afternoon the minutes from the last Fed meeting were released and even though they should be taken about as seriously as a Mel Brooks movie, oil nosedived on the Fed's gloomy outlook for the economy. In the end oil was up 23 cents, closing at 49.38, though today in mid-session European trading it's above $51 again.

The price of oil was weak early Wednesday because of a report Tuesday evening from industry group, the American Petroleum Institute, that indicated there was 6.9-million-barrel build in storage.This report is not terribly reliable because it is not comprehensive and submitting data is voluntary. The government's EIA report that came out the next morning, painted a very different picture of the oil market. Oil in storage rose 1.7 million barrels, much less than the 2.3 million barrels that analysts had predicted. Distillates, which include heating oil and diesel, fell by 3.4 million barrels versus expectations of a drop of only 600,000. Gasoline demand was reported as being 0.2% below a year ago (if demand was 100 a year ago, it is now 99.8). While the drop in U.S. gasoline demand is something you would need a magnifying glass to see, the mainstream media has continually reported it as collapsing and falling off a cliff or words to that effect.

Despite the bullish tone of the storage report, oil (and most of the rest of market) sold off big time when the meetings from the Fed's March meeting were released in the late afternoon. The Fed, which didn't see the Credit Crisis coming, miscalculated it at every twist and turn, and didn't foresee the recession, is now gloomy for the next two years going forward. Sure they were wrong over and over and over again, but now they know what's going on. The minutes also indicate the Fed is worried about deflation even though it is stated in the same minutes that they are printing new money like no tomorrow. Worrying about deflation under such circumstances is like worrying about being attacked by Big Foot while walking through Central Park. The probability is somewhat less than zero.

While gasoline demand in the U.S. is flat, it should be rising in China. For the last three months cars sales in China have exceeded car sales in the U.S. Year over year, car sales are down 37% in the U.S., but up 5% in China. China is on its way to becoming the number one auto market and the number one energy user. Oil demand is shifting from North America to East Asia while the ability to produce oil is declining 6% a year by some estimates. There are even predictions out there of an oil price spike as early as later this year. While I don't necessary believe it will happen that soon, it will indeed happen as some point.

NEXT: It's Not the News, It's How the Market Reacts to the News

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.