Wednesday, July 22, 2009

The Bullish Case for Natural Gas Prices

1. Supply and Demand
2. EIA inventory reports – why aren’t they bearish anymore? Over the past 2 weeks, demand is outstripping supply by 25 BCF/week, and the infamous NG glut would disappear in 16 weeks at that rate.
3. Supply: rig counts. Rig counts continue to fall. Since supply continues to fall even after rig counts start to grow again, we can be assured that supply will continue to fall for at least another three or four months.
4. Demand: If the recession has in fact bottomed, then we can expect natural gas demand to boomerang higher, as economy wide production levels are currently below economy wide consumption levels, and inventories are down 10% YOY. Inventory/sales ratio is still higher than it was in 2006-2008, so industrial demand may remain weak in the short term.
5. Previous examples of rig lay downs, their duration, scope, and the related price action. There are two cases where the number of rigs decreased by 40-45% (1999 and 2002). They were both in similar periods of excess gas storage and the correlated low price. In our current situation, the number of rigs has decreased by 59%(‼)There is a gap between where a company will lay down a rig and start one up again. It requires a significant move higher in price before companies will increase the rig count. If a company will lay down a rig at $4, they won’t necessarily put it back into operation until $5 or even higher. In previous examples, prices moved by 50-75% off their lows within 2 months.
6. Technical price support for a bullish conclusion
7. Conclusion

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