Natural gas futures prices have come roaring back to life of late. The June 2015 contract (last trading day is May 27) is quoted at $3.025 as I write this. The low for this particular contract was reached on April 29 at $2.488. So we've seen an upside move in excess of 20% in 2½ weeks.
It's not shocking to see that volatility from nat gas futures, a contract that pit traders bestowed with the non-affectionate nickname of "the widowmaker."
But what does that tell us? The consensus seems to be the nat gas price improvement comes from:
1) Demand is still holding up as we enter the injection season.
2) People are expecting a hot summer.
3) Demand from power plants is increasing.
There are some estimates that show that power-generating plant natural gas use is running 11% ahead of last year, but I would caution against overreacting to the most extreme estimates.
The energy industry is absolutely consumed by consultants charging for making inaccurate guesses. The same industry that brought you the "Cushing is going to fill up" meme for oil storage and that consistently misses the weekly oil inventory estimates by millions of barrels is the same one telling you what's going to happen with natural gas supplies. Especially because it knows what the weather is going to be like in August.
Come on, man!
I have no idea what the actual storage capacity for crude is in Cushing, Okla., and I don't think the so-called experts do, either. I do know Cushing storage levels are down 1.5 million barrels (62.2 to 60.7) in three weeks, according to the Energy Information Administration (EIA). As we are heading into the "driving season" -- Memorial Day is the historical kickoff -- I would say the chances of further material gains in Cushing storage levels above the April 19 high are de minimis.
Also, natural gas inventories, unlike oil inventories, are safely within their five-year average range based on EIA data. So there isn't a natural gas glut, but there's no doubt that producers have choked back on production of gas for the last six months.
It's not as acute as the "fracklog" of uncompleted wells everyone is talking about in the Bakken and Permian basins, but there is no doubt there is ready inventory of nat gas just waiting to be tapped in Appalachia and the Rockies.
So my bold prediction on natural gas prices is not to predict at all. Seriously, to retain any sanity, just watch the natural gas contract and try to stay limber with your trading. Remember, this contract was trading consistently above $4/mmBTU until last July, and there is room for a technical breakout.
If that happens, you want full leverage to natural gas, so you go long:
-- Antero Resources (AR)
-- Range Resources (RRC)
-- Eclipse Resources (ECR)
-- Rex Energy (REXX)
-- Magnum Hunter Resources (MHR)
-- Chesapeake Energy (CHK)
Just pull the trigger, indicate a limit for a 10% to 15% upside (or, even better, use call options) and then set it and forget it.
It's been a trying time for these companies, and all are addressing liquidity in some way, shape or form.
I've written about Magnum Hunter many times and its preferreds are a large holding for my firm. Magnum sold its hedges to bolster its near-term liquidity, and liquidity is clearly the market's main concern regarding MHR.
It's a sign of the times that I feel the need to point out that Magnum made its regular semi-annual payment of $29.25 million on its 9.75% senior notes on Friday. Yes, MHR is current on interest payments, and yes, faceless commenters, you can stop trolling me on the message boards.
But the real salve would be getting more per thousand cubic feet of gas from wells where virtually all the capital has been spent. And while I'm not going to predict specific price levels, I do believe nat gas prices are heading higher this summer, so I remain bullish on the group.