Natural Gas Prices Too High
From the good guys at ISI:
"* Our updated analysis of the "carry out" - where natural gas storage will sit come April - suggests inventories will be about 1.73 trillion cubic feet or almost 50% above normal.
* That figure assumes normal withdrawals during February and March. If we look at a scenario where draws are much larger than normal, stocks would still be 25% above normal.
* With inventories high, come spring, storage gas effectively has to compete with wellhead supply - a phenomenon called gas-to-gas competition.
* For prices, we see the storage situation essentially manifesting in a 12 month natural gas strip price of $6.75-$7/MM BTUs as opposed to the current figure of $8/MM BTUs.
* For equities, this means we still favor the idea of being short (or underweight) stocks leveraged to natural gas prices with one vehicle being the American Stock Exchange Natural Gas Index (the XNG).
* The XNG shows a very strong positive correlation to the one year-strip price. As of last night's close, the XNG is trading off a $10 strip price, suggesting there is about 30% downside potential."
The cold weather has caused a short-term rally in energy stocks but they look bad across the board. Oil stocks are trading like crude is at $70 and gas stocks are trading off a $10 price.
"* Our updated analysis of the "carry out" - where natural gas storage will sit come April - suggests inventories will be about 1.73 trillion cubic feet or almost 50% above normal.
* That figure assumes normal withdrawals during February and March. If we look at a scenario where draws are much larger than normal, stocks would still be 25% above normal.
* With inventories high, come spring, storage gas effectively has to compete with wellhead supply - a phenomenon called gas-to-gas competition.
* For prices, we see the storage situation essentially manifesting in a 12 month natural gas strip price of $6.75-$7/MM BTUs as opposed to the current figure of $8/MM BTUs.
* For equities, this means we still favor the idea of being short (or underweight) stocks leveraged to natural gas prices with one vehicle being the American Stock Exchange Natural Gas Index (the XNG).
* The XNG shows a very strong positive correlation to the one year-strip price. As of last night's close, the XNG is trading off a $10 strip price, suggesting there is about 30% downside potential."
The cold weather has caused a short-term rally in energy stocks but they look bad across the board. Oil stocks are trading like crude is at $70 and gas stocks are trading off a $10 price.
posted by Never-Limp at 6:37 AM
2 Comments:
"gas stocks are trading off a $10 price" I either don't buy or dont understand this premise
Its easy to see that inventories will be historically high at the end of the drawdown season. I would gladly short june or july nat gas futures if there was an easy way to do so. but i don't see why this means the equities will go down
APA for example made 1.56 last qtr with an average gas price of 4.77 so even if gas retreats to halfway between here and there they should make significantly more than that. CHK is also down since winter started reflecting that gas will be down year over year most likely for most of the year
gas prices are up because the inventories are going to be far less of a record high than they were looking to be before this cold snap. So prices should be decent through summer rather than disasterous
I still feel most of these stocks are already trading with the assumption that prices will come down which is why when oil went to 50 not that much happened with the big names.
The analyst plots a regression of the XNG against strip prices and it shows an 88% correlation. Based on where the XNG is now trading and where he thinks strip prices are headed, he sees 30% downside in the XNG. I'd show you the chart but it's proprietary.
I have to strongly disagree with you about the big oil stocks.
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