Jeff Lee https://alpha-week.com/ en The Never Ending Recovery Of Natural Gas https://alpha-week.com/never-ending-recovery-natural-gas <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--title--features.html.twig x field--node--title.html.twig * field--node--features.html.twig * field--title.html.twig * field--string.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <span>The Never Ending Recovery Of Natural Gas</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--created--features.html.twig x field--node--created.html.twig * field--node--features.html.twig * field--created.html.twig * field--created.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <span>Tue, 03/12/2019 - 15:08</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--body--features.html.twig * field--node--body.html.twig * field--node--features.html.twig * field--body.html.twig * field--text-with-summary.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-body field--type-text-with-summary field--label-hidden field__item"><p><span><span><span><span><span><span><span>Natural gas prices witnessed a rise of 50% followed by an approximately 50% plunge in the winter of 2018/19. The commodity suffers from a never-ending recovery from the great shale hangover ten years ago. In 2018 U.S. consumption rose by 7 billion cubic feet per day (Bcf/d) compared to 2017 but dry gas production also increased by 8 Bcf/d, and prices as of February ended up where it was a year ago. If the brutal winter we just came off did not even cause lasting effect on prices, are we destined for another boring year for gas?</span></span></span></span></span></span></span></p> <p><img alt="Kronos" data-entity-type="file" data-entity-uuid="a3cf8767-4afe-4f1d-b10f-ce2b2fc2665a" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2019-03-12-A.png" width="550" height="291" loading="lazy" /></p> <p><span><span><span><span><span><span><span>The story of technological advance in shale oil and gas is extraordinary. As recently as 2015, a great gas well is one that averages 5 million cubic feet per day (MMscf/d); today a monster well in the Appalachia clocks in at 15 MMscf/d routinely. The U.S.’s single year production increase of 8 Bcf/d represents half of all volumes produced in Canada. However, this productivity gain has flattened out; and there are good reasons to believe that gas, as well as oil producers, have begun to hit a wall on packing more wells into a single drilling pad, lengthening the drills, and using more frack sand and water. Since hitting a peak in October 2018, production has flatlined. Gas drilling has not yet been affected by lower oil prices but it is expected, and that has a lagging effect that will show up a few months down the road.</span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span>Stellar export growth, especially to Mexico, in 2018 was a big story and with continued significant LNG capacities coming online in 2019 overall export is projected to grow by another 3 Bcf/d. Granted, some of these volumes are tied to short term contracts., but worldwide buyers of LNG tend to be big-volume consumers with long term, stable demand projections. There is little room for surprise.</span></span></span></span></span></span></span></p> <p><img alt="Kronos" data-entity-type="file" data-entity-uuid="09d3fca4-c001-4002-9c3c-078a26789890" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2019-03-12-B.png" width="550" height="278" loading="lazy" /></p> <p><span><span><span><span><span><span><span>Storage level is tracking 5-year low following big draws in November and January. While weather patterns in the Northeast U.S., where heating demand is the highest, are trending normal this spring, there are structural factors that point to bullish consumption patterns. According to a recent RBN Energy study, not only is petrochemical industrial demand picking up, temperature-adjusted demand for the past two years has also been trending up, indicating structural changes in the power sector related to increasing market share of gas-fired generation at the expense of coal and nuclear power plants. In fact, coal prices have been trending up all year to $35 per megawatt-hour (MWh) of power generated compared to that of natural gas at $20 as of this writing, encouraging higher gas utilization.</span></span></span></span></span></span></span></p> <p><img alt="Kronos" data-entity-type="file" data-entity-uuid="bfd950e5-6bbb-4ad9-9e57-fd9a91492fb6" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2019-03-12-C.png" width="550" height="319" loading="lazy" /></p> <p><span><span><span><span><span><span><span>After a blockbuster year, the latest EIA outlook now forecasts only 0.8 Bcf/d net demand growth for 2019, resulting in a build in inventory back up to 5-year average. This assumes a slower pace of coal-to-gas switching and subdued summer cooling demand and normal winter demand. Given that half of all domestic demand growth last year came from power generation, this projection contains a significant upside price risk should we have a weather upset this summer. </span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span>Natural gas prices are so notoriously volatile it is sometimes called the widow maker. The recent violent drop was due solely to its sensitivity to weather changes. However, with a corresponding plunge in speculative money short to multi-year low, likely flattening of production growth in the coming months, the ferocity of price drop to 2.5-year low, and the promise of summer heat, there appears to be an asymmetric setup for natural gas for an upside surprise.</span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span>**********</span></span></span></span></span></span></span></p> <p><span><span><span><span><em><span><span><span>Jeff Lee is Principal of </span></span></span></em><span><a href="https://kronos-management.com/"><strong><em><span><span><span>Kronos Management</span></span></span></em></strong></a></span></span></span></span></span></p> <p><span><span><span><span><em><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Opinions expressed in this document are for general informational purposes only and are not to be construed as an offer, recommendation, solicitation, or investment advice. Kronos Management makes no representation or warranty relating to any information herein, which is derived from independent sources. Trading commodities bears substantial risk of loss, and is not suitable for all investors. Please consider your financial condition prior to investing with Kronos. For further details regarding the risk of trading with Kronos, refer to the Disclosure Document.</span></span></span></em></span></span></span></span></p> <p><span><span><span><span><em><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>***</span></span></span></em></span></span></span></span></p> <p> </p></div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-tags--features.html.twig * field--node--field-tags.html.twig * field--node--features.html.twig * field--field-tags.html.twig * field--entity-reference.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-tags field--type-entity-reference field--label-hidden field__items"> <div class="field__item"><a href="/hedge-funds-guest-articles" hreflang="en">Hedge Funds Guest Articles</a></div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <drupal-render-placeholder callback="flag.link_builder:build" arguments="0=node&amp;1=10338&amp;2=bookmark" token="56WAA9RoFacRnfE7hzeMJwkpQpwewbqyStAQ_8jkEuw"></drupal-render-placeholder> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-author--features.html.twig * field--node--field-author.html.twig * field--node--features.html.twig x field--field-author.html.twig * field--entity-reference.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <a href="/author/jeff-lee" hreflang="en">Jeff Lee</a> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-content-role--features.html.twig * field--node--field-content-role.html.twig * field--node--features.html.twig * field--field-content-role.html.twig * field--list-string.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-content-role field--type-list-string field--label-above"> <div class="field__label">Content role</div> <div class="field__item">Public</div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> Tue, 12 Mar 2019 15:08:20 +0000 AlphaWeek Staff 10338 at https://alpha-week.com Oil Market Goldilocks: Eight Things To Watch https://alpha-week.com/oil-market-goldilocks-eight-things-watch <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--title--features.html.twig x field--node--title.html.twig * field--node--features.html.twig * field--title.html.twig * field--string.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <span>Oil Market Goldilocks: Eight Things To Watch</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--created--features.html.twig x field--node--created.html.twig * field--node--features.html.twig * field--created.html.twig * field--created.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <span>Mon, 10/08/2018 - 15:48</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--body--features.html.twig * field--node--body.html.twig * field--node--features.html.twig * field--body.html.twig * field--text-with-summary.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-body field--type-text-with-summary field--label-hidden field__item"><p><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Since hitting bottom at $42 last summer, oil (WTI) has staged an impressive comeback to trade in the $60-$76 band. Even more impressive is the fact that it is pulling away from almost all other major commodities. Given that oil is a key input, high oil prices could eventually lift the tide for the commodity universe or get dragged down by the rest of them. In this issue we briefly examine the moving parts and address the current state of affairs, mostly to answer the question: how sustainable is this uptrend?</span></span></span></span></span></span></span></p> <p><img alt="Kronos" data-entity-type="file" data-entity-uuid="615e0ed9-57cd-47de-bd4f-08727c0d3bd3" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2018-10-08-A.png" width="550" height="253" loading="lazy" /></p> <p><span><span><span><span><em><span><span><span>Figure 1 - Oil vs the Rest</span></span></span></em></span></span></span></span></p> <p><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>First things first. In commodity markets, one always has to remember the second-order effect – all the headlines of conflicts, outages, and natural disasters matter, but only to the extent of their effects on the underlying trends in supply and demand. Commodities have end users, so when the fundamentals exert themselves, especially on the margin, minor events can create shocks. When sentiment runs ahead of fundamentals, even minor positive news are exaggerated; when sentiment sours, every minor bad news brings intense selling pressure. In light of the remarkably stable demand and the upcoming Iran sanctions, we argue that oil is poised for further upside, albeit limited, in the near term, but face significant headwinds in later half of 2019. Consider the following:</span></span></span></span></span></span></span></p> <ol><li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Supply/demand is widely considered to be tight and remain so until late 2019. American refineries have been running above 95% utilization but are barely keeping up with demand. Global fiscal and monetary stimulus remain intact to goose economic growth, though on increasingly shaky grounds.</span></span></span></span></span></span></span></span></li> </ol><p><img alt="Kronos" data-entity-type="file" data-entity-uuid="2e534150-093c-4f8a-8d58-97ecd1aceed4" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2018-10-08-B.png" width="432" height="289" loading="lazy" /></p> <p><span><span><span><span><em><span><span><span>Figure 2 - Supply/Demand are Balanced</span></span></span></em></span></span></span></span></p> <ol start="2"><li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The general sentiment for oil among analysts and investors are still extremely bullish. Managed money long/short gap has been very wide all year and strong pricing backwardation shows no signs of reversing.</span></span></span></span></span></span></span></span></li> <li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Seasonality is a headwind as we head into winter low demand season but crude inventory levels are trending decidedly lower and are now below 5-year average.</span></span></span></span></span></span></span></span></li> </ol><p><img alt="Kronos" data-entity-type="file" data-entity-uuid="7e2069f4-cee6-4bc8-a1bd-00ca4fc8cd58" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2018-10-08-C.png" width="354" height="279" loading="lazy" /></p> <p><span><span><span><span><em><span><span><span>Figure 3 - Decreasing Stocks</span></span></span></em></span></span></span></span></p> <ol start="4"><li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Saudis are content with the current price level (Brent $70-$85) as it stabilizes their budget. Although they have ramped up production since March to counter Venezuelan and Iranian decline, President Trump is expected to escalate the rhetoric for OPEC to “do something” about oil (read: gasoline) ahead of the midterm election. Symbolic gestures in the form of a mild production boost is likely.</span></span></span></span></span></span></span></span></li> <li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>America’s European and Asian allies are expected to comply with the November Iran sanctions. Most have already drastically cut back Iranian imports. One of Iran’s biggest customers India was recently caught receiving an off-grid Iranian tanker but it should be an anomaly. China on the other hand, can be expected to circumvent the U.S., especially when it is cutting American oil imports in light of the trade war.</span></span></span></span></span></span></span></span></li> <li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Saudi Arabia is about the only country with any meaningful spare capacity. This is widely believed to have dwindled down to around 1.5 to 2 million bopd, which at 1%-2% of overall global demand is limiting their ability to manage prices and is create a potentially disproportionate upside shock.</span></span></span></span></span></span></span></span></li> <li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>Despite declining capital efficiency, U.S. shale oil producers are still operating comfortably above their breakeven prices ($30s to $40s) and are already hedged out for the next few years. They are, however, struggling mightily to increase production, fighting constraints on takeaway capacity, water disposal, sand, trucks, and inflation. Production is at record high but is expected to flatten out in 2019. Rig counts are revealing: they are declining in the most prolific Permian Basin but increasing in other basins, though it will take a few months to materialize into production.</span></span></span></span></span></span></span></span></li> <li><span><span><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span>The latest EIA survey showed that the gap between drilled wells and drilled but uncompleted (DUC) wells in the Permian Basin is rapidly widening, signaling producers’ desire to time production to new pipelines coming online at the end of 2019 to avoid the wide Midland-Gulf Coast discount.</span></span></span></span></span></span></span></span></li> </ol><p><img alt="Kronos" data-entity-type="file" data-entity-uuid="b12e2bb1-649d-499b-a559-83a4cf6a7f2b" src="https://www.alpha-week.com/sites/default/files/inline-images/Kronos-2018-10-08-D.png" width="428" height="280" loading="lazy" /></p> <p><span><span><span><span><em><span><span><span>Figure 4 - Sitting DUC</span></span></span></em></span></span></span></span></p> <p><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>The last two points are not trivial. While OPEC provides the big chunk of the world’s oil and the Saudis, with their large spare capacity, manage the production swing, Permian Basin, by its sheer size and velocity, has become a critical marginal producer that carries an outsize influence. We are not sure how much excess DUC inventory will be built when all is said and done, but we do believe that given time it can develop into a significant drag on prices. When pipelines are completed or if prices break and producers rush to complete the wells and turn on the tap this could exacerbate any downward movements.</span></span></span></span></span></span></span></p> <p><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>Give that economic growth, and by extension, equity markets and risk appetite, are stable for now, there are few catalysts to dislodge oil from the current uptrend. The few bearish factors are mild and non-structural. In fact, geopolitical tensions have not been this subdued for a while, setting up an asymmetrical situation for an upside move for the next few quarters.</span></span></span></span></span></span></span></p> <p><span><span><span><span><span lang="EN-US" xml:lang="EN-US" xml:lang="EN-US"><span><span>**********</span></span></span></span></span></span></span></p> <p><span><span><span><span><em><span><span><span><strong>Jeff Lee</strong> is Principal of <strong>Kronos Management</strong></span></span></span></em></span></span></span></span></p> <p>***</p> <p><em>The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group</em></p> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-tags--features.html.twig * field--node--field-tags.html.twig * field--node--features.html.twig * field--field-tags.html.twig * field--entity-reference.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-tags field--type-entity-reference field--label-hidden field__items"> <div class="field__item"><a href="/hedge-funds-guest-articles" hreflang="en">Hedge Funds Guest Articles</a></div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <drupal-render-placeholder callback="flag.link_builder:build" arguments="0=node&amp;1=10369&amp;2=bookmark" token="uB1ijT4xIZhsvJ38_wZmnbG3zAjHEOa8gJh7YnAxMn8"></drupal-render-placeholder> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-author--features.html.twig * field--node--field-author.html.twig * field--node--features.html.twig x field--field-author.html.twig * field--entity-reference.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <a href="/author/jeff-lee" hreflang="en">Jeff Lee</a> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-content-role--features.html.twig * field--node--field-content-role.html.twig * field--node--features.html.twig * field--field-content-role.html.twig * field--list-string.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-content-role field--type-list-string field--label-above"> <div class="field__label">Content role</div> <div class="field__item">Public</div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> Mon, 08 Oct 2018 14:48:05 +0000 AlphaWeek Staff 10369 at https://alpha-week.com