By EconMatters
Natural Gas Prices Bottomed
Everyone is trying to figure when the oil markets will bottom. Well lost in all the crazy action in markets globally is the nice resurgence off the bottom for natural gas prices. Natural Gas prices have essentially gone from $1.68 per MMBtu to $2.40 per MMBtu rather rapidly in the midst of a mild winter so far. The reason is that all those rig reductions are starting to affect the production of the commodity, less natural gas is coming to market relative to expectations. [image]https://3.bp.blogspot.com/-5b6Xmn285I8/Vo8JmxH7PZI/AAAAAAAAImE/vZvZhkxz27Q/s640/20160107_NGSP.png[/image]
[image]https://3.bp.blogspot.com/-lw-P9d7eeDE/Vo8I-X7qJoI/AAAAAAAAIls/xdxBw-_l2-k/s640/20160107_rigs.png[/image] The Lag Effect
[image]https://1.bp.blogspot.com/-4-3yeaRuuSE/Vo8JF3WHzhI/AAAAAAAAIl0/h-eKx96GveM/s640/20160107_Supply.png[/image]
The lag effect in all those rig declines is starting to show up in the natural gas production numbers, and although the cut in oil rigs hasn`t shown up yet in oil production in a meaningful way, it is just around the corner over the next three months by my calculation. We should start to experience some meaningful U.S. Oil Production cuts by late March and early April which will solidify the fact that the oil market had long sense bottomed in January of this year.
| Rigs | |||
| Fri, January 01, 2016 | Change from | ||
| last week | last year | ||
| Oil rigs | 536 | -0.37% | -63.83% |
| Natural gas rigs | 162 | 0.00% | -50.61% |
| Miscellaneous | 0 | 0.00% | -100.00% |
| Rig numbers by type | |||
| Fri, January 01, 2016 | Change from | ||
| last week | last year | ||
| Vertical | 89 | 3.49% | -70.33% |
| Horizontal | 549 | -0.90% | -58.91% |
| Directional | 60 | 0.00% | -65.71% |
| Source: Baker Hughes Inc. | |||
| Working gas in underground storage | ||||
| Stocks billion cubic feet (bcf) | ||||
| Region | 2016-01-01 | 2015-12-25 | change | |
| East | 857 | 876 | -19 | |
| Midwest | 983 | 1,025 | -42 | |
| Mountain | 185 | 195 | -10 | |
| Pacific | 381 | 382 | -1 | |
| South Central | 1,347 | 1,340 | 7 | |
| Total | 3,643 | 3,756 | -113 | |
| Source: U.S. Energy Information Administration | ||||
Market Investment
[image]https://2.bp.blogspot.com/-iv0F6bz858U/Vo8JOYpaorI/AAAAAAAAIl8/tfmJ7w97Uuk/s640/201511-November-monthly.png[/image]
By the time everyone realizes that the oil market has bottomed it is too late to make the real good, easy money off the bottom, just like in natural gas prices. You have to be willing to step in and take the risk that prices haven`t bottomed. You basically are getting paid to buy when everyone else is selling the market, in essence, blood in the streets is the market analogy. We accurately called the bottom in natural gas prices, we will see how close we are in the oil markets. But we know that any investment right now in the oil market where one can stay in the trade, and not be liquidated for any reason, i.e., bankruptcy risk in insolvent company – is going to make money over a two year time frame. Moreover, the reward will far and above exceed the risk involved, and the performance of said trade will greatly outperform the overall market returns of most other asset alternatives.
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