Wednesday, August 26, 2009

Advisory Warning: Natural Gas to Fall Below $1


Natural gas inventory levels in Western Canada are at 492.46Bcf as of
August 23 and now exceed the existing storage capacity of 489Bcf.

As readers here know, storage of natural gas in the US will reach capacity in the next couple of months. What happens then to the prices is unknown as we are in uncharted territory. However, we may have a good preview occurring right now in Canada. This is very much what we stated on August 20.

Natural gas in Canada is performing even worse than in the US (see vs UNG). Current prices are already below $2, prices not seen since 2002.

FirstEnergy Capital, an energy advisory based in Calgary has issued a warning that prices could fall below $1 in coming weeks, according to Canwest news service.

The firm says that Canadian supplies "continue to drift lower" but there is no evidence of large scale shut-ins occurring. Inventory levels in western Canada are at 492.46Bcf as of August 23 and now exceeed the existing storage capacity of 489Bcf.

Also with regards to, the natural gas ETF in Canada that is underperforming UNG in the US, Claymore has responded to me on the reasons, which were as we had previously stated:

"GAS follows the AECO price for Natural Gas whereas UNG follows the NYMEX. Although the commodity is the same, they are different hubs and currencies. Both would have an effect as to how closely the two track one another.

The fund rolls forward contracts over a five day period, seven days before month end. This is done on a monthly basis. The fund rolls the contracts 20% per day over five days. "

What Claymore does not mention is the other reason , UNG is overpriced dues to its shares issuance problems and is comanding a premium over NAV.

Keep your eyes on for a possible preview of UNG future prices.

Straddles (strangles):

With so much volatility expeted on natural gas, and particularly UNG due to its broken status, and hurricanes arriving at any minute, straddles and strangles may present a great opportunity for profit. Here are updated strangles for UNG, with expiry of September 2009, October 2009, and January 2010, computed with our StraddlesCalc tool:

(please click to enlarge)
Storage Chart:

US Storage Chart comparing 2008 with 2009 (from our previous articles) :

Dreadful is one way to describe it.

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traderpau said...

I was looking at USD/CAD just now and it seems there could be a lift coming in the pair. IF the US dollar rises from here, it would add additional pressure on NG.

The Shocked Investor said...

Indeed, I agree. There are too many variables and too many things *potentially* against NG.

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