Monday, September 21, 2009

Rediscovering Natural Gas

NPR's Morning Edition on the glut of shale gas hitting the market.

"I used to say the nation is awash in natural gas," Hefner says. "Now I say we're drowning in it."

One area getting new attention is the Marcellus basin, a 400-million-year-old shale formation stretching from New York to West Virginia. That basin alone is believed to hold as much as 500 trillion cubic feet of natural gas, the equivalent of about 80 billion barrels of oil. (There are also large shale gas basins in Texas, Wyoming, Arkansas and Michigan.) It is not clear how much of the shale gas is recoverable, but the new production techniques have boosted all previous estimates.

Shale formations are deep underground — 6,000 feet or more — and the rock is relatively impermeable. Deep drilling is expensive, and in the past the amount of gas that could be reached was not considered sufficient to justify the cost.

Sunday, September 20, 2009

The Dorian Gray Pill

Mostly, I try to post only market info on this site.  But I can't resist.  This op-ed is by a conservative economist that teaches at Harvard. 

I am confident that you will find it thought provoking.  Below is an excerpt,  the whole article is HERE.
Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.
Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality.

Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets.

So here is the hard question: How should we, as a society, decide who gets the benefits of this medical breakthrough? Are we going to be health care egalitarians and try to prohibit Bill Gates from using his wealth to outlive Joe Sixpack? Or are we going to learn to live (and die) with vast differences in health outcomes? Is there a middle way?

Thursday, September 17, 2009

Explaining the Irrational Exuberance of Natural Gas: De-constructing a Dead Cat Bounce

Since the last time I wrote an extended piece on this blog site, the market has moved significantly (56% higher than the low placed about 10 days ago). The market didn’t see this rally coming. And, searching for answers, analysts attempt to attribute a particular fundamental to what has transpired over the last 10 days.  I don't think what has gone on is "fundamental" - as in supply and demand -  at all.  In my opinion, it is a dead-cat bounce.

This rally was a one of human emotion. It was caused by a blend of greed (or complacency) and fear. As the market fell, the front month price fell more significantly than the out months. This Rigzone article discusses that the steepness of the term structure contango was a four standard deviation event - meaning that the difference between the front month price and the out-month price is about as significant as it ever gets.  Considering this, many shorts entered the market in the front month, knowing that the roll from month to month would credit their position and the term-structure "contango" would work in their favor.

These speculative positions in the market were short in the face of the lowest gas prices in a decade. But they were making money, so they remained short. And then….the market rallied 15 cents. Some of them – the recent entrants – were then holding losing (unprofitable) positions. Trading with a stop-loss discipline, they said “enough is enough” and blew out – they BOUGHT. This pushed the market higher, and took even more trader's positions into negative equity situations. As nervous or disciplined investors, THEY headed for the exits, too. They BOUGHT. And this forced the market higher still. At this point the market had rallied maybe 50 cents. At this point, the market move started to attract the hot money that looks for trends with velocity. This money wants to jump on the trending market’s bandwagon and ride that bandwagon for a significant and quick profit. So…the move higher created by nervous investors exiting shorts is exacerbated by new “hot money” longs. The market has ingested these new positions by adjusting price, and by now it is more than a dollar higher. we stand. Such is the status of the natural gas market on September 16th.

Old trader types say “if you drop it far enough, even a dead cat will bounce.” It is because the steady move lower allows folks to get out of position – to blend greed and complacency and find them in an unmanageable position should the market stop behaving in such a convenient and predictable trend. I perceive the recent strength as a dead-cat bounce and I look for more downside as the market adjusts from the exuberance of the last 10 days.

Let’s not forget: Natural gas storages are full. Rig counts are down, and gas production numbers still relatively flat to prior years. There are new and significant sources of shale bed supply that are shell-shocking the market to a new reality, and the demand base is slow to evolve to these breakthroughs. These are all short-to-intermediate term bearish considerations.

As I wrote in my last market commentary extended post, the last two times that natural gas prices have been this cheap, things turned around quickly. People that actively manage energy price risk should consider buying a piece of product at historically low prices if it fits their needs.  And while we all get nervous in this situation, after the market rallies 56% off the lows, it seems reasonable to wait for prices to adjust after such a dead-cat bounce.

Wednesday, September 16, 2009

One Year Post Lehman: "A Drunken Binge of Over"

See the CNBC interview here.
“The West, especially the Anglo-Saxon economies, went on a drunken binge of excess consumption, leveraged up the eyeballs with totally inadequate savings,” Roach said. “It was reckless, irresponsible and it’s over,” he added.

Tuesday, September 15, 2009

Is NYMEX Natural Gas a "Bubble"

That is what Steven Schork  (This article, from the Financial Times, is ABSOLUTELY worth the jump.)
"We stand by our words and our numbers. No doubt, gas is cheap. But, if there is no value, than cheap, in and of itself, is not a reason to own something. Back in the 1980s the Yugo GV was cheap also. The car was cheap for a reason. Its Soviet-bloc engineering (see today’s G.M.) exuded the feeling it was assembled at gunpoint1. Gas today is cheap for a reason.

There is too damn much of it. Over the weekend Alan Lammey at Natural Gas Week noted that ANR Storage was reported as 97.4% full, Sonat Storage was 97.3% full. Meanwhile, Texas Gas Storage was 96% full, Transco Storage was 83.3% full and Tennessee was estimated at 89% full… and it is only the middle of September for crying out loud."

The Oracle: Not Up. Now Down, Either.

Wednesday, September 9, 2009

Will the Demand for Assets Fall When the Baby Boomers Retire?

A new paper from the Congressional Budget Office states the following:
"...[will] the demand for assets, such as stocks and bonds, will fall after the retirement of the baby-boomer generation—the segment of the nation’s population born between 1946 and 1964, whose oldest members turned 62 in 2008. Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance their retirement; they assert that the sell-off could cause a dramatic decline in prices. An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely."

Do You Worry about how Your Spleen Works?

A spunky rebuke of Peak Oil theory is found in the Canadian National Post
Note how the use of the term “skeptics” suggests that Peak Oil is the mainstream view, which it is not. The word also links unbelievers to beyond-the-pale climate change “skeptics.” Finally, the report suggests that these people are suggesting a “golden age of exploration and supply” although in fact the only relevant quote is from Peter Odell, professor emeritus of international energy studies at Erasmus University in Rotterdam, who merely says, “It’s an amazing turnaround from the gloom of the last 10 years. All these finds will take a long time to bring on stream, but it shows the industry is capable of finding more oil than it uses and shows we have not come to any peak.”
Peak Oil theory represents a combination of economic ignorance and moral rejection of markets as greed-driven and shortsighted. These all-too common attitudes usually go with a profound faith in effective government policy, despite the monumental weight of evidence to the contrary.

The seminal image for depletionists -as for apocalyptic climate change theorists — is that of the photo of the Earth taken from Apollo 17; seemingly dramatic confirmation of finite resources on a “small planet.” In fact, the interpretation of the Apollo picture is symptomatic of how far technology has outstripped our primitive assumptions about the way the world works. But then people don’t have to think about the vast, natural “extended order” of the economy any more than they have to worry about how their spleens work. (italics are mine)

Debate between economists and Peak Oilsters tends to be a dialogue of the deaf. Economists often seem to imagine that they are explaining a technical issue. They note that the alleged failure to “replace” production is in fact due to the way reserves are reported. They stress that startling new technologies –such as the ability to drill in thousands of metres of water to depths of more than 10,000 metres (as at Tiber), or 3-D computer seismic imaging, or horizontal drilling –are constantly finding new oil and gas, and producing more from old reservoirs.

Again, citing how often alarms over “the end of oil” have been sounded since 1880 holds no sway with Peaksters. Since they see oil supply as essentially “fixed” and economists as deluded and morally deficient, delays in the projected “crunch” will only make it all the more painful when it –inevitably –comes."

Sunday, September 6, 2009

Let's Be Practical

Barry Eichengreen, a professor at Cal-Berkeley, writes an essay in The National Interest about the future of economics after the fallout from the last year's crisis:
"...Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.

Should this reassure us that we can avoid another crisis? Alas, there is no such certainty. The only way of being certain that one will not fall down the stairs is to not get out of bed. But at least economists, having observed the history of accidents, will no longer recommend removing the handrail."

Thursday, September 3, 2009

BP Finds Oil - Lots of It - 35,055 ft below the Earth's Surface

See all about it on Bloombergy TV:

Read All About It:
From the Wall Street Journal

From the Houston Chronicle

Hear All About:
On NPR's Marketplace

Tuesday, September 1, 2009