Daniels Trading - Special report natural gas prices - January 2014
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Daniels Trading - Special report natural gas prices - January 2014

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Daniels Trading - Special report natural gas prices - January 21th, 2014 ...

Daniels Trading - Special report natural gas prices - January 21th, 2014

From early 2007 many analysts thought the natural gas market was facing an unending oversupply condition and slack industrial demand. Furthermore, the market was being held in check by historic drilling efforts that were accentuated by advances in technology. But while the wheels of justice and commodity fundamentals grind slowly, they also grind exceedingly fine. Long-term change is afoot in the natural gas market.

While the tightening of supply has a long way to go before that theme provides a dominant lift to natural gas prices, a couple of record weekly draws in the US supply in December 2013 and January 2014, combined with consistent year-over-year working gas in storage readings below the 750 bcf level could alert the trade to the end of oversupply and the beginning of a tightening situation.

Another issue that might signal a shift in the fundamentals of supply is drilling rig counts at the lowest levels since 2000. But the primary reason for our turning more positive is the realization that the world economy is recovering and that over 50% of US natural gas demand comes from industry and electrical power generation. For this reason we expect 2014 demand to be the strongest since 2008, when prices averaged almost twice current
price levels.

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    Daniels Trading - Special report natural gas prices - January 2014 Daniels Trading - Special report natural gas prices - January 2014 Document Transcript

    • January 21, 2014 Use Near Term Weather Volatility to Position for Higher Intermediate Prices Following a move to historically high prices in 2005, natural gas was easily considered the most out of favor market in the energy sector. Sentiment towards that market has been extremely negative for almost six years. With the exception of a brief period in early 2009 when speculators managed to become slightly long, natural gas has been considered to be the most oversupplied and demand deficient industrial commodity on the board. From early 2007 many analysts thought the natural gas market was facing an unending oversupply condition and slack industrial demand. Furthermore, the market was being held in check by historic drilling efforts that were accentuated by advances in technology. But while the wheels of justice and commodity fundamentals grind slowly, they also grind exceedingly fine. Long-term change is afoot in the natural gas market. Natural Gas - COT - Futures and Options Non-Commercial and Nonreportable Combined Net Position Number Of Contracts 120,000 80,000 40,000 0 -40,000 -80,000 -120,000 -160,000 -200,000 -240,000 -280,000 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 The Hightower Report | Source: CFTC Max: 85,586 (8/29/2006) - Min: -242,712 (7/1/2008) - Most Recent: -13,679 (01/14/2014) While the tightening of supply has a long way to go before that theme provides a dominant lift to natural gas prices, a couple of record weekly draws in the US supply in December 2013 and January 2014, combined with consistent year-over-year working gas in storage readings below the 750 bcf level could alert the trade to the end of oversupply and the beginning of a tightening situation. EIA Working Gas In Storage 5 Year Comparison 4,000 3,750 3,500 But the primary reason for our turning more positive is the realization that the world economy is recovering and that over 50% of US natural gas demand comes from industry and electrical power generation. For this reason we expect 2014 demand to be the strongest since 2008, when prices averaged almost twice current price levels. Billion Cubic Feet 3,250 Another issue that might signal a shift in the fundamentals of supply is drilling rig counts at the lowest levels since 2000. 3,000 2,750 2,500 2,250 2,000 1,750 1,500 Jan Feb Mar 2014 2013 Apr May 2012 Jun 2011 Jul Aug 2010 Sep Oct Nov Dec Most Recent: 2,530 on 01/10/14 This Special Report was prepared by 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 1
    • January 21, 2014 THE HIGHTOWER REPORT SPECIAL REPORT Futures Analysis & Forcasting US economic readings in the final portion of 2013 and early 2014 have continued to trend higher, pointing toward an improving demand outlook for natural gas. A number of manufacturing surveys have indicated their most active levels in four and five years. 1,800 1,600 1,400 Number of Rigs 1,200 1,000 800 600 400 Jul-13 Jul-11 Jul-09 Jul-07 Jul-05 Jul-03 Jul-01 Jul-99 Jul-97 Jul-95 Jul-93 Jul-91 Jul-89 200 Jul-87 The EIA is forecasting US natural gas demand to be down 2.1% in 2014, to a rate of 69.63 bcf per day. But power generation represented was 35.5% of total demand during the first week of the 2014, compared to levels just below 19% for the same period last year. More below-trend temperatures are in the forecast, and this is expected to put more strain on supply. The tight supply/strong demand situation played out in the Northeast spot market during the first week of January, where prices climbed to record high levels. These factors could lead to stronger demand than what the EIA is currently forecasting. Baker Hughes Natural Gas Rig Count Source: Baker Hughes There are strong indications that China is poised to expand its domestic natural gas use (based on its latest 5-year plan), which could serve to stimulate global demand. China's National Petroleum Center expects demand for natural gas to expand 11% in the coming year and for their reliance on foreign supply to rise by nearly 19%. Another positive factor for US natural gas prices is the prospect for greater Liquid Natural Gas (LNG) export capacity. This comes as US companies move to satisfy foreign demand with supply that is priced three to five times cheaper. Forecasts from the International Energy Agency (IEA) indicate that 138 billion cubic meters of LNG production is under construction, and this is expected to grow exponentially in the coming years. As it stands, the EIA is forecasting the US to be a net exporter of natural gas by 2018 and a net exporter of LNG by 2016. EIA storage levels fell 15% below their five year average for the week ending January 10th. This was in sharp contrast to a surplus situation just seven weeks earlier. A continuation of above average demand due colder temperatures and improving economic conditions could tighten the supply and push prices significantly higher. The market’s technical action since putting in a contract low in November has been quite impressive, and it favors more upside ahead. The impulse wave from $3.537 in the June contract projects a near term objective at $4.38. However, the market has gotten overbought, and we fear that a move to that level would trigger a corrective setback. For this reason we would prefer to buy a on a pullback to position for an advance toward $5.20. The natural gas market has become highly dependent on weather forecasts, and that has fueled a steady increase in option market volatility. We recommend selling a March call to help finance a pair of June calls. Suggested Trading Strategy SELL 1 March Natural Gas 4.40 call, and BUY 2 June Natural Gas 4.60 Calls for a net cost of 0.030. Use an objective of zero on short March 440 call, and hold the 2 June 4.60 calls for an objective of 0.52 each. Risk a total of $1,500 on entire strategy. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 2
    • THE HIGHTOWER REPORT Futures Analysis & Forcasting January 21, 2014 SPECIAL REPORT Disclaimer The information in this report may be considered dated upon its release and should not be considered interpersonal advice. This report is merely an opinion on the market and is a reflection of conditions as of its publication. Market conditions change! Traders should not consider entering positions without their own independent analysis of the market’s current situation, nor without further consideration of any changes to the information contained herein that may have occurred since this report was written. The authors are not responsible for any verbal or written claims and opinions that might be provided in conjunction with this report. The trading suggestions contained herein have been provided merely as a general guide and only for the purpose of quantifying the authors’ opinions. This report includes information from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of Daniels Trading is strictly prohibited. WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED. THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION. THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE “RISK DISCLOSURE” WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICES. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 3