Scorching Summer Heat Pushes Nat Gas Back Up To $3.00, Chesapeake Over $20

Several months ago, as John Arnold was terminally unwinding long gas positions into an illiquid market, sending natgas as low as  $1.80, various pundits called for a bidless market in natgas. Today they are silent, because 3 months later, nat gas is 60% higher, and is on the verge of crossing the $3.00 psychological barrier, and going unchanged on the year, in the process pushing Chesapeake energy above $20 for the first time since the vendetta-like Reuters battery of negative articles allowed such activists as Carl Icahn and Dan Loeb, not to mention Zero Hedge readers, to accumulate a position in the name in the mid-teens.

The main reason for this relentless push higher is what is shaping up to be another record hot summer, leading to a surge in A/C use and putting many marginal natgas power plants in play. From Reuters:

U.S. natural gas futures edged higher in early post-holiday trading on Thursday, boosted to their highest level in six months as more hot weather on tap for much of the nation lifts  air conditioning demand.

But traders expect little more upside, with prices hovering above the 200-day moving average near $2.82 per million British thermal units and most noting the market will have a hard time breaking the $3 level, where gas loses its appeal over coal for power generation.

As of 9:00 a.m. EDT (1300 GMT), front-month August natural gas futures on the New York Mercantile Exchange were at $2.916 per mmBtu, up 1.7 cents, after trading as high as $2.957, the highest mark for a front month since early January, according to Reuters data.

NYMEX was closed Wednesday for the U.S. Independence Day holiday.

Since posting a 10-year low of $1.902 twice in late April, nearby futures are up about 53 percent on signs that record production was finally slowing and demand picking up as more electric utilities switched from coal to gas.

Furthermore, all those rumors about the demise of nat gas demand appear to have been greatly exagerated:

Gas demand picked up sharply this year as spring prices hit 10-year lows and prompted many utilities to use more gas-fired generation to produce power. But gas production is still flowing at near-record-high levels despite relatively low prices that have made many dry gas wells uneconomical.

EIA's gross gas production report on Friday showed that April output rose 0.8 percent from March to 72.48 bcf per day, just shy of January's record of 72.74 bcf daily.

But data from Baker Hughes last week showed the gas-directed rig count fell to 534, its ninth drop in 10 weeks and its lowest level since August 1999.

It appears that with no easing in sight (pun intended) to scorching weather, nat gas has only one way to go. Up.

The National Weather Service's 6- to 10-day outlook issued on Wednesday called for above-normal readings for much of the western half of the nation and along the Gulf Coast of Texas, with normal readings in the Mid-Continent and below-normal readings in the Northeast and Southeast.

Nuclear power plant outages were running at about 8,800 megawatts, or 9 percent, on Thursday, up from 4,700 MW out a year ago and a five-year outage rate of just 4,100 MW.

There is good news: as the following weather forecast shows, things could always be worse.

Comments

[francis_sawyer]

Aubrey... AUBREY!!!... I'm guessing he's net short at the moment...

[I think I need ...]

more like the free oil saudi arabia's been sending the united states so obama can get relected will stop flowing soon.....

[Flakmeister]

Do you just make shit up because it sounds good?

[Fukushima Sam]

Should we really make money off of a company that utilizes fracking to release more carbon into the atmosphere?  Sure, you can make the money, but should you?

[Flakmeister]

Umm... non sequitur?

[N. B. Forrest]

Yes and yes.  I'm in big in CHK and hope they make a fortune in nat gas over the next few years. 

[reader2010]

Shit. I sold NG at $8 years ago. 

[Arnold Ziffel]

No matter what gas costs. I'm living off the fat 'o the land...my "High Yield Savings Account" with a generous ZIRP (or is it NIRP?) rate of 0.06%

[bigdumbnugly]

livin' high on the hog...

[russwinter]

Crops Burning Up:

http://seekingalpha.com/article/703261-crops-burning-up

[francis_sawyer]

The corn crop areas in the article are thise which would be 'burned up' anyway as they go mostly to ethanol production...

No big loss... BUY LOCAL...

The only relevance was to the added diesel fuel required to pump irrigation (which it means it's more cost effective to cull the crop and save the water)... It's a net plus, IMO...

[blunderdog]

Are there natural gas air-conditioners?  Or is this supposed to be from increased consumption to power the grid?

[Tyler Durden]

[firstdivision]

What would qualify as "Other"?

I can assure you that companies are over-flowing with coal, so the coal plants will continue to burn over the gas plants. 

[Catullus]

All depends on the spark spread and dark spreads.

Other can be considers a lot of things: biomass, oil, maybe even other assets that distributed gen.

[firstdivision]

How many Biomass plants are out there on the PJM market?

[firstdivision]

Also LMP's have been quite depressed this year.

[blunderdog]

That chart baffles me, but I appreciate the reply.  I have some issues w/colors.  Also saw what I missed when I first read the piece.

(Panem?  Is that some pop-culture reference?)

[francis_sawyer]

Where the fuck do you live? Panem?

~~~

Uh, the answer to your question is that your air conditioning comes from 'District 12'...

Edit: Response was to Blunderdog...

[Joe Sixpack]

Dude:

Nat gas produces electricity, which runs air conditioners. Everyone is dumping their coal plants for Nat gas.

[CharlieSDT]

Well, I use it my nat gas toaster and my girlfriend has a nat gas powered dildo.  

[francis_sawyer]

Well if that's the case Charlie, I'd suggest you get yourself some nat gas powered Viagra & get to work...

[J 457]

"Everyone is dumping their coal plants for Nat gas."

Not exactly, when NG crossed $2.75 it became comparable to cost of coal.  If it goes above $3.00 you'll start seeing providers switch.

[firstdivision]

"increased consumption"...hahahahahahaha!  Not on a YTD average.

[russwinter]

India's monsoon and rain coming up seriously short. 

http://bit.ly/M8lJOL

[Oh regional Indian]

Yup, I'm living it right now. Instead of incessant rain, we have incessant clouds with NO rain. Water tables falling, cities running dry, rain irrigated crops suffering.

This fall/winter sure is setting up to be a hard one.

ori

[DaveyJones]

water tables have been falling pretty rapidly there haven't they?

[Flakmeister]

Don't worry... it's being replenished....  similar process to abiotic oil  :)

[Flakmeister]

Speaking of Cheasapeake and lousy tax policy...

Cheaspeake’s 1% Tax Rate Shows Cost of Drilling Subsidy

Chesapeake Energy Corp. made $5.5 billion in pretax profits since its founding more than two decades ago. So far, the second-largest U.S. natural-gas producer has paid income taxes on almost none of it.

Chesapeake paid $53 million over its 23-year history, or about 1 percent of the cumulative pretax profits during that period, data compiled by Bloomberg show. That’s less than half of Chief Executive Officer Aubrey McClendon’s compensation, for example, in 2008 alone.

My fuck, if the wind and solar guys got sweetheart treatment like this....

Corporate tax breaks being pocketed by the Officers.... can you say kleptocracy? 

[tarsubil]

Forget the wind and solar guys, what about me? If I got a $500 bil 0% interest loan, I'd guarantee that I wouldn't go bankrupt in the first 5 years.

[DaveyJones]

let's see, tax payer bailouts and subsidies and then,  like bankers and oilers, and drug companies, when the taxpayer becomes a criminal victim, you never go to jail, just pay some of the taxpayer money back as a fine.

it's a tough life

[adr]

even with increased consumption there is still an overabundance of supply, which does not explain a 60% increase in the cost of the commodity in three months time. Selling below $2 was overdone, but bidding higher than $2.25 is putting a premium on the commodity that shouldn't exist.

$2.25-$2.50 keeps nat gas in a position where it is expensive enough to discourage waste, but cheap enough on the retail level to not put too big of a dent in consumers pocketbooks. Nat gas rates above $4 translate to $6 per mcf or more at the retail level, a cost that leads to home heating bills hitting $200 in the winter. Retail rates never really dropped very far during the wholesale collapse. Retail rates went from $5.35 in january to about $4.25 per mcf in April. A far cry from the sub $3 rates that should have been available. The best long term PUCO contract never dropped below $5.45.

This is pure leveraged play speculation by traders that have no business being in the game in the first place.

This is the second time since april that speculators have tried to double the price of nat gas within a month, there is no supply and demand scenario going on right now that can justify this.

[Flakmeister]

Aren't you missing the fact that the associated NGL are paying the freight and whatever comes out of the well better fetch ~$7 per mcf or your compnay is going to sink fast? And did you also forget that the US is still a net importer of NG?

[Desert Irish]

Exactly....there's still a good chance that Canadian NG storage will be full by the end of August and early September and when it goes bidless guess where they are going to dump it . At $3 NG it's more economical for the utilities to switch out to coal so there's still life in the NG bear yet.

[Bicycle Repairman]

"even with increased consumption there is still an overabundance of supply, which does not explain a 60% increase in the cost of the commodity in three months time."

Speculators and their market fixing ways.  Please, please, please do not try to tell me that NG is the only completely free market.  There are none.

[Alaric_I]

Agreed, supplies continue to increase and we will likely be pushing maximum excess storage capacity by this fall.  Demand can't come online quickly enough.  Nat gas power stations alone won't soak up the supply, congress won't export the stuff yet (plus it will take 3 - 5 years to get LNG facilities online) and I have yet to see a nat gas filling station for my car.  Prices will stay below $3, and companies will go bankrupt.  Eventually enough wells will go offline to bring supply back down.  Then you go long... long now is a fools game.  Unless, of course, you manufacture gas powered dildos...

http://ir.eia.gov/ngs/ngs.html

http://www.eia.gov/pub/oil_gas/natural_gas/feature_articles/2010/ngpeakstorage/ng_peak.html

http://www.eia.gov/pub/oil_gas/natural_gas/analysis_publications/ngcapacity/ngcapacity.pdf

[wrs1]

This sounds like an emotional argument with no facts to back it up. Nat gas power plants are already soaking up the supply and production isn't rising in the shale plays of Texas, it's falling because of low prices. Wells are being shut in and wells that have been drilled and proven are not being produced due to lack of infrastructure.

[Alaric_I]

How many bcf of new demand is set to come online from power plants?  As for production:

http://www.eia.gov/oil_gas/natural_gas/data_publications/eia914/eia914.html

[wrs1]

http://in.reuters.com/article/2012/07/05/markets-nymex-natgas-idINL2E8I5...

Lot's of heat in the forecast across the nation which increases demand.  Texas uses natural gas for more than 50% of it's electricity generation and as temperatures rise, output increases which of course causes more natural gas to be consumed.  Here in Austin where I live, we have three NG fired plants that can produce up to 925mw of power.  It's not a matter of how many new plants get built but how much power is produced by existing NG plants.  There are old NG plants that were mothballed but are being turned back on here in Texas because of the excessive heat and at these prices they are OK to operate.  There is plenty of existing generation capacity that is capable of consuming more than is currently being produced.

Natural Gas equalled coal for electric generation for the first time ever in April

http://www.reuters.com/article/2012/06/27/utilities-coal-gas-eia-idUSL2E...

[wrs1]

$2.20-$2.25 keeps 60% of the natural gas produced in the US at a net loss.  It takes $4-5/mcf for dry gas to be profitable.  Most of the shale gas in the US is dry.  The wet plays aren't working out because of extra processing cost and if the well doesn't produce enough liquid, it's a loser.

The shorts are the speculators here, not the longs.  The producers are the longs and they are being destroyed by these prices.

[Dr. Engali]

I can confirm that Godzilla will not be here on Wednesday. He is still lingering around Fukushima collecting the radioctive fall out trying to save Tokyo. Godzilla really has turned over a new leaf since they introduced children to the movies and went to technicolor.

[francis_sawyer]

I'd be more worried about this system here...

~~~

http://www.ebaumsworld.com/pictures/view/201132/

[pods]

My guess is Fukashima is producing something more like The Blob.

[Cursive]

Any support nat gas finds this heat wave will be negated by weaker industrial demand from a weaker economy.  Not that you can't make money trading the swings, just don't get too excited about intermediate to long-term prospects.

[midgetrannyporn]

Reuters is full of bullshit. They did zero research and their conclusions are laughable.

1) The summer 2012 electrical utility consumption numbers aren't even out yet.

2) Where is their evidence that spot natty prices affect summer utility demand?

3) Electrical utilities use long term supplier contracts and coal is still cheaper than natty.

4) A whole bunch of other shit bitchez.

[VulpisVulpis]

Careful everyone. If El Nino comes, expect cooler temps as the summer wears on

http://www.livescience.com/21403-el-nino-chance-increases.html 

http://www.bloomberg.com/news/2012-07-05/el-nino-may-form-by-september-possibly-curbing-atlantic-storms.html

http://cornandsoybeandigest.com/blog/transition-el-ni-o-brings-midwest-drought 

[Flakmeister]

Any El Nino will have minimal impact on this Hurrican season... Next year definately....

The models are predicting at least a mid-strength El Nino...

[SpeakerFTD]

.

[Flakmeister]

Yep... this "little" heat wave is frying the Corn crop...

http://www.dairyherd.com/dairy-news/USDA-Corn-and-soybeans-roast-in-heat-drought-161124645.html

http://www.nytimes.com/2012/07/05/us/for-midwest-corn-crop-the-pressure-rises-like-the-heat.html?_r=1

http://droughtmonitor.unl.edu/

You fake AGW skeptics are in for a rude surpise when the Corn Belt gets slowly incinerated over the next 30 years...

And just wait till we get a real El Nino, one like in 98...

Edit: If anyone is interested, this puts the heat wave into some context

Part One:

The Amazing June Heat Wave of 2012. Part 1: The West and Plains June 23-27

Part Two:

Permalink

Be sure to note the following:

Conclusion

There is no imminent conclusion to this heat wave. As the high-pressure ridge over the Southeast weakens, a new ridge is developing again over the Southwest and threatens to form a broad flat upper-level dome stretching from New Mexico to Georgia. An up-to-date list of all the ‘all-time’ heat records broken at significant sites since June 23 may be found on ‘Wunderground U.S. Records’ under the ‘Climate’ tab at the top of the WU front page (scroll down to ‘Record Extremes’.)

18 of the 298 locations I follow closely (because of their long POR’s and representation of U.S. climate) have already broken or tied their all-time heat records.

It is just July the 1st and the summer has just begun.

Christopher C. Burt
Weather Historian

[A Nanny Moose]

Eazy there chicken little. Just because your dinner turns from corn to popcorn neither enforces, nor debunks the A in AGW

[Flakmeister]

Funny thing is that I understand that better than you... but I am aware enough to know when the dice are loaded....

I believe this has recently been accepted for publication

http://www.columbia.edu/~jeh1/mailings/2011/20111110_NewClimateDice.pdf

You may want to peruse this as well:

http://www.realclimate.org/index.php/archives/2012/03/extremely-hot/

For illustration, let’s take the most simple case of a normal distribution that is shifted towards the warm end by a given amount – say one standard deviation. Then, a moderately extreme temperature that is 2 standard deviations above the mean becomes 4.5 times more likely (see graph below). But a seriously extreme temperature, that is 5 standard deviations above the mean, becomes 90 times more likely! Thus: the same amount of global warming boosts the probability of really extreme events, like the recent US heat wave, far more than it boosts more moderate events. This is exactly the opposite of the claim that “the greater the extreme, the less global warming has to do with it.” The same is also true if the probability distribution is not shifted but widened by a constant factor. This is easy to show analytically for our math-minded readers.

[DaveyJones]

the never before seen ice core leaps (specifically their speed) coinciding with "modern energy" has something to say about it.

[Flakmeister]

Damn links got garbled

Part I and Part II

http://www.wunderground.com/blog/weatherhistorian/comment.html?entrynum=79

http://www.wunderground.com/blog/weatherhistorian/comment.html?entrynum=80

[Flakmeister]

Here is some more good news on this:

NBC Meteorologist On Record Heat Wave: ‘If We Did Not Have Global Warming, We Wouldn’t See This’

The definitive NOAA-led U.S. climate impact report from 2010 warns of scorching 9 to 11°F warming over most of inland U.S. by 2090 with Kansas above 90°F some 120 days a year with 850 ppm.  By 2090, it’ll be above 90°F some 120 days a year in Kansas — more than the entire summer. Much of Florida and Texas will exceed 90°F half the days of the year.  These won’t be called heat waves anymore.  It’ll just be the “normal” climate.

And remember, high heat means dry areas become drier and humid areas become intolerable.

On our current emissions path, we may well exceed the A2 scenario and hit A1FI, 1000 ppm (see here).  In a 2010 presentation, Climate scientist Katherine Hayhoe has a figure of what the A1FI would mean:

http://thinkprogress.org/climate/2012/01/03/397048/wp-content/uploads/2011/06/Hayhoe-warming.gif

[Bicycle Repairman]

Yeah the climate heats up and cools down.  It's not humanity's fault.  There's nothing we can do about it.  And if you favor a carbon tax, fold it five ways..........

[Flakmeister]

Which group do you fall in? (Hattip to  Ray Ladbury)

Certainly, there are professional denialists, funded by fossil fuel interests–they’ll deny the sky is blue if you pay them sufficiently.

There are contrarians–mostly folks who secretly think they are smarter than everyone else…especially those pointy-headed scientists. Ironically, this is where you get a lot of the physicists and engineers who are denialists.

There are libertarians who oppose the idea because they fear it would require a big-gummint solution (which, in addition to being a classic Argument from Consequences Fallacy, seems to me to indicate that they secretly suspect that their entire political philosophy is BS).

Political conservatives pile on because they value social cohesion even above truth and it is what their peers believe.

I’ve also noticed that for the most part, denialism is the province of “manly men”. They get to accuse all those wimpy scientists of being alarmist and get to pretend to be the voice of manly reason.

Frankly, though, I think one of the biggest contingents of denialists are simply those who deny the evidence because they don’t see a solution and are terrified of the consequences.

[A Nanny Moose]

Please remove your tin-foil hat prior to poisoning the well.

[Flakmeister]

I'll venture that you classify yourself as "the manly type"....

Do you want to play? I have a little time and I will check back.  Please explain the following recent paper:

Foster and Rahmstorf (2011)

Here is a laymans overview

http://www.skepticalscience.com/foster-and-rahmstorf-measure-global-warming-signal.html

An excerpt:

Based on this average of all five adjusted data sets, the warming trend has not slowed significantly in recent years (0.163°C per decade from 1979 through 2010, 0.155°C per decade from 1998 through 2010, and 0.187°C per decade from 2000 through 2010).  As Foster and Rahmstorf conclude,

"The resultant adjusted data show clearly, both visually and when subjected to statistical analysis, that the rate of global warming due to other factors (most likely these are exclusively anthropogenic) has been remarkably steady during the 32 years from 1979 through 2010. There is no indication of any slowdown or acceleration of global warming, beyond the variability induced by these known natural factors."

[Flakmeister]

I guess he didn't want to play... maybe he wasn't so "manly" after all....

[Bicycle Repairman]

I'm somebody with common sense.  BTW I understand several people jumped ship at the last climate "summit".  Face the facts.  You made some climate related investments and you are going to lose.  Probably all of it.

[Flakmeister]

Jumping ship? Or accepting the inevitable?

Fortunately I will be dead and gone when the real pain comes, with luck you will too. Our kids and grandkids, not so much....

BTW, I'd say DBA is looking good right now. the only thing that AGW has made me do is to avoid all thermal coal investments... No big loss...

[Bicycle Repairman]

Flakey, you're a blowhard who I've owned numerous times.  Your "science" has been debunked and abandoned whether you want to admit it or not.  Take your losses and move on.  You've convinced nobody here.

[Flakmeister]

Debunked by who? Where? Certainly not by you... ever. 

And if by "owning" you mean, following up on any thread that we both have posted and giving me your gratuitous junk vote on every post, then I guess you do own me....

[Bicycle Repairman]

Denial is a terrible thing, Flakey.  I hope you put a lot of your capital into ventures like Solyndra and other subsidized green garbage.  You need to learn a lesson on more than a merely academic basis.

[Flakmeister]

Firing potshots hoping to hit something??

I'd love to stay and chat but I have wedding upstate I have to get ready for... 

I did however arrange for a couple of VIP passes at tickiet window for you at the Creation Museum in KY...

It's going to be hot so bring sunscreen and lots of water...

http://forecast.weather.gov/MapClick.php?CityName=Petersburg&state=KY&site=ILN&lat=39.0324&lon=-84.8352 

[Catullus]

Spot gas doing well. The test will be this fall. There's still a lot of gas in the ground. Would be surprised to see $2 again by October. Then again, I wouldnt be surprised to see $4.50 gas either.

BTW, July 7, 2008 was the peak of the commodities bubble. I remember $14 gas that day and $147 oil. Feels like decades ago.

[constantine]

Yes, but let's not forget that the $14 gas print was largely a function of the flooding of the Mississippi delta region so it was a bit anomolous.

[otto skorzeny]

big electric bills=bullish for consumer. where are the  Obama CNBC tools talking about how low nat gas prices last winter would "help" the tapped out US consumer now that all of that "saved $" will go to electric bills. some honcho from ComEd (IL) lives in one of the biggest houses in our heighborhood-7000+ sq ft-all-brick/stone, cedar shake roof and a $26K prop tax bill-in case you were wondering what your electric bill goes towards- remember that the next time Com Ed screams that they need a rate increase

[constantine]

CVR Partners LP (UAN) is an even better play on natgas and scorching temperatures.  It's an amonia and UAN fertilizer producer but it uses petcoke as opposed to natural gas to produce its various fertilizers.  It wlll benefit not only from the increase in price of natural gas (as competitors have their margins pinched by higher natgas prices) but also in the abysmally hot weather conditions that are, unfortunately, decimating the corn belts crops this summer.  Coincidentally, Carl Icahn also bought a large position in the company recently via his acquisition of CVR Energy, which is the General Partner for CVR Partners.  I don't think he intends to flip this one; my guess is that he can kill two birds with one stone here, playing the crack spread with the refiner (CVR Energy) and the bullish fundamentals of the fertilizer space via CVR Partners.  CVR Partners has close to a 9% yield and has a plant expansion that is fully funded and scheduled to come on line next year.

[Flakmeister]

Be careful of the sweetheart deal for the petcoke.... I don't trust Icahn..

That being said, it is a very interesting play. The better play is TNH IMNSHO....

Edit: I own both....

[constantine]

Yes TNH is a good one... admittedly, Icahn has added a very volatile variable to the UAN equation.  However, I don't see how he makes either unit more valuable by splitting them up and given his bullishness on CHK, it leads me to believe that he is a longterm bull on energy and NatGas, which leads me to further believe that he intends to simply hold CVR Energy / CVR Partners.

All in all, the petcoke agreement between the refiner and the fertilizer operations is a very productive economic supply chain and I don't know how one makes money by interrupting productivity but, then again, who knows what a know-it-all money-changer can ruin.

[Flakmeister]

Well said...  You do agree that Icahn doesn't care about long term value if he can pocket a good fraction of it in a shorter period of time?

[constantine]

yes, he is a douche-bag, to use technical terms.

[Flakmeister]

I didn't realize you were a CFA and so conversant with the lingo.... :)

[John Doeman]

Chesepeake has a large cash flow problem. Keep pushing the stock Tyler.

Wait till drilling opens up in NY. You are fooling yourself on the long run of this stock. Short run, you made a good bet. 

[Flakmeister]

They are bleeding cash on the existing wells, why would drill more wells that require ~$7 per mcf (NG+NGL) to have positive cash flow???

[Flakmeister]

James Hansen, October 2010 (PDF) (emphasis added):

“Given the association of extreme weather and climate events with rising global temperature, the expectation of new record high temperatures in 2012 also suggests that the frequency and magnitude of extreme events could reach a high level in 2012. Extreme events include not only high temperatures, but also indirect effects of a warming atmosphere including the impact of higher temperature on extreme rainfall and droughts. The greater water vapor content of a warmer atmosphere allows larger rainfall anomalies and provides the fuel for stronger storms driven by latent heat.”