Friday, December 19, 2014

UGAZ--Is there a bottom?

We may not be at a bottom yet--I see support around NG 3.20, but if you study the chart below, you will see that downward momentum is abating.  Somebody is nibbling.  Don't be in a rush--unless weather changes soon--but now that we are below October low, look for signs of an impending rally.

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TVIX--Time to buy?

I am buying TVIX this morning.  GL

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Thursday, December 18, 2014

ISE Sentiment Index—lots of call buying today





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$VIX--Things move fast

The chart below is pretty good at catching lows that lead to bounces.  It's not so good at highs.  With the market up 700 + points, I think--unless we are going to new highs--that tomorrow might be a good time to buy TVIX or similar vehicles.  I'll be watching for an entry point if this rally starts to choke.  I still like NUGT, but the rally has to continue for me to stay.  NG continues to play possum.  GL

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Wednesday, December 17, 2014

Keynesian Dope

I’m Not Buying It—–Not The Wall Street ‘Rip’, Nor The Keynesian Dope

by David Stockman • December 17, 2014

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First comes production. Then comes income. Spending and savings follow. All the rest is debt…….unless you believe in a magic Keynesian ether called “aggregate demand” and a blatant stab-in-the-dark called “potential GDP”.

I don’t. So let’s start with a pretty startling contrast between two bellwether data trends since the pre-crisis peak in late 2007—debt versus production.

Not surprisingly, we have racked up a lot more debt—notwithstanding all the phony palaver about “deleveraging”.  In fact, total credit market debt outstanding—-government, business, household and finance—-is up by 16% since the last peak—from $50 trillion to $58 trillion. And that 2007 peak, in turn, was up 80% from the previous peak(2001); and that was up 103% from the business cycle peak before that (July 1990).  Yes, the debt mountain just keeps on growing.

As a proxy for “production” I am using non-durable manufactures rather than the overall industrial production index for three good reasons. The former excludes utility output, which incorporates a lot of weather related noise, and also excludes oil and gas production, which, as we are now learning, embodies a whole lot of debt. Besides, if the US economy has any hope of growing, non-durables should not still be migrating off-shore at this late stage of the global cycle; nor are they subject to fashion or lumpy replacement cycles like cars and refrigerators.

Moreover, the virtue of the industrial production index is that it is a measure of physical output, not sales dollars which reflect inflation; or if deflated into “real” terms, the data points are not distorted by Washington’s fudging and finagling of the prices indices.

So how are we doing on production of things the American economy consumes day-in-and-day out?  Well, at the most recent data point for November, production had soared…….all the way back to where it was in January 2003!

That’s right. Domestic output of food and beverages, paper, chemicals, plastics, textiles and finished energy products (e.g. gasoline), to name just a few, has experienced no net growth for nearly 11 years.

Now that’s a lot more informative than the Keynesian GDP accounts, which presume that government output is actually worth something and that do not know the difference between current period “spending” derived from production and “spending” funded by hocking future income, that is, by borrowing.

Stated differently, the current capitalism suffocating regime of Keynesian central banking and extreme financial repression has created systematic bias and noise in the so-called “in-coming data”. These distortions are the result of mis-allocations and malinvestments reflecting artificial sub-economic costs of debt and capital. The resulting bubbles and booms, in turn, cause highly aggregated measures of economic activity to be flattered by the unsustainable production, spending and investment trends underneath at the sector level.

Thus, during the peak-to-peak cycle between 2000 and 2007, industrial production was reported to have generated a modest 1.5% per year growth rate. But that was almost entirely accounted for by construction materials and defense equipment. Production of non-durable manufactured goods during that period, by contrast, expanded at just a 0.2% annual rate.

But, alas, defense production inherently destroyers economic wealth, whether it provides for the national security or not. And the housing and commercial real estate construction boom did not add to permanent output growth and wealth at all; it amounted to a bubble round trip that has gone nowhere on a net basis during the last 11 years. And the graph below which documents this truth is in nominal terms, meaning that real private construction spending for residential housing, offices, retail and other commercial facilities actually declined by 10-15% after inflation during that period.

Stated differently, bubble finance does not create growth; it funds phony  booms that end up as destructive round trips.

Yet, here we are again. The graph below reflects production of oil and gas, coal and other mining products including iron ore and copper. It has soared by 35% since the 2007 peak, and accounts for virtually all of the gain in industrial production ex-utilities over the last seven years.

Yet the plain fact is, the above explosion of mainly oil and gas production did not reflect the  natural economics of the free market, and certainly no technological innovation called “fracking”. The later wasn’t a miracle; it was just a standard oilfield production technique that was long known to the industry, if not to CNBC. It became artificially economic during recent years only due to the massive and continuous distortions of both commodity prices and capital costs caused by the world’s central bankers.

Indeed, there are two charts which capture the central bank complicity in the latest bubble distortion of the “in-coming” data. These are the charts of plunging junk bond yields and soaring oil prices which materialized after the world’s central banks went all-in powering-up their printing presses after September 2008.

At the time of the 2008 financial crisis, what remained of honest price discovery in the capital markets caused a hissy fit among traders and money managers—–who had been stuck when the music stopped with hundreds of billions in dodgy junk bonds issued during the prior bubble.  Accordingly, yields soared to upwards of 20% when massively overleveraged LBOs and other financial engineering gambits went bust.

Needless to say, that urgently needed cleansing was stopped cold in its tracks when Bernanke tripled the Fed’s balance sheets in less than a year after the Lehman crisis, and then officially adopted ZIRP and the greatest spree of debt monetization in recorded history. The resulting desperate scramble for yield among professional money managers and home gamers alike caused nominal interest rates on junk to be driven to levels once reserved for risk free treasuries.

But it wasn’t cheap debt alone that fueled the energy bubble. The 10- year graph of the crude oil marker price (WTI) shown below is an even greater artifact of central bank financial repression. The unprecedented global credit expansion since 2005, and especially after the financial crisis in China and the EM, caused several decades worth of normal GDP expansion to be telescoped into an artificially brief period of time.

As a result, demand for industrial commodities temporarily ran far ahead of new capacity—–even as the latter was being fueled by low-cost capital. That’s why iron ore prices, for example, soared from $20 per ton prior to the China boom to $200 per ton at the peak in 2012, and have now plummeted all the way back to $60 ton. This implosion is still not over. Owing to this extended period of artificial sky-high prices for  the iron ore commodity, the massive investment boom they triggered in mining capacity and transportation infrastructure is still coming on-stream, adding even more increments to supply even as prices plunge.

Call it “operation twist” compliments of central bank bubble finance. It embodies a temporally twisted imbalance of supply and demand that inherently results from false prices in the capital and commodity markets.

Yet this condition is neither sustainable nor stable. Indeed, now we see the back side of this central bank bubble cycle as capacity races past sustainable consumption requirements, causing prices, profits margins and new investment to plunge in a violent correction. Iron ore is just the canary in the mine shaft. The same thing is true of nickel, copper, aluminum and most especially hydrocarbon liquids.

So the oil price chart below does not represent a momentary dip. This time the central banks are out of dry powder because they are at the zero  bound or close in the greater part of world GDP, while the lagged impact of the bloated industrial investment boom continues to pour into the supply-side.

Needless to say, the emerging worldwide liquidation of the energy bubble will hit the highest cost provinces first—-which is to say, the shale patch and oils sands of North America. When drilling rigs start being demobilized by the hundreds rather than just by the score—-and its only a matter of weeks and months—the present the US mining production index shown above will bend back toward the flat-line just as housing and real estate construction did last time around.

Stated differently, there is no “escape velocity” in the forward outlook notwithstanding the delusional expectations unloaded again this afternoon by Yellen and her merry band of money printers. Much of what meager production and job growth there has been in recent years will soon be taken back as the energy bubble comes back to earth.

Needless to say, the Keynesian pettifoggers at the Fed and the other central banks around the world see none of this coming. So once again in its post-meeting statement, the Fed majority could not bring itself to let go of ZIRP, choosing to assert that it will remain “patient” as far as the eye can see while presiding over meaningless regime change which might be called  N-ZIRP. That is, almost free money, and just as destructructive.

Needless to say, the promise of almost free money for the carry trades is all the Wall Street speculators needed to hear. Within a minute or two, the robo-traders and gamblers managed to put a half-trillion dollars of fairy-tale money back on the screen.

But here’s the thing. The meaning of the oil crash is that the central bank fueled bubble of this century is over and done. We are now entering an age of global cooling, drastic industrial deflation,  serial bubble blow-ups and faltering corporate profits.

So if some headline grabbing algos want to hyper-ventilate because the clueless money printers in the Eccles Building have now emitted the word “patient”, so be it. But why would you pay 20X for bubble bloated profits which had already peaked, and which will be subject to fierce global headwinds as far as the eye can see?

Indeed, the Fed’s lunatic assurance this afternoon that the Wall Street casino will have had free money for 76 months running, and that it will remain quasi-free long thereafter only means that the current financial bubbles in virtually every class of “risk assets” will become even more artificial, unstable and incendiary.

In any event, it ought to be evident by now that “potential GDP” is a fairy tale and that N-ZIRP has no more chance of generating that magic ether called “aggregate demand” than did ZIRP. We are at “peak debt” in nearly every precinct of the world economy, and that means that central banks cannot close this wholly theoretical and imaginary gap; they can only blow dangerous bubbles trying.

What counts is production of real goods and services based on honest prices and the efficient utilization of labor and capital resources. And it  goes without saying that cannot happen under the current  central banking regime of false prices and drastic misallocation of economic resources.

The current illusion of recovery is a result mainly of windfalls to the financial asset owning upper strata, the explosion of transfer payments funded with borrowed public money and another supply-side bubble—-this time in the energy sector and its suppliers and infrastructure.

But that’s not real growth or wealth. Its why the American economy is not even maintaining its 20th century level of breadwinner jobs. And its why  real median household incomes—- which are not distorted by the bubble at the top, are still lower than they were two decades ago.

Breadwinner Economy - Click to enlarge

Breadwinner Economy – Click to enlarge

UGAZ--Wave 2 bottom?

So far NG has held above low in October, but UGAZ made an all time low.  When the wave 3 rally begins, I expect UGAZ to shoot upward impulsively.  Right now I don't see much strength in NG, so I won't be surprised to see NG dip below October low.  If that happens, I will be watching for signs of life in this oil-tainted energy commodity.  I am still bullish.  GL

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NUGT--So far, so good

Well, I'm happy I sold TVIX and so far NUGT looks like it wants to rally--we'll see what happens tomorrow.  If NUGT is going to rally here, I'll be looking for at least 15.  I think DJI can get to at least 17,500.  Maybe next Monday or Tuesday I'll pick up some more TVIX.  Be careful and GL.

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Tuesday, December 16, 2014

Junk Spread Continues to Widen

Subject: FRED Series BAMLH0A0HYM2EY: BofA Merrill Lynch US High Yield...
From: St. Louis Fed Economic Research
Date Sent: 12/16/2014 10:01:13 AM


FRED Series BAMLH0A0HYM2EY: BofA Merrill Lynch US High Yield Master II Effective Yield©, %, D, NSA

The following Federal Reserve Economic Data (FRED) series has been updated:

BofA Merrill Lynch US High Yield Master II Effective Yield©
Frequency: Daily
Units: Percent
Seasonal Adjustment: Not Seasonally Adjusted
Updated: 2014-12-16 8:01 AM CST

Federal Reserve Bank of St. Louis
One Federal Reserve Bank Plaza
St. Louis, MO 63102

Bullish NG

Moshe Ben-Reuven

Long/short equity

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Natural Gas: Predicting, Especially The Future

Dec. 15, 2014 7:25 PM ET  |  29 comments  |  Includes: BOIL, DCNG, DGAZ, GAZ, KOLD, NAGS, UGAZ, UNG, UNL by: Moshe Ben-Reuven

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)


  • A dynamic pricing model for NG is presented, based on the Hotelling (1934) approach for an exhaustible resource.
  • The model uses available US consumption, production, storage and proved reserves data published by the EIA. NG Henry Hub monthly price moves are correlated well for 2013-2014.
  • Our ad-hoc conclusion: NG prices are set to increase in the near term, quite appreciably.

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In an earlier article ("Marcellus Shale: Through a Glass, Darkly"), we have carelessly predicted an average rise in the price of NG, based on an enhanced Hotelling model. Hotelling (1934), dealing with any exhaustible resource, originally projected forward an exponentially increasing asset value, driven by the current discount rate. We thought this should be further amplified, multiplied by the ratio of current consumption over remaining proven reserve. Of course, as the resource comes closer to near-exhaustion, the denominator will accelerate the increase in cost. The formulation provided a smooth exponential curve. Since the Henry Hub price is known to fluctuate quite a bit, could we do better?

Here, too, we are dealing with the physical world of balancing reserves, consumption, production and storage - over time. Natural gas travels in only two ways. As liquefied NG (LNG) by large shipping tankers, or in compressed gaseous form through pipelines. The market tends to be essentially confined and regional. In the US, external influence by inflows and outflows is still small and physically negligible. This near-hermetic system affords some simplicity, as cause and effect in an export-less and import-less environment may be clearly delineated up to a point.

1. Proved Reserves

To make absolutely certain, we are dealing with an exhaustible mineral resource. Whether we have already discovered (or accounted for) the ultimate extent of "Proved Reserves" or not makes little difference. How come? Because the rate of our usage relative to the amount of proved reserves indicates we have on the order of 10 years if we continued consuming 26 TSCF/year without any change. This, under the naïve assumption that 100% of the Proved Reserve would be indeed available for recovery, which is never the case. Skeptic? Ask Mr. Mark G. Papa, CEO of EOG Resources, Inc.

Regrettably, in a world where miracles are rare, we should forget about sudden new disruptive technologies to allow far more shale gas recovery, orders of magnitude better than hydro fracking. For one thing, E&P shale operators have invested not a red cent in R&D over the last 10 years; they have, however, invested billions of dollars in their respective books of hedges. A new technology needs some 25-30 years to mature for commercial implementation, so time is almost up. The service providers like Schlumberger, Halliburton, Weatherford, Baker-Hughes and National Oilwell Varco did invest in ways and means to improve hydro fracking. Although staged fracking and "short & fat" show improved yield, and multi-bore tightly-spaced well pads are saving on the drilling, one cannot expect an order of magnitude improvement in either yield or CAPEX.

The same goes for sudden, vast reservoir discoveries deep under the salt in Utah. Or elsewhere.

(click to enlarge)

Fig. 1 shows the evolution of the US Proven Reserves of NG. Source: EIA-2014. The recent accelerated increase over the last 10 years or so is due to the implementation of horizontal drilling and hydro fracking in shale gas recovery. The 2013 drop shown is based on physical consumption. It is inferred that low prices will curtail development and discovery.

Note: TSCF is trillions of standard cubic feet. "Standard" means "standard temperature and pressure" STP, namely 0 degree C and 1 bar absolute.

Suppose we accept the EIA December 31, 2013 benchmark for Proven Reserve at some 322 TSCF as an ultimate reservoir (normally, less than 10% of proven reserves are recoverable), and we are using over 8% of it annually (current figure, 26 TSCF/y), then we should consider the effect of consumption on the remaining reserve.

2. NG Production, Withdrawals

There are four sources of NG in the US: gas wells, oil well gas, coal bed gas, and shale gas. Withdrawals are listed by the EIA, 2014. In Fig. 2, we see the proportions of each source recorded at the end of December 2013. Evidently, shale gas is the largest contributor, at 40% of the total of 2.56 TSCF/month withdrawn.

Historical monthly withdrawals (i.e., production) from 2006 through end of 2013 are shown in Fig. 3. The four sources and the totals are depicted. Withdrawals from gas wells, oil wells, and coal beds are in steady decline, while shale gas is the only source increasing. Note that a significant percentage of the total recovered gas is used for recovery, production, and separation of non-hydrocarbon components. Thus, for December 2013, from a total of 2.56 TSCF/month produced, only 2.18 TSCF were actually brought to market. We also note that although shale gas withdrawals are still rising, the production gradient is tapering off from 2011 and on.

(click to enlarge)

Of course, not all gas comes to the same distribution point. Henry Hub is quite distinct from north Appalachia, and their prices are quite different. We will nevertheless sum up all of the sources as we answer the question of production over time. Note that although production of each source goes through fluctuations in time, the amplitudes are small relative to the respective mean value from each source. We focus here on the total Marketed Production curve, showing quasi-linear rise correlated in Fig. 3. Marketed production has increased on average from 1.65 to 2.17 TSCF/month over a period of 7 years to 2013, a 4.5% average annual increase.

3. NG Consumption, Demand

There are four major consumption sectors: residential, commercial, industrial, and power generation. Additional, smaller depletion goes for the production and distribution process, and a fraction of a percent to vehicle use in the form of compressed NG or CNG. Figure 4 shows a 2013 snapshot of the division among the sectors, based on the EIA, 2014 monthly consumption update. Total consumption in 2013 was 26 TSCF.

(click to enlarge)

Figure 5 shows historical annual consumption per sector, 1997-2013 (EIA annual). The only sector in significant Y/Y growth is electric power generation, affecting total consumption. Even this sector is showing a sharp decline in 2012/2013. Industrial usage, following a long decline, is also in recovery from 2009, which, combined with power generation, causes the total consumption (top curve) to be stronger on average.

(click to enlarge)

It should be mentioned that the 2012/2013 decline in NG use for electric power is "compensated" by a significant increase in usage of coal. Figure 5a shows historical data on electric power generation by source (EIA, 2014). The total electric power generation from all sources remains roughly constant at 4 trillion kWh. However, between 2012/2013, NG-based generation declined by 112 billion kWh, while coal-based generation surged by 72 billion kWh.

Remarkably, this was accomplished while NG was going through a very low price period, touching on $2/MBTU. So much for "clean air" policies, or "Green House Gas reduction": To generate 72 billion kWh/year, one must burn 33.2 million tonnes/year of bituminous coal at 30% efficiency. To reduce NG generated electric power by 112 billion kWh, at typical 50% efficiency, one uses 16.2 million tonnes (0.7 TSCF) less NG per same year. Thanks, Peabody Energy, but we can't breathe.

Back to Fig. 5. Whereas annual consumption figures seem rather smooth, not so the corresponding monthly values. Intra-year, or monthly, consumption figures vary significantly and quite sharply. Here we used EIA, 2014 monthly consumption data. Figure 6 shows the monthly consumption curves per sector and the sum of all four sectors.

(click to enlarge)

We note that total consumption per month fluctuates with near-perfect 12-month periodicity, and a peak-to-peak amplitude of 1-1.5 TSCF. The sharpest saw-tooth contribution is from spiking of the synchronized residential, commercial, and industrial heating during winter months. The lesser spikes are due to electric generation peaking during hot summer months. It is also worthy of note that the 3 last winter peaks of total consumption, 2011 through 2013, have consistently risen, from 2.55 to 2.99 TSCF/month, exponentially. The last peak rise was 12.4%, which is significant. We likewise note that the summer's mini-peaks of consumption in the same 2011-2013 period were also above the averages of the preceding 3-year interval, 2009-2011.

4. NG Storage

The last parameter in the current NG puzzle is storage. Very clearly, storage is not a huge reservoir which acts as an alternative to production in case of major disruptions. It is a relatively small reservoir set, intended as buffer between slowly varying steady production and sharp seasonal variations in consumption, as we have observed. Figure 7 shows weekly reported (EIA, 2014) storage levels in billions of SCF, or BSCF.

Storage has three physical locations reported: consuming region east, consuming region west (far smaller), and producing region. The sum of all 3 appears in Fig. 7. We note again a near-perfect 12-month periodicity of the level of storage vs. time, and that peak storage levels are between 3.5 and 4 TSCF. In other words, the maximal amount stored is of the same order of magnitude as monthly consumption. We also note that the spring minima of the last 3 years go lower and lower. These bottoms occur at the end of March each year, and the most recent minimum in March 2014 has slipped below 1 TSCF. This will be discussed further.

5. What About the Money?

How does all this combine on the same time-axis? Fig. 8 has all relevant monthly variations depicted on the same timeline. We introduce here a monthly storage depletion variable, Dp(t) = St(t-1) - St(t), obtained by subtracting the current month storage from that of the trailing month. A net usage for the current month, i.e. depletion, would be a positive increment in TSCF/month. Conversely, a net increase in the storage would be a negative number. The monthly storage depletion variable, Dp(t), is the yellow curve in Fig. 8, which shows all variations in TSCF/month.

(click to enlarge)

The second variable plotted in Fig. 8 is the net of monthly marketed production minus consumption, N(t) = M(t) - C(t); this is the red line, with winter heating consumption spikes shown as sharp negative bottoms, while the periods of net summer production are the positive intervals in red, with the slight summer dips due to electric generation for cooling. What is very clear from Fig. 8 is that charging and discharging of the storage system is nearly perfectly synchronized with the net production/consumption. Note the near-equality of the areas between the opposing red and yellow curves and the t-axis. During winter, storage is used to supplant the high demand. In summer, storage is charged with the excess production. The red and yellow lines form near-perfect mirror images on the 2 sides of the horizontal t-axis. The 12-month periodicity of the entire system is also highly evident.

To measure the ultimate gain/loss of the system, we finally combined the monthly storage depletion, the production, and the consumption. What emerges is the Deficit line, in green. When Deficit is negative, like during the years up to March 2011, it means the system is in gain, producing more than is consumed. After that date, the Deficit line crosses over to positive, which means we are consuming more than is produced for the market. The Deficit line has some small-amplitude monthly fluctuations, and is increasing linearly on average: Every month, the mean Deficit increases by 3.9 billion SCF/month (BSCF/month). If we consider for a moment storage as reservoir, at its lowest drawn state (March 28, 2014, at 822 BSCF), then one may see about 5% annual depletion.

The increasing Deficit observation above is also supported by the continuous increases in peak consumption rate and peak storage withdrawal rates in TSCF/month. It is evident from Fig. 3 that should shale gas production decline in the coming months, as expected, the aforesaid Deficit would increase considerably.

Deficit, however, is far less frightening than the specter of punching through zero storage (hard bottom) during a winter peak in consumption. We are not so far from it. Looking again at Fig. 7, during the last 3 years, the storage bottom has decreased by about 800 BSCF each year. The last bottom-record, as mentioned above, was 822 BSCF in last March 28.

5.1 The Dynamic NG Price Model

Following the enhanced Hotelling formulation of the earlier article, it seems natural to use actual data for the trailing month to predict the current month price. Of course, we must start at a date where both the current Proved Reserve and consumption rate are known. We start with the consumption rate, as published in recent EIA monthly update. This is shown in Fig. 9. We have also projected the trailing 12-month data forward three full cycles, effectively extrapolating consumption data in BSCF/Month to 2017.

(click to enlarge)

Now we assume that the Proved Reserve is a virtual reservoir, which is drawn down by the amount consumed each month. Proved Reserves data is normally published annually, and may be corrected downward or upward. Since the annual rate of withdrawals (marketed production) and consumption roughly agree, we have seen that on a monthly basis (see Figs. 3 and 6 above) their rates differ substantially. We elected to use the consumption dynamics, which are directly incorporated in all acts of buy and sell (regardless of whether physical or virtual) as the variable representing demand and affecting price. Using the consumption data and the available proved reserves data, we may then plot the remaining reserve as PR(t) - C(t) for the current month, t. This is plotted vs. time in Fig. 10, using our composite extrapolated C(t) of Fig. 9.

(click to enlarge)

The two points over-plotted are actual recent Proved Reserves updates by EIA. We note that although 2 orders of magnitude separate the monthly consumption C(t) and PR(t) initially, the effect over several years is pronounced, and PR(t) declines nearly linearly.

Now, we can complete our dynamic pricing model in the manner outlined above. The projected (forward month) price is calculated as:

P(t+1) = Po * exp(a * t) *A * C(t) / [ PR(t) - C(t) ]

Where Po is the Henry Hub price in $/MBTU at time t=0 (the selected reference time, which in our case is $ 4.49 on 12/31/2010); "a" is the prevailing interest rate at t=0, taken as the yield on the 10-Y Treasury Note; "t" is time in months, and "A" is an initial normalization factor, defined:

A = [ PR(0)/C(0) -1 ].

It is quite obvious that the initial point at P(1)=Po is a miss; however, the idea is to get sufficiently far from the initial conditions. This model contains the actual dynamics of intra-year (monthly) variations, and is compared with the earlier Mean (annual) projection in Figure 11. The Mean formulation is percent GDP-driven, which is held constant; The Mean looks like a reasonable correlation, if an average GDP=1.2% is used. The Dynamic part, P(t+1), shows the periodic behavior typical of consumption, C(t), as well as the amplification due to drawing closer and closer to the reserve bottom.

(click to enlarge)

In Fig. 11, regarding the red P(t+1) curve: aside from matching the initial price to the trailing month HH value, there is absolutely no adjustment done. It should be interesting now to compare the NG price predictions above, with the available monthly closings of Henry Hub, as published by EIA, 2014. This is done in Fig. 12.

(click to enlarge)

Evidently, the initial 2 years of pricing prediction in Fig. 12 are nearly exactly out of phase with HH, as peaks of P(t+1) match bottoms of HH in the same period. Nevertheless, the periodicity in both P and HH are strikingly similar. The prediction improves significantly as we approach 2013/2014. It appears that the market recognizes, perhaps implicitly, the physical drawdown of an exhaustible resource, causing prices to converge on this Hotelling mechanism. In the meantime, our prediction remains a conjecture, although based on the underlying physical argument, that price is driven by demand, and also, when close to depletion, by the amount of stock remaining. Yet, the good fit with HH in 2014 may be just a coincidence, or some funny stochastic process. And having matched the recent-past performance of HH, there is absolutely no guarantee that the future shall be likewise matched.

6. Conclusions

We have made several inconvenient observations.

(click to enlarge)

1. There is a persistent annual deficit in our balance of production and consumption, which may contribute to a consistent reduction in the minimal (bottom) storage over the last 3 years and forward. There are severe winters ahead. According to Dr. Hathaway of NASA, we are currently at the peak of sunspot cycle 24, and from hence to 2020, sunspot activity will decline to near zero. This means an increased likelihood of severe winters. Each of the last three resulted in NG consumption spikes exponentially higher. Closeness between storage bottom and such peak winter consumption may cause a sharp NG pricing spike considerably above what is predicted above.

2. NG shortages are likely. Unfortunately, shale gas operators have turned to more (yet, now far less) lucrative shale liquids production and away from gas. This was due to miserably low pricing for most Marcellus operators, which are away from the major pipeline infrastructure. As a full 40% of the NG in the US is from shale, Houston, we may have a problem. Most operators are actively using hedges to alleviate the pain of dropping NG prices, essentially (taking a page from the master, Aubrey McClendon) betting against their own commodity. This inertia will be difficult to overcome, should demand rise appreciably. Also noteworthy, no R&D ergo no vision for a future.

3. Think LNG imports. Instead of getting gung-ho about conquering the world (now, minus China) with some cheap energy exports, the US should take a hard look at LNG imports on a massive scale. A reverse Cheniere? Yes, and most likely 10 additional import terminals. It is quite right to complete building the 11 or so Australian export LNG terminals. The US should be one big customer. Of course, not at JCC prices.

4. NG prices are set to increase significantly over the coming months. As projected in Fig. 12, $6.58, $5.71, and $5.37 per MBTU at the end of February, March, and April, respectively.

This is the place to point out that trading futures is not for the poor in spirit, (for to them belongs the kingdom of heaven.) It takes balls, experience, clever strategy, and deep pockets to enter the futures market. Please be warned. To the expert, caveat emptor. And to all, good luck.

NG gasoline?

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A Bay area company has new catalysts that can convert natural gas to gasoline at $1 a gallon
Submitted by IWB, on December 16th, 2014

The clear liquid flowing from a collection of pipes and wires in a Hayward industrial park smells just like gasoline, and for all practical purposes, it is.

But it wasn’t made from crude oil. Instead, it came from natural gas, the fuel whose sudden abundance in America is reshaping the country’s energy landscape.

Siluria Technologies says it can produce large quantities of gasoline, diesel, jet fuel and chemicals at a lower cost than traditional refineries and chemical plants. At today’s natural gas prices, Siluria’s technology could make gasoline at roughly $1 per gallon, according to the company.



NUGT--Wave 3 up?

I believe wave 3 up is just about to get started.  Conditions are right for a rally, especially sentiment, which is overwhelmingly bearish.  As I said in earlier post, I sold TVIX yesterday and started buying NUGT at end of the day.  If NUGT goes lower, I will buy more.  GL

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Sunday, December 14, 2014

NUGT--Is it time to buy?

I think so--should be a good trade for a week or so.  Good luck.

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TVIX--Is it time to sell?

As the chart below indictes, the market is very oversold, and has reached a point where it has rallied in the past.  Tomorrow I will probably sell my TVIX and buy NUGT.  I believe equities have entered a bear market; however, a counter trend rally should develop soon--maybe after a washout tomorrow.  It will be a partial retracement of the fall from lastest high, after which the downside will resume.  In the meantime I think NUGT, which has lagged GLD lately, is ready to rally.  Now I believe precious metals are in bear market; however, we have just entered a strong counter trend rally.  As always, GL

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Once again, this is a strong chart.  Once wave 2 bottom is in, which may have happened last week, wave 3 will take UGAZ to new highs.  Don't give up and GL.

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Americans are 40% poorer than before the recession - MarketWatch


Americans are 40% poorer than before the recession - MarketWatch

Thursday, December 11, 2014

Weather not helping NG bulls

Natural Gas Heads for Third Weekly Drop on Weather Outlook
By Christine Buurma Dec 11, 2014 12:48 PM ET

Natural gas futures in New York headed for a third straight weekly decline as forecasts showed above-normal December temperatures that would limit demand for the heating fuel.

The weather may be warmer than usual across most of the contiguous U.S. through Dec. 20, according to WSI Corp. in Andover, Massachusetts. A government report today showed gas inventories fell 51 billion cubic feet in the week ended Dec. 5 to 3.359 trillion, less than the five-year average drop of 72 billion for the period.

“The lack of weather demand has been pressuring prices lower,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “The market is adequately supplied.”

Natural gas for January delivery fell 8.4 cents, or 2.3 percent, $3.622 per million British thermal units at 12:34 p.m. on the New York Mercantile Exchange. Volume for all futures traded was 38 percent above the 100-day average. Prices are down 14 percent this year.

Gas stockpiles totaled 3.359 trillion cubic feet as of Dec. 5, 9.5 percent below the five-year average for the time of year. The supply deficit to the norm has narrowed from a record 55 percent at the end of March.

“The storage number wasn’t all that robust,” said Aaron Calder, an analyst at Gelber & Associates in Houston. “We’re going to need a large amount of demand to soak up all this excess supply.”

Boston’s Reading

The low in Boston on Dec. 16 may be 34 degrees Fahrenheit (1 Celsius), 6 more than average, data from AccuWeather Inc. in State College, Pennsylvania, show. Detroit temperatures may fall to 30 degrees, 7 above normal.

About 49 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department’s statistical arm.

U.S. gas production may climb 5.5 percent this year to a record 74.26 billion cubic feet a day, the government said Dec. 9 in in its monthly Short-Term Energy Outlook report.

Gas output from the Marcellus shale formation in the Northeast may advance to 16.3 billion cubic feet a day in January, up 19 percent from a year earlier, the agency said Dec. 8 in its monthly Drilling Productivity Report.

Production from the top seven U.S. shale fields in the U.S. will rise 1.4 percent to 44.7 billion cubic feet a day in January from this month, the government report showed. These deposits accounted for 95 percent of U.S. gas supply growth in the three previous years.

To contact the reporter on this story: Christine Buurma in New York at

To contact the editors responsible for this story: David Marino at Bill Banker, Richard Stubbe

Charts Show 28 Seriously Troubled Mega-Banks: 24 of them in Europe

Charts Show 28 Seriously Troubled Mega-Banks: 24 of them in Europe

3 December Charts Are Emulating The September-October Swoon | Seeking Alpha


3 December Charts Are Emulating The September-October Swoon | Seeking Alpha