RE:Dennis Gartman on Natural gas
In that interview Dennis Gartman said this:
That said, one of the problems is that the natural gas futures market has gone into backwardation, with front month priced well above the deferred months. I think that's predicated upon the fact that the Commodities Futures Trading Commission (CFTC) has made it relatively impossible to hold large enough positions on the part of the long-only funds who used to be wonderful buyers in the deferred contracts, both in crude oil and in natural gas. And they used to bid the back months up, which made a wonderful mechanism for hedgers.
It used to be that, several years ago, if front-month natural gas contracts were at $5, contracts two years forward would probably have been at $7. In that instance, drillers would have said, "I'll drill and I'll sell forward to lock in wonderful gains." You can't do that now. Because now the front month is at $5 and the deferreds are $4 and $3. It's taken the ability to hedge properly away. That's going to make drilling far more problematic than it has in the past.
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Fergus would like to add his 2 cents on hedging. Yes, there may have been some regulatory changes made in the number of contracts certain entities can hold but this is only part of the reason why the NG futures strip sells at a discount to the spot. The real reason I will put to you in the form of a question. Who in their right mind would buy NG forward contracts at a premium to the spot, given the known quantities of gas available in the shale plays? The answer to that is nobody, - unless of course they’re idiots. If anything, this is a good thing for the NG market as producers will now be forced to practice restraint and they will not be able to use the futures strip to develop unproductive plays by finding some sucker to hedge against. Production from plays like the Haynesville which is mostly a dry gas play will be cut back to await the day when it is once again economic for it to go forward. And if you check the EIA weekly NG update you will see a chart at the end of each bulletin that monitors production output from these shale plays. Note that Haynesville production is down significantly. So balance” is and will” be restored in this market and the companies best positioned to do well in this new environment will be the ones that have good acreage and know how to spend their money wisely.
What this market really needs is more storage and better takeaway (pipelines). That sector will need to see more investment before gas production gets kicked up to higher levels. The drillers know that. It’s only the public who live in mortal fear that we might see a repeat of 2 cent gas as we did in 2011. It just isn’t going to happen.