Thursday, July 23, 2009

Cheap Natural Gas-2?

"'Nobody was talking about $3 gas a year ago,' said James Daly, director of gas and energy supply for Nstar, the utility formerly known as Boston Edison. ... For more than a century, the US has relied on coal to produce the biggest share of its electricity. Coal now accounts for about half of the nation's electricity, compared with about 21% from natural gas. ... This isn't the first time the power industry has embraced natural gas. In the late 1990s, as states deregulated their electricity markets, a new breed of so-called merchant generators built scores of gas-fired plants, ecouraged by rosy supply forecasts and easy borrowing. ... New natural-gas discoveries, however, in Texas, Lousiana, Pennsylvania and elsewhere, have created a gas glut that analysts expect to linger. Energy consulting firm Wood Mackenzie predicts gas prices won't recover until 2015. ... 'We're pulling back the coal throttle,' said Ted Carver, chief executive of Edison International, Rosemead, Calif., which owns several coal-fired plants that sell power on the open market. ... 'There basically is no spot market for coal right now,' adds Jim Thompson, managing editor of the Coal and Energy Price Report in Knoxville, Tenn., a coal-industry newsletter. 'Coal companies are living off their utility contracts'," my emphasis, Rebecca Smith and Ben Casselman at the WSJ, 15 June 2009, link:

Coal and natural gas both look cheap to me. Disclosure: I own shares of companies in both industries.


Anonymous said...

Interesting IA.

Maybe low energy prices will help form a base for true economic recovery.

Clint Athey said...

"S CPA" please clarify, are you bullish on natty gas as a contrary opinion to the Mackenzie statement or in spite of it? I saw an interview last week on C-NBC where an analyst noted that oil is usually some 6-10x natty gas. The current ratio, however, is about 17x. The piece is linked here:
I was of the opinion that if the "green shoots" hypothesis doesn't pan out, oil would probably drop back to the normal 6-10x ratio rather than NG rise. Your thoughts? Thanks "The Miserly Accountant"

Clint Athey said...

I just stumbled into this on "The Big Picture". It goes along with my comment above as well as The Skeptical CPA's fascinating post on China on 28 July 2009. Thanks, "The Miserly Accountant"

Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.

Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.

0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.

Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have two, very contradictory, explanations for this:

1) The Chinese government is lying through its teeth about its economic miracle growth. It has the incentives to interrogate economic data until it confesses to the party line numbers. This is very plausible, as for months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously this doesn’t make much sense. Also, China is not famous for production of intellectual type goods (i.e. software, creation of toxic financial products – that is our specialty) which scale a lot better and don’t require proportional electricity consumption to grow GDP. China makes stuff and to make stuff you need a lot of electricity. Also, even if the growth is completely driven by building high story buildings (even if they collapse), highways, schools - these activities still require a lot of electricity.

2) The numbers are real, the monetary base was up 28.5% in June (again if you can trust that number) and thus the quality of growth is horrible. I’ve discussed this scenario in great detail.

I hate to leave on open-ended note, but only time will tell what is actually going on in China.

P.S. I was not surprised to learn that Jeremy Grantham of GMO – a value investor for whom I have a tremendous respect is concerned about the future of Chinese economy as well.--BY Vitaliy Katsenelson

Independent Accountant said...

As contrary opinion. At 17 to 1, relative to oil, natural gas is cheap. Your calculations on China are provocative to say the least.

出張ホスト said...
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家出 said...
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Clint Athey said...

If only I could read Mandarin...?

Clint Athey said...


This echoes your thoughts on natty gas. Might I ask how you are long?...Equities, ETF?? Piece is from MBradbard at MBWealth...

"Am I suggesting getting long the US dollar…NO. However the powers that be may push the dollar higher so I wanted to make you aware of this. The fundamentals do not justify a strengthening dollar and talk of negative interest rates do not make me get bullish but nevertheless be aware if the dollar rallies we may get a commodity pullback. We are still short the Aussie dollar with clients but may need to move to December as the September only has 8 days. This trade is more of a hedge but we feel 8100 is in the cards on a pullback. Numerous people have contacted us questioning on why we would short oil. We would not outright but only against a long in natural gas thinking the ratio may tighten up. Brutal… yes natural gas was down again today. You know where we stand but just to clarify for all the haters. We are committed to be in natural gas thinking prices are way to low! We may lose on the next 2 contract months but when it turns we will be there with clients. Additionally a thing about risk management when I say we are long or short a particular market that does not mean my clients whole portfolio is in that market i.e. natural gas. We may in fact continue to lose in natural gas but the idea is we will try to more than make up those losses with other winners in other sectors. Silver and gold higher, clients remain long silver and unfortunately lightening up on gold yesterday. Caution getting too long if the dollar rallies. Grains could move lower in the short run, we will ride December wheat and corn but will not be buying more until a bottom is more defined. We will be exiting our clients cocoa shorts early next week, need further downside to get value. Sugar was higher by almost 5% today and broke out to a new contract high. We advised clients to lift there hedges at a profit and remain net long. See previous recommendation; long SBH10′ 25 cent call/ short (2) SBH10′ 35 cent calls. We are trying to work out of the October 50 cent lean hog calls at 300 points o/b. Buy the dip in December 09′ and February10′ live cattle. We still like the spreads, October becomes the front month next week."

Independent Accountant said...

E&P companies which produce natural gas.