31
Natural Gas Price Dynamics Insight to Emerging Trends January 13, 2011
Natural Gas Price Dynamics
Insight to Emerging Trends
January 13, 2011
Natural Gas Price Dynamics Insight to Emerging Trends
2
o Who is Gavilon?
o History of Natural Gas
o What Drives Pricing?
a. Weather forecasts
b. Storage Inventories
c. Supply/Demand Items
d. Market Technical's
e. Economic Activity
o Other Outside Factors that Influence Pricing
a. Producer Hedging Activity
b. Fund Buying Allocations
c. Natural Gas Correlations to other Commodities
o Longer Term Outlook
Gavilon Today
3
Agriculture, 52%Energy,
32%
Fertilizer, 16%
CEO: Greg Heckman
Headquarters: Omaha, Nebraska
Locations: 250 offices world wide
Services: Origination
Storage & handing
Transport & logistics
Marketing & Distribution
Risk Management
Employees: 1,100+
History of Natural Gas
Low Price/ Regulation
Cogen Buying /Deregulation
Very Cold Winter
Low Inventory, declining supply, & cold winter
Natural Gas (Nymex) Price History: 1990 - Present
Production Increase
Hurricane 10 BCF Shut in
Declining:
Imports/$
Recession, Commodity &
Market Liquidation
$3.5-4.5 Floor Price &
Competition with Coal
Amaranth
High Inventories
Below Avg.
XH Temps
& Contango
Production Increase
Current Snow Cover
5
Weather Outlook for Feb-March, 2011 &
June-August, 2011
6
February – March Outlook June - August Outlook
Natural Gas Supply and Consumption, 2005-2011
7EIA James M. Kendall, Houston, TX
|8
Common Reasons for Spikes in the
Past (perceived or actual, with or
without a lag):
1) Low storage at the end of
injection season
2) Low storage at the end of
withdrawal season (especially
when prior season’s draw was
high).
3) Historically high absolute draw
or historically low injection
Current Status:
Relatively low injections since 2009
are not perceived as bullish because
the storage has been refilled almost to
capacity at the end of each injection
season
Common Reasons for Drops in the
Past (perceived or actual, with or
without a lag):
1) High storage at the end of
injection season
2) High storage at the end of
withdrawal season (especially
when prior season’s draw was
low).
3) Historically low absolute draw
or historically high injection
Current Status:
Historically high storage levels after
injection season this year failed to
produce decline of usual dramatic
speed due to significant increase in
the overall storage capacity.
NG Pricing: Effects of Storage Trends
Total Natural Gas Demand and by Sector
58
59
60
61
62
63
64
65
66
12
14
16
18
20
22
24
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
To
tal D
em
an
d (
BC
F/d
)
De
ma
nd
by S
ec
tor/
(B
CF
/d()
Total R&C EG Load Indust.
Total Average LNG Imports (MMBtu/Day)
10
0
500
1000
1500
2000
2500
3000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total Gas Storage Capacity Additions, 2004-2012
11
Growth of Shale Gas Lower 48 States
12
Significant growth of shale gas through the United States
EIA - More Than Doubles Shale Reserves
13
According to the Dec. 27th 2010 release, the EIA believes there is 827 trillion cubic feet
(Tcf) of technically recoverable unproved shale gas resources as of January 1, 2009,
which more than double what it had previously estimated. The prior estimate of 353 Tcf
of shale gas resources has been increased by some 474 Tcf in the new assessment.
Influx of “New” Money in Natural Gas
14
E & P Shale Focused Acquisitions/JV’s
15
U.S. Gas Drilling Rig Count
16
0
200
400
600
800
1000
1200
1400
1600
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010
Total Horiz. Other
Major Change to Pipeline Infrastructure
17
2009 -MEP and Gulf Crossing (3.4Bcf/d)
2009 – Greenville Laterals: 1BcfFayetteville Laterals: 1.3Bcf
2009 – Centerpoint Perryville (Increases to 2.0 Bcf from 1.2Bcf)Regency: 1.0 Bcf
18
MMBtu Fuel Comparisons
Competing Fuels in the EG Stack (as of 01/05/2011)
$-
$5
$10
$15
$20
$25
$30
$35
$40
Se
p-0
7
No
v-0
7
Ja
n-0
8
Ma
r-0
8
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ma
r-1
0
Ma
y-1
0
Ju
l-1
0
Se
p-1
0
No
v-1
0
Ja
n-1
1
Ma
r-1
1
Ma
y-1
1
Ju
l-1
1
Henry Hub Natural Gas
Heating Oil (FO2 NYH)
NBP Natural Gas
Central Appalachian Coal
NYH Resid
Historical Prices Forward Prices
$4.41
$24.88
$8.96
$5.90
$16.71
NG/Coal Parity by Efficiency (as of 01/05/2011)
Sources: Gavilon, CME, Bloomberg
$2
$4
$6
$8
$10
$12
$14
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ma
r-1
0
Ma
y-1
0
Ju
l-1
0
Se
p-1
0
No
v-1
0
Ja
n-1
1
Ma
r-1
1
Ma
y-1
1
NYMEX NG
NYMEX 10 HR COAL (in NG 7.5 HR terms)
NYMEX 10 HR COAL (in NG 8.5 HR terms)
NYMEX 11 HR COAL (in NG 7.5 HR terms)
Forward PricesHistorical Prices
19
Coal / Natural Gas Pricing
Coal Plant Retirements
20
Fuel Switching in BCF/d
21
US Nat. Gas Producers Hedging Activities
22
According to industry analyst Raymond James – “U S Natural Gas Producers are 66%
unhedged for 2011”
• The hedged positions of 41 large, mid and small cap producers which Raymond James
covers had a floor price of $5.92 on 34% of their production
• Chesapeake is now approximately 96% for its 2011 expected natural gas production
with an average of $5.84
• Range Resources was the most hedged among the large cap producers @ 90% for
2011 at a floor price of $5.50
• Sandridge Energy is most hedged among the small cap producers @ 85% for 2011
•According to Credit Suisse – “For 2011 E&P’s are 36% hedged on North American
natural gas production”
23
Cotton, 2.0%
Lean Hogs, 2.1%
Nickel, 2.4%
Coffee, 2.6%
Sugar, 2.9%
Soybean Oil, 3.0%
Zinc, 3.0%
Silver, 3.3%
Unleaded Gasoline, 3.5%
Heating Oil, 3.6%
Live Cattle, 3.6%
Wheat, 4.7%
Aluminum, 5.7%
Corn, 7.1%Copper, 7.6%
Soybeans, 7.9%
Gold, 9.1%
Natural Gas, 11.6%
Crude Oil, 14.3%
Cotton
Lean Hogs
Nickel
Coffee
Sugar
Soybean Oil
Zinc
Silver
Unleaded Gasoline
Heating Oil
Live Cattle
Wheat
Aluminum
Corn
Copper
Soybeans
Gold
Natural Gas
Crude Oil
DJ-UBS Commodity Index TR - Target
Weights Within Index (NG up 4%)
DJ-UBS Commodity Index TR:
Target Weights Within Index (NG up 4%)
24
UBS Commodity Index Fund Rebalance
CFTC Natural Gas Trader
Positions by Type
25
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
200,000
300,000
400,000
Jan
-10
Jan
-10
Feb
-10
Feb
-10
Mar-
10
Mar-
10
Ap
r-10
Ap
r-10
May-1
0
May-1
0
Ju
n-1
0
Ju
n-1
0
Ju
n-1
0
Ju
l-10
Ju
l-10
Au
g-1
0
Au
g-1
0
Sep
-10
Sep
-10
Oct-
10
Oct-
10
No
v-1
0
No
v-1
0
No
v-1
0
Dec-1
0
Dec-1
0
Nym
ex
Pri
ce
Co
ntr
acts
Managed Money Swap Dealers Hedger NG1
60 Day Energy Correlations
26
CL-G11 NG-G11 RB-G11 HO-G11 ETH-G11 UREA SPX DXY
CL-G11 100% 21% 96% 99% 57% 63% 89% 50%
NG-G11 100% 26% 22% -30% 29% 11% 26%
RB-G11 100% 97% 47% 73% 89% 67%
HO-G11 100% 52% 68% 91% 59%
ETH-G11 100% 29% 67% 5%
UREA 100% 77% 86%
SPX 100% 59%
DXY 100%
The correlation show NG’s disconnect from the rest of the Energy complex
27
Natural Gas 2011 Price Targets
Analysts & Bank Surveys
28
2011 NYMEX Technical
Price Outlook
2011-2013 NYMEX Technical
Price Outlook
30
Long-Term Natural Gas Technicals
Calendar 2012 - 12 mo Strip
1. The Cal ‘12 strip reached
a significant downside
support area of 4.80. This
area triggered a corrective
consolidation that has lasted
2.5 months so far.
2. The market may take
longer time to consolidate
and/or advance towards to
at least the 5.25 area, and
possibly even towards the
upside target zone of 6.20
over the course of this
winter. At this time,
however, this move is still
considered to be a correction
of the prior downtrend.
3. If prices return to the 4.80
area at any point, the strip is
likely to make at least
marginal lows below the
lows of this past October.
4. A move more serious than
marginal would indicate the
resumption of the
downtrend, with targets
clustered just under the 3.50
area.
6.611
10.705
6.575
7.518
4.848
31
NYMEX Pricing 2011-2014
