A Commodity Trading World

It’s hard to believe, but just ten years ago $2/mcf was a pretty good natural gas price.

North American gas sold for around that level throughout most of the 1980s and 1990s. And plenty of producers made money during those times.

The reason was costs. Back in those days, it cost a lot less to drill and service a well, build pipelines, and maintain a field.

Here’s some example data from the Petroleum Services Association of Canada. In 1981, a 2,000 meter gas well in central Alberta cost $450,000 to drill and complete. By 2005, the same well more than doubled in cost to over $1 million.

I’ve been talking a lot about coal lately.

Specifically, how India’s need for thermal coal imports is going to tighten this market, both in terms of prices, and bids for coal deposits within shipping distance of Asia.

India simply doesn’t have enough coal. As of yesterday, one-third of the nation’s coal-fired power plants were running at “critical” levels of coal stocks (meaning less than seven days of supply). And 10% are at “super-critical”, with less than four days of stock.

I’ve been on this theme for about six months. And finally some of the signs of India’s “dash for coal” are starting to appear.

This had been an exiting week for traders as the equities market was on a verge of a major sell off. Fortunately, we were watching the market very closely and saw the sentiment and market internals shift shortly after a new low was set last week. That was an early warning for us that a trend reversal to the upside could happen at any hour or day this week.

Wednesday and Thursday’s rallies were on solid volume and the market internal indicators along with market breadth were strong also. There has been a large surge of new highs across the board on the NYSE, NASDAQ and AMEX. These numbers tell me that it’s not just one sector moving the market; instead it’s a broad market advance (institutional buying).

Natural gas is a broken global market.

For oil, there’s enough import-export capacity worldwide that global prices tend to align closely. In natgas, global markets are fragmented. Leading to disparate pricing in different regions. Just look at the comparison below, from PFC Energy.

One of the implications being: if you’re going to produce natural gas (or ship it as LNG), find the regions with the top prices.

Increasingly, it’s looking like this will be Asia. And specifically, southeast Asia.