What are the chances of it happening?
Around 30m Bcf/day of natural gas production is associated with oil (p19), out of 92 Bcf/day total. So around 1/3rd of it is associated.
For demand, the EIA predicts a drop in demand due to covid-90, due to less commercial usage (especially restaurants), less industrial and exports. Slightly offset by an increase in home demand.
There are many moving parts to the thesis. What are the risks?
- Shale oil producers may not begin to cut back until next year, due to hedging.
- Even if the supply of natural gas drops, demand may drop further.
- Trump may put tariffs on imported oil, or simply force the Saudis from targeting US shale production. There are good reasons why the US needs its own oil industry.
How would I play it?
Initially I wanted to follow the textbook and but the lowest cost producers. Cabot, here. But there are too many things about this industry that I can't understand. I do not understand industry decline curves, or how much companies have to reinvest to maintain reserves. Nor well level data. Or takeaway capacity from the different producing regions. This industry is difficult to understand, and full of liars.
Better to spread my bets and just trade the FCG ETF. That removes company specific issues, though it concentrates on the Marcellus. Most of the companies there are generating cashflows from operations, though many are loss making - but they look like they won't go to zero. I do not know enough to cherry pick companies or create my own ETF.
This is far from a certain thing, so if I took the trade, I would trade around the position to manage risk. Take my signals from the market and play a rising natural gas price as it happens. Don't throw all my bets down on the table and say 'this is definitely going to happen'.
I do not know if or when I'll make this trade.
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