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U.S. Refiners: Buy Me Maybe?
8/21/2012 12:58:02 AM

Seeking Alpha 8/15/12
Refining crude oil has been a low margin business. Huge capital outlay, high maintenance costs, and susceptibility to commodities price swings are just some of the challenges the industry faces.....

The Summer of Natural Gas: Are We Clear Yet?
8/21/2012 12:56:01 AM

Seeking Alpha 8/6/12
Natural gas (Henry Hub) has been on a tear lately. Since bottoming out around $1.90 in April we have witnessed a >70% rally to a recent high of $3.28...

Oil Producers In For Slow Months Ahead
8/21/2012 12:53:04 AM

Seeking Alpha 8/2/12
8/2/12: Since touching a low of around $77 a barrel in June, oil (WTI) has roared back above $90 amidst improving European volatility.....

June 30, 2012
7/16/2012 6:44:57 PM
Kronos Management
Observations
6/30/2012

Oil staged a huge rebound to $84.82 on Spanish bank bailout and gas slowly rises to tests 200D moving-average around $2.81.

After some hard negotiations, the Germans capitulated and agreed to a joint European banking supervisor and bailout of the Spanish banking sector. The fund will be available to the banks directly so as not to increase the debt level of Spanish government. Markets the world over seem to like the development, a little too much, in our opinion.

This first step toward fiscal union is a step in the right direction in the current mainstream economic circle. The peripheral economies in Europe have not been able to cope with the ongoing crisis effectively like the Americans due to the fact that they can’t devalue their currency. To remain competitive they have to lower wages and standard of living. This kills demands, not to mention a lot of social issues. The other problem with European banks is that the governments tend to view them as national champions, and it makes it hard for politicians to take a hard line and demand a real stress test and shape-up of their balance sheets. The muddle-through approach lets problems fester and we have a vicious cycle of banks and governments dragging down one another.

What does this mean for us?

We can expect the European governments to continue making slow progress, interrupted by periodic flare-ups like the current one. The short to intermediate term effects are a setback in growth expectation and a jittery market with a bearish bias. There are some safe-haven buying heading into US Treasury and US Dollar. Over the longer term, probably the next 9 months to a year, we will probably see some more money headed to commodities as equities enter a bear market and the inflationary effect kicks in.  

 

We continue to see a bearish tone in the oil market. Against the backdrop of weak demand, plentiful oil inventories, negative consumer sentiment , the market found some short term support in the positive European news, lingering geopolitical risks from Iran, Norwegian oil strike, and the technical “oversold” chart.

Natural gas, on the other hand, maintained its upward momentum, helped by the production shut-in in the Gulf of Mexico related to Tropical Storm Debby. Continued hot weather throughout the much of the high-demand areas has kept the gas burning for power plants. We see short term price strength in the supply demand picture and volatility around the weekly EIA storage number release dates.  

 

 

Oil

WTI has been posting some big numbers lately. The correction came hard and fast and the 8% rally on the last day of June looked more like a huge relief bounce than anything. Let’s take a look at the headlines in the last two weeks.







On any given day in this period, we observed that amidst all the background noise of economic numbers, tension between Turkey and Syria, US manufacturing data, the US Dollar, the broader stock market, the market’s default action is to drift down to the last support area in the mid-$70s. Debby-related shut-in, Iranian sanction talks, Norwegian oil workers’ strike, and other mildly or strongly bullish factors barely registered on days when they surfaced. There has been definite underlying bearishness until the Spanish banking bailout news came along.

So what now?

We think most of the selling from the $100-a-barrel crowd is done for now. This rebound, which we characterize as a relief bounce, from $77 could go on for a while, though we are not willing to guess how long. These relief bounces are notoriously hard to gauge and dangerous to play. And when they do reverse, the ferocity could catch you by surprise. They have low likelihood of success and high consequence of failure. In other words, we do not intend to trade this short term momentum. Instead, we will wait and see when it runs out of steam to initiate some short positions.

The market could surprise us in the coming weeks but we think the biggest bullish catalyst would come from the Middle East. A minor catalyst could come from another round of QE but we doubt a rally of that nature is going to last long. Domestic production continues to rise and we don’t see a significant slow down until WTI gets down to the $50s and $60s, the breakeven point of most producing basins including Midland and Eagleford Shale.

 

 

Natural Gas

After correcting down to $2.17 Natural Gas responded to the moderately bullish EIA storage injection (67Bcf vs 75Bcf consensus) on June 14 and rallied past $2.50. Building on that strength, the price action has been bullish, aided by relentless heat wave, low storage injection numbers, and Tropical Storm Debby. The latest report shows 3,063Bcf in working storage, representing 73% of total available storage. 

http://stockcharts.com/c-sc/sc?s=$NATGAS&p=D&st=2011-07-01&en=2012-06-29&i=t67671704216&r=1342981694644

Domestic oil rigs continue to pick up at the expense of gas. Gas-directed rigs now stand at 541, 62% of where it was a year ago. There are 1,421 oil-directed rigs, a 42% rise from last year. There has actually been an increase of number of rigs in the past year. As the ever more efficient rigs get re-directed from gas to oil wells, there has been a significant increase in both oil and gas production. The associated gas produced is the reason we are not seeing much reduction in overall gas production. As we mentioned before, the balance among decline rates on existing gas wells, the amount of associated gas, and the backlog of shut-in gas wells waiting to be brought back on is pretty delicate. No one knows the net effects of these factors and the timing. And if oil price cracks wide open causing a reduction of overall drilling it’ll be even more complicated. For now, the supply side of things seems to hang in a balance.

Tropical Storm Debby shut in some 17% of Gulf of Mexico gas production and 18% of oil for a few days. Combined with the extra power demand in the Midwest and the higher than normal temperature forecast for the summer, front-month gas price has been steadily creeping up. We are hearing that natural gas has a real chance of overtaking coal as the largest electricity generation fuel this year. Hurricane forecast however, indicated a below average hurricane season, minimizing the possibility of a supply disruption. Storage overfill scenario is probably shaky at this point, even though it is still at record high. In other words, the fundamentals of our October short trade look to be eroding fast due to assaults from multiple fronts.

Let’s look at the technical side of the trade. Since 2003, gas has trended down in the summer toward September every year due to similar supply/demand structure The only exception is 2005 when Katrina wrecked havoc in the Gulf and sent gas price soaring. In the same 9-year period, gas hit its low in September four times, October and August once, making a bet on end-of-summer low a high-probability one (67%). The underlying assumption of burning in the winter and storage filling from April through October is still valid. As we stated earlier, the magnitude of coal-to-gas switching at power plants is likely to be the biggest determinant of price action in the coming months.

When we examine the short interest we also see some favorable trends. So far this year, the non-commercial long-short spread has been tightening up. As a whole, traders and hedgers have been either bottom fishing due to low price or covering their shorts due to limited downside potential from $2-$3 gas. We’d like to see net short positions shrink further and reverse the persistent uptrend since 2009 and we will likely see that happen in the next few weeks. If this were to happen we might see another run up toward $3 before the trade goes our direction. 

Non-commercials open interest: Natural Gas futures and options

Source: CTFC

Although gas price has rallied to its 200D MVA (moving average) and potentially going higher, it is still firmly in a downtrend. The rally in our opinion is partly technical rebound and partly fueled by some shifts in fundamentals. We are wary of these shifts and will probably have to adjust our profit expectation for the trade downward. The longer the rally lasts, the less room there is for price to drop below prior low of $1.90. In the coming weeks, we expect to see continued volatility around storage number release dates and a slight bullish bias. Having said that, we are maintaining our October short positions.

 

Other Sectors

US Refiners have been enjoying relatively lower crude prices than their international peers, making market share gains in recent years. There has been a resurgence of refined products export from US based refiners. There are some discrepancies operating conditions for the Gulf Coast based refiners (heavy/sour crude) and Midwest based refiners (light/sweet crude) but as a whole they should perform similarly as domestic crude prices come down and more transportation options for Canadian heavy, Bakken, and Midland oil become available in the not-too-distant future. Overall, this group is importing less and exporting more amidst a flat to declining demand. We see continued economic woe in the foreseeable future. Therefore, we are not too excited about going long or short. On the other hand, the dislocation of NGL prices to oil price has dealt a big blow to NGL processors and the midstream sector. We are seeing signs that this could be a multi-quarter or multi-year phenomenon. Therefore we have a long bias toward names that have more of a fixed fee structure, e.g. pipelines, storages, and stay away from processors with large exposure to commodities prices.

Equipment/Service sectors continue to be bi-polar. With the softening of commodities prices and margin squeeze, drilling is expected to slow down for the next few quarters. We do not find reasons to be cheerful for drillers and equipment suppliers that are heavily exposed to upstream activities. Construction and suppliers that are geared toward infrastructure build-out are still doing well as they are working off their existing backlog. Some slowdown is expected but there is a lag. Until we start seeing companies initiate significant curtailment of projects we are staying neutral.

Coal’s pain continues. Natural gas has been eating its lunch as the preferred fuel for power generation heading into the summer. The steady loss of market share seems to have no end in sight. We have actually been bearish on coal for at least a year and we think the negative expectation for the rest of the year has been largely built in at this point. With low expectations and lack of further, significant downside catalysts, we will start looking for signs of a rebound as we progress into the summer and fall seasons. Between coal plant retirement and reduced competition due to companies exiting the sector we should see some improvement in coal companies that survive. We may even buy into some coal operators at that time.

The green energy sector has suffered significant lack of enthusiasm. As we mentioned before, this being an election year, neither party has an incentive to encourage the development. We are keeping an eye out for opportunities to play the downside. This may mean a meaningful rally followed by a reversal. We need to be patient. 

 

 

Special Discussion – Midstream/Pipelines Update

Companies in this sector own facilities that gather oil and gas produced from wellheads, remove the undesirable components (acid, sulphur, water, etc), process the fluids into different grades (methane, propane etc), transport them to different markets or downstream refineries, storage them as necessary. Some activities fall under the definition for downstream sector but generally we are referring to the gathering, processing, and transportation sector excluding petroleum refining, which is usually a standalone area of discussion.

Since about 2005 US domestic shale gas has experienced a boom, bringing a renaissance to infrastructure build-out on a massive scale to handle all the additional production volume. Shale oil has come of age more recently and the application of horizontal drilling technique to other matured fields will be next. Through the process of “creative destruction” coined by economist Joseph Schumpeter this has created a new frontier for many new companies to emerge as major players and many established companies to defend their turfs and compete with a renewed focus on growth. This growth phase was interrupted by the 2008 financial crisis and is now entering what we believe to be the beginning of a maturing phase. We expect the pace of mergers and acquisitions to pick up as the onset of weak economics begins to erode margins.

The midstream and pipeline sectors of the oil and gas industry are populated by Master Limited Partnerships (MLPs) due to their supposedly stable cash flow. Investors craving for yields and stability have sought them out, prompting even some Exploration and Production (E&P) companies with matured producing properties to utilize the structure to raise capital and fund their operations. Generally the interstate transportation of liquids and gas has a more stable fee structure with tariffs determined by FERC. Conversely since the deregulation of natural gas the midstream gathering and processing sectors have been free to set rates. With the advent of shale drilling there is much competition for volume among operators, resulting in various degrees of exposure to gas and NGL prices.

 

 

Mont Belvieu NGL, Ethane, and Crude Price Comparison

More recently with the divergence of natural gas and oil prices we have seen midstream operators try to shift to more fixed fee contracts on dry gas while maintaining exposure to liquids prices. The collapse of NGL price relative to crude in addition to the drop in crude oil price itself has led to a panic exit among investors. This look overdone in the short term but we believe it is the onset of a longer term trend. Years of rapidly expanding drilling programs and the recent acceleration of liquids focused drilling seem to have caught up to reality, as evidenced by the plant tailgate prices at Mont Belvieu and Conway, the two major hubs for NGL processing. Until industry and manufacturing figure out how to make use of the excess supply we are likely to see depressed price level stay. NGL is somewhat tied to the general economy similar to crude oil, but mainly used in plastics and industrial products. In the domestic midstream space, the implication to us is that there may be an opportunity to arbitrage pipelines and processors as a long/short pair trade. Generally speaking, we try to avoid shorting high yield MLPs directly, instead we utilize options if there is sufficient liquidity.

Comparing year-to-date performance, we see some solid names in the oil and gas transportation/storage space that pay good dividends, and deteriorating performance in the midstream processors. The key driver to the midstream names up to this point had been growth. We see some of that on an on-going basis but as a commodity price scare and a possible slowdown scenario loom large we exited the midstream players but kept the pipelines. EPD, PAA, ENB, OKS and KMI all have large diversified portfolios of crude, liquids, and gas pipelines, compression/pumping, terminals, and storage facilities with stable and predictable cash flow. Their relative performance show that.  Of the smaller players, GEL and BWP have fared pretty well so far and we expect the trend to continue.

Source: Yahoo Financial

 

Uptrend for pipelines intact...

 

Uptrend for processors questionable...

 

 


 

Current Theme

Market actions the past two weeks did not warrant a change in our trading theme. As we mentioned before, we are watching the natural gas numbers every week for clues on power demand for a possible shift into Scenario G2 (hot summer, high coal switching, low production). So far we have an early hot summer, encouraging price condition for power plant coal-to-gas switching, but on the supply side we are not seeing a significant production cutback, even with a tropical storm. The implication is that while the fundamentals still point toward a storage peak price drop we may not see a break below the April low. In addition, we may have to tolerate a little more adverse price action to keep our short position.

On the oil side, the Iranian threat keeps the market on its toes while the Norwegian oil workers strike is adding the suspense. The strike is widely believed to be resolved within weeks and represents only a blip in the supply disruption. Tropical Storm Debby’s effect on the Gulf of Mexico production barely even registered with traders. For now the immediate concern for oil is the anticipation of QE3 by the Fed causing US Dollar to rise and WTI to fall, or the outright collapse of large European economies taking down the rest of the world. While OECD leaders responded forcefully and in unison during the 2008 crisis, we can expect a hard slog and gradualism both in the US (election year) and the Euro zone (new governments, disagreement on austerity/growth measures) this time.

In the coming months we think the bearish bias will dominate the stock market. We believe that basic materials, energy, and financial sectors are the weak links and will continue to lag other sectors. The market may take a while to set up a coming crash but we will be prepared. While the development in the oil and gas sector is bringing cheap fuels, good jobs, and energy security to the country, there will be winners and losers when the market forces sort themselves out. Cheap and plentiful gas is promising to create a huge demand in transportation to replace gasoline, revitalize manufacturing, reduce greenhouse gasses, and cut federal deficit. In the meantime we will profit from our insight and ability to stay in sync.

Scenario O2- G1:

-          US economic growth expectation slows down before summer;

-          US stock market breaks uptrend and corrects for the rest of 2012;

-          Crude Oil follows macroeconomic trend and declines for the rest of 2012;

-          Weather this summer relatively hot but not extreme;

-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013.

Our current theme calls for the following strategy. While this is a road map for our investment direction, we do not necessarily hold all of these positions at one time nor do we believe every company in the sector exhibits the same characteristics. It also does not describe the leverage to use – this depends on the volatility of the underlying instrument and the level of conviction we have in each position. In execution of this strategy, we incorporate pricing analysis, market sentiment, technical analysis, liquidity, timing, and many other portfolio construction / optimization considerations.

-          Oil Futures: flat, wait for confirmation.

-          Natural Gas Futures: short September/October contracts.

-          Oil focused producers: flat small to mid-sized companies that operate in liquids/oil rich basins.

-          Gas focused producers: short small to mid-sized companies that operate in gas rich basins.

-          Equipment/Service companies: short drillers, flat materials suppliers.

-          Refiners: flat; demand likely to slow down soon but offset by lower feedstock prices.

-          Midstream/Pipeline: long high yield MLPs with little exposure to commodity prices.

-          LNG: long companies that are positioned to export/transport North American gas.

-          Alternative Energy: flat on wind, short solar players; weak sector economics.

Red = short bias

In constructing the portfolio, we aim to arbitrage the relative values of different commodities and sectors or companies within the sectors to generate alpha. Not much has changed since June 15 and we see no need to alter the portfolio makeup. Oil drifted down and rallied back to around the same point. Gas powered up toward 200D MVA but we did not see enough fundamental changes to change tact. The general equity market was flat and made no meaningful range changes to worry us, even with big rally on June 29. It is taking it time to set up a pattern. Gas stocks were relatively stronger than oil stocks for obvious reasons but none has violated their prevailing trends. Refiners surprised us with their strength and we think it is something worth investigating.

The current target portfolio is approximately 75% short. We are conserving some room to prepare for a set up for oil to roll over from a bigger bounce or to pick up some long positions in 2013 natural gas when it drops back down. From our analysis, we still believe gas will roll over from this point, head toward prior low before rising back up in the winter. When that happens we want to be ready to load up on some. We might also do the same for coal stocks as they kind of run in sync with gas at this point. The other plays on stocks and options are somewhat more opportunistic. We will take advantage of more opportunities to enter downside positions when there are occasional rallies toward major resistance areas based on technical analysis.

Oil weighted producers have predictably tracked oil price down and bounced up the last two weeks, making their attempt at the first resistance level near 50D MVA. Some bounced faster than others but they are mostly just responding and behaving according to macro conditions. WLL, GPOR, OAS, ATPG, PXP, CPE, ROSE, BRY are a few examples. We see a lot of trouble ahead for this group, as the correction has just begun and there have been lofty expectations built in to their prices. We are staying flat at this point due to uncertainties in the oil price near term but are prepared to enter short positions when we see signs of oil price turning back down after this rally fizzles out, and when the stocks rebound toward their resistance area near 50D MVA.

 

Gas weighted producers such as XCO, UPL, SWN, BBG, QEP, CNX, KWK, predictably tracked gas price upward the past two weeks. Much negative expectations from low gas price have been built in to this group. They are still vulnerable to a downward pull as soon as gas price turns down, in addition to the general stock market souring. There are too many things that can go wrong but not enough upside catalysts. As we mentioned, the credit facilities and borrowing base are going to be an issue in the new few months when banks revisit the price deck and reserves calculations. We are maintaining our shorts on this group and potentially adding new positions.





In the midstream/pipeline space, we are biased toward the transportation and storage sub-sector and neutral on the processors with more exposure to dropping NGL prices. See Special Discussion section.

Service/equipment providers are generally not looking well at this point. With slowing prospects and eroding margins in the coming months we can’t get excited about the drillers and upstream service/equipment providers. PTEN, NBR, HERO, RIG, HAL, SLB are some examples in this group that look ripe for short entry. We maintain our short bias. Engineering and construction companies such as PWR, WG, ORN, URS, JEC are a mixed bag. We don’t see much upside in taking a long or short position at this point.

At this juncture, our target portfolio is not ideal in a sense that it is heavily directional since we exited the oil trades in May. We aim to use more spread positions to mitigate the highly synchronous behaviors of several positions in the portfolio, for instance gas producers/service and equipment, gas futures/gas producers. We are maintaining a lower leverage and waiting to gain more visibility into drivers of the oil market and economic conditions in order to make additional moves. Stay with us.


 

Alternative Development

We see several potential scenarios that could play out for the rest of 2012. There are many uncertainties associated with the nascent economic recovery in the US and Europe. The emerging economies appear to have run into a slow patch. Certain supply disruption events such as Iranian sanction on oil and hurricanes in the Gulf of Mexico are likely to cause violent but short term price volatility. We will evaluate these events on a one-off basis as the magnitude and duration of impact are hard to incorporate into the scenarios. 

We think any of the following scenarios could take hold. As soon as we realize that we are heading down the wrong track with our current investment theme, we will switch gear and reposition our portfolio.

Scenario O1:

-          US economic growth continues but sluggishly through this summer;

-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;

-          Crude Oil follows macroeconomic trend and stays above $100;

Scenario O2:

-          US economic growth expectation slows down before summer;

-          US stock market breaks uptrend and corrects for the rest of 2012;

-          Crude Oil follows macroeconomic trend and declines for the rest of 2012;

Scenario G1:

-          Weather this summer relatively hot but not extreme;

-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013.

Scenario G2:

-          Weather this summer relatively hot but not extreme; but coal to gas switching at power plants pick up significantly, or production slows down faster than expected;

-          Natural Gas price bottoms out before October storage peak, and rises toward winter and 2013.

Base Scenario:

-          US economic growth continues but sluggishly through this summer;

-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;

-          Crude Oil follows macroeconomic trend and stays above $100;

-          Weather this summer relatively hot but not extreme;

-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013;

Certain supply disruption events such as Iranian sanction on oil and hurricanes in the Gulf of Mexico are likely to cause violent but short term price volatility. We will evaluate these events on a one-off basis as the magnitude and duration of impact are hard to incorporate into the scenarios. 

 

Disclaimer:

This publication is solely for informational and educational purposes. Where the results of analysis are discussed in this publication, the results are based on application of specific assumptions and personal opinion. These results are not intended to be predictions of events or future outcomes.

Kronos Management is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services to any person. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your investment. Before making any decision or taking any action that may affect your investment, you should consult a qualified professional advisor. Kronos Management shall not be responsible for any loss sustained by any person who uses or relies on this publication.

May 31, 2012
7/16/2012 6:44:12 PM
Kronos Management
Observations
5/31/2012

 
Oil broke psychological $90 and gas consolidated recent gain around $2.40.
Global economic news has been discouraging to say the least, producing upward pressure on US Dollar and decreasing anticipation of future oil demands.
Spain’s deepening banking crisis has touched some raw nerves. Although the renewed European crisis is well anticipated, we projected that the earlier ECB bailouts would delay the day of reckoning to later this year. However, given the perceived magnitude of the problem (Spain is euro zone’s fourth largest economy) and the unlikeliness of European leaders to come up with an effective solution quickly enough, we are revising our outlook for the rest of the year and adjusting our trading theme accordingly.
The latest US jobs report, GDP numbers, and the market reaction are telling us that the road ahead is going to be rocky. The flight to safety in US Treasury and US Dollar is a fairly long-term mindset that will not reverse overnight. Commodities should benefit from that over the long run but for the time being, oil is strongly tied to short term economic news as market participants re-run their calculations. We are getting out of the long-oil business while this is taking place. 
Natural gas continues to be subject to its own supply/demand forces in the US. Recent rally and consolidation around the $2.40 level presents us with a burning question – is this the bottom? While we suspect this is more of a technical reversal than fundamental, there is a potential for a hot summer to throw our trade off. For now we are holding tight on our short positions into October.
 
 
 
Oil
The robustness of the US economy is now called into question, while European economies are projected to crash. China is slowing down but to what extent no one yet knows. We believe the China factor has been priced in for a while and the US economy slow down is kind of a given. The real surprise here is not the re-emergence of the Euro crisis but the timing of it.
On the supply side, Libyan oil is coming on strong and the Saudis seem to have ample capacity to make up for potential lost Iranian oil when the sanction kicks in. The real threat is if Iran attempts to close the Strait of Hormuz we can expect to see a spike. We believe the international community has the military might and incentive to unblock it swiftly. Although one can argue that the Saudis would like to maintain high oil price, they are also cognizant of the ill effect that has on world demand. To cut back on supply when all the headlines are screaming low growth is to shoot themselves in the foot.
Turning to the domestic market the picture is similar. Cushing is well supplied. The trend of increasing drilling activities in the oil/liquids basins is set to continue, bringing more production online. Since we are in the early days of oil price correction, we don’t anticipate companies to cut back on drilling and production anytime soon.
Without a major supply shock we see no imminent catalyst to the upside and the oil market is going to be determined by macroeconomic factors which are notoriously hard to predict on a short term basis.
 
 
 
Natural Gas
Natural gas corrected from an interim high of $2.76 after pulling off a 45% rally in a month. The picture is looking a little murky whether or not this is a technical rally or a reversal. The latest storage number is 2,815Bcf as of May 25.  At current injection rate of 71Bcf/week, the storage overfill scenario seems inevitable.
 

The current price range between $2 to $3 is where majority of coal and natural gas compete in the power generation market. Power plants that have the option to switch fuel from coal to gas, many of them in Texas, will take advantage of the low gas price due to lower emission and higher efficiency. How much switching is going to happen this season depends on how low gas price gets and how hot the summer will be. Weather is the key. We have not seen gas prices this low in a long time so it will be indicative of what the future holds. Outside of power generation, we do not see a reason to think industrial and residential demand is going to pick up significantly. There are projects that will eventually make use of this surplus gas but they are several years out.
Gas rigs continue to be laid down while oil rigs that produce associated gas continue to increase at an increasing pace, offsetting the production cut. We expect gas production to remain constant in the next few months, especially when oil and liquids still offer attractive returns. With the high decline rates of unconventional gas wells, the lack of gas-directed drilling will eventually show up in the big production volume drop. On the other hand, there are many gas wells currently shut-in that are waiting to come back. We believe this will act as a ceiling on the price. The one thing we are not sure at this point is the timing for this equilibrium to break.
We are holding our bearish positions on summer gas. There is not yet any reason to suspect the summer downtrend in eight of the last nine years will not hold in 2012. We will continue to keep an eye out for winter gas for entering some long positions.
 
 
Other Sectors
Refinery margins are still looking good. With the economy slowing down in the US and globally, we are not counting on continued strong demand for gasoline and other products. We have not seen much weakness in refineries. However, the disproportionate collapse of NGL prices of late has had a big economic impact on NGL processing plants. We will cover this in the portfolio section.
Equipment/Service sectors have stayed relatively buoyant but cracks are showing. As we mentioned before, drilling is slated to slow down toward the later part of the year due to lower commodity prices and efficiency gains. Margins are coming down as more rigs are competing for a shrinking pie. Construction and equipment suppliers are still enjoying elevated activities but we are not holding our breath. Many infrastructure projects have been planned or underway for a while and they don’t get canceled overnight.
Coal continues to struggle as natural gas stays in the competitive price range. Some analysts had previously estimated that natural gas has to be below $2.00 for large scale coal-to-gas switching especially in Texas where many of the CCGT plants have been operating below capacity. What we are seeing suggests that the threshold price is likely to be higher. The 60% drop in the coal index in a year (see chart in Special Discussion) seems partly due to anticipation of lost business to gas and partly due to actual loss. While we are bearish on the sector long term, we’ve taken profits due to the assessment that downside opportunities are limited in the near term and there is real potential for a violent rebound. We don’t want to be caught on the wrong side.
The green energy sector has suffered significant lack of enthusiasm. This being an election year, neither party has an incentive to encourage the development. We are keeping an eye out for opportunities to play the downside. 
 
 
 
Special Discussion – Coal-to-Gas Switching
Most of the coal power plants were built in the 50s, 60s, and 70s. Since the late 90s, we have experienced a massive build-out of cheaper and more efficient gas-fired combined cycle gas turbine (CCGT) plants to take advantage of natural gas produced, especially in Texas. However, this newer fleet has historically been underutilized, at around 30%. This means that there is plenty of room for natural gas to take coal’s market share. The chart below shows that coal still makes up more than a third of all power generation fuel but has been steadily losing share to natural gas. It is widely expected that natural gas and coal’s share will be equal in 2012. Nuclear and renewable sources make up about 30% of all generation.
Given the abundance of shale gas and low price, the cost of power production utilizing coal vs gas on a $/MWh basis has recently moved to parity. The 5-year range of natural gas power demand in the summer is about 25-34Bcf/d, and analysts have estimated with maximum switching an extra demand of 12Bcf/d can be created at the expense of coal generation, even though less than 3Bcf/d of switching has happened in the last 3 years. This represents a 19% demand increase compared to about 63Bcf/d a day of domestic gas production.
It is widely believed that the price range at which gas displaces coal is around $2.00-$3.00 and we are currently in this environment. We also believe that the shale gas production curtailment in response to the low price is not going to be fast enough this summer to have a meaningful impact. With the rest of the demand picture pretty stable barring an economic collapse or a big hurricane in the Gulf of Mexico, the most important demand factor will be power plants’ response to the coal vs gas price and the summer temperature.
 
 
In our analysis, coal stocks like PCX, JRCC, BTU, ACI have all priced in a brutally competitive environment and therefore we will not be chasing them to the downside. At some point later this year or early next year when natural gas price rebounds and when power demand wanes, we could see a massive correction to the upside. And until then, we do not see much more to be gained by staying short. Instead we will be watching closely for a trend reversal toward the end of summer and revisit the upside if necessary.
 
 
 
 
Current Theme
As we mentioned the last time, we were on the lookout to shift our trading theme for the coming months due to the rapid fall of crude oil prices. The unwinding of the euro zone situation and the confirming price action in the past two weeks has necessitated a shift into Scenario O2-G1. With summer approaching we will keep an eye out on the power demand data for a possible shift into Scenario G2 (hot summer, high coal switching, or low production). Some of the significant developments that could throw off the trade include a collapse of talks between Iran and the West, the blockage of the Persian Gulf, and the inability of Saudi Arabia to make up for the supply shortfall. Of course if we run into a full-blown credit crunch the Feds or the ECB/IMF could start printing money and bring about a flight to commodities (bullish) through inflationary effect, or a flight to USD causing depressed oil price (bearish).
The net effect of all these events is devilishly hard to pin down. Government intervention adds complexity to our calculations. That’s why we continually assess the horizon and develop themes to guide our action. Without a theme it is easy to get caught in a heat of the moment and forget the basic forces that move particular markets. We need to stay in sync.
 
Scenario O2- G1:
-          US economic growth expectation slows down before summer;
-          US stock market breaks uptrend and corrects for the rest of 2012;
-          Crude Oil follows macroeconomic trend and declines for the rest of 2012;
-          Weather this summer relatively hot but not extreme;
-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013.
Our current theme calls for the following strategy. While this is a road map for our investment direction, we do not necessarily hold all of these positions at one time nor do we believe every company in the sector exhibits the same characteristics. It also does not describe the leverage to use – this depends on the volatility of the underlying instrument and the level of conviction we have in each position. In execution of this strategy, we incorporate pricing analysis, market sentiment, technical analysis, liquidity, timing, and many other portfolio construction / optimization considerations.
-          Oil Futures: flat, wait for confirmation.
-          Natural Gas Futures: short September/October contracts.
-          Oil focused producers: flat small to mid-sized companies that operate in liquids/oil rich basins.
-          Gas focused producers: short small to mid-sized companies that operate in gas rich basins.
-          Equipment/Service companies: short drillers, flat materials suppliers.
-          Refiners: flat; demand likely to slow down soon but offset by lower feedstock prices.
-          Midstream/Pipeline: long high yield MLPs with little exposure to commodity prices.
-          LNG: long companies that are positioned to export/transport North American gas.
-          Alternative Energy: flat on wind, short solar players; weak sector economics.
Red = short bias
In constructing the portfolio, we aim to arbitrage the relative values of different commodities and sectors or companies within the sectors to generate alpha. We continue to project the continuation of downward momentum for natural gas toward the peak storage season. It continues to trade on its own supply/demand dynamics and respond to different drivers than the general market, relatively independent of the general economy, whereas oil’s fate is highly correlated to macroeconomic conditions, responding acutely to economic news in addition to its own supply/demand forces. Domestic NGLs are typically traded at a percentage of crude oil but that link has recently weakened due to oversupply. It could get worse as rigs move aggressively from gas wells to liquids-rich wells.
This has significant implications for selecting equity positions for our portfolio. With the high correlation of gas stocks to the stock market, and even higher correlation of oil stocks in a jittery market preparing to roll over, we decided to exit the crude oil futures and oil-heavy stocks (flat) but keep some positions in the midstream/pipeline sector especially the high yielding MLPs. We’d like some of the portfolio to be kept in cash in light of the uncertainty related to the recent crash. We need to understand if this is a mere correction or the beginning of a longer-term break down. The target portfolio is approximately 75% short and it represents our view for the next couple of quarters, not weeks. We may see another crash followed by a violent upswing or slow drift up. As we assess the situation in the next few weeks we will either pick some good entry points to add to the downside or tiptoe back in some long positions. Since the recent crash was due to a structural issue, namely economic deleveraging, the effects are likely to linger. Government actions can delay the day of reckoning like what we saw in 2011 but capturing the timing is tricky.
Oil weighted producers have mostly broken their 6-month uptrend, witness WLL, GPOR, OAS, PXP, CPE, ROSE in charts below. Most of these small to mid-sized producers have seen healthy production growth in the past year but can expect to experience much headwind from now on. The intense competition from gas-focused producers trying to gain entry into oil/liquids acreages, as well as declining oil and NGL prices spell trouble for this group. We are staying flat at this point but are prepared to enter short positions in the next few weeks.
 
Gas weighted producers such as XCO, UPL, SWN, BBG, on the other hand, mostly resumed their downward. Many of these companies are operating below breakeven points but are heavily hedged. That is one of the few things that are keeping them afloat. As gas price lingers near historic low, their credit facilities and borrowing base are going to be an issue going forward. If banks start revising down the price deck and reserves calculations, these producers are going to be stuck in a vicious cycle until gas price recovers. We are maintaining our shorts on this group.
In the midstream/pipeline space, we observed a pretty dramatic decline in average NGL price in relation to crude oil. This ratio has dropped from around 50% to 40% since the beginning of the year and is now at its low since the 90’s.  MWE, CPNO, DPM, RGP with their heavier exposure to commodity prices are getting hit hard whereas the ones with more stable and diversified revenue streams have weathered the storm pretty well, e.g. OKE, GEL, EPD, TRGP. We think there’s some stability and upside in this group partly due to their higher yield. It is time to get selective in this space.
Service/equipment providers are experiencing much headwind as well. Ironically, the drillers are facing pricing pressure because of the improving efficiency they bring to the industry. PTEN, HP, NBR, HAL, RIG are some examples in this group. We plan to add to our short position.
As mentioned above, we took our profit on the coal positions earlier and do not see many good entry points in this sector as they have been severely beaten down for a long time. We are standing on the sideline for now.
Our general philosophy at this juncture is to lower leverage and avoid being too aggressive. As the fog of war lifts we will continually assess the situation and make our plays.

 
 
Alternative Development
We see several potential scenarios that could play out for the rest of 2012. There are many uncertainties associated with the nascent economic recovery in the US and Europe. The emerging economies appear to have run into a slow patch. Certain supply disruption events such as Iranian sanction on oil and hurricanes in the Gulf of Mexico are likely to cause violent but short term price volatility. We will evaluate these events on a one-off basis as the magnitude and duration of impact are hard to incorporate into the scenarios. 
We think any of the following scenarios could take hold. As soon as we realize that we are heading down the wrong track with our current investment theme, we will switch gear and reposition our portfolio.
 
Scenario O1:
-          US economic growth continues but sluggishly through this summer;
-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;
-          Crude Oil follows macroeconomic trend and stays above $100;
 
Scenario O2:
-          US economic growth expectation slows down before summer;
-          US stock market breaks uptrend and corrects for the rest of 2012;
-          Crude Oil follows macroeconomic trend and declines for the rest of 2012;
 
Scenario G1:
-          Weather this summer relatively hot but not extreme;
-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013.
 
Scenario G2:
-          Weather this summer relatively hot but not extreme; but coal to gas switching at power plants pick up significantly, or production slows down faster than expected;
-          Natural Gas price bottoms out before October storage peak, and rises toward winter and 2013.
 
Base Scenario:
-          US economic growth continues but sluggishly through this summer;
-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;
-          Crude Oil follows macroeconomic trend and stays above $100;
-          Weather this summer relatively hot but not extreme;
-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013;
Certain supply disruption events such as Iranian sanction on oil and hurricanes in the Gulf of Mexico are likely to cause violent but short term price volatility. We will evaluate these events on a one-off basis as the magnitude and duration of impact are hard to incorporate into the scenarios. 
 
Disclaimer:
This publication is solely for informational and educational purposes. Where the results of analysis are discussed in this publication, the results are based on application of specific assumptions and personal opinion. These results are not intended to be predictions of events or future outcomes.
Kronos Management is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services to any person. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your investment. Before making any decision or taking any action that may affect your investment, you should consult a qualified professional advisor. Kronos Management shall not be responsible for any loss sustained by any person who uses or relies on this publication.
April 30, 2012
7/16/2012 6:02:09 PM

Kronos Management

Observations

4/30/2012

 

 

 
Oil (WTIC) continues to trade in a tight range while Gas (Henry Hub) rallied hard from the bottom of $1.90. 
Europe is on the verge of a breakdown as negotiations have so far produced very little results while the sovereign bond yields of the peripheral economies creep up. This and the early signs of US economic slowdown are making us uneasy. While the general markets and oil stocks have made a decent recovery we are wary of a reversal of trend.
Natural gas on the other hand arrested its relentless slide and had rallied >20% from recent low. The fundamentals point toward a resumption of downtrend in the near future; we will use technical analysis to time our entry to attempt to catch the downward momentum when it reverses.

 
 
Oil
Tension between Iran and the West lingers and the oil market is in a holding pattern. The relatively robust US economy and the weakening growth in the rest of the world including China appear to balance each other out.
Since coming off the October low of $76.25, WTIC has been moving in sync with the general economic news and the upbeat forecast of recovery. We expect this macroeconomic correlation to continue for now, though we have a hard time envisioning oil to outpace the general market. There are several factors ahead that could throw this delicate balance off.
First is the robust domestic oil production from the unconventional plays in the US potentially driving down prices at Cushing. This may take a while to realize due to the logistical struggle of Canadian and Bakken Shale oil from North Dakota to get to the market, but with the gas rigs continue to be moved to oil plays and the planned infrastructure build out to debottleneck the system the day of reckoning will come. There is even talk of the US exporting some of its oil but we are very far from that scenario.
Secondly, the euro crisis is casting a shadow on the horizon. Like it or not, Europe is a big economy it consumes a lot of oil. With the Spanish and Italian sovereign bond yields creeping up once again, the situation could snowball into a full blown crisis, taking down other economies and destroying oil demands. If this happens we can expect a sharp correction.
The Iranian sanction has appeared to have produced a floor to the oil market. The Saudis claim to have plenty of spare capacity to make up for it. We believe that. However if Iran decided to roll the dice and block the Strait of Hormuz it would be a war situation and we can expect to see a major spike.
Overall oil price should generally follow the equity market and economic growth which appears to be chugging along fine. Until that picture changes we are moderately bullish on oil.
 
 
 
Natural Gas
Natural gas staged a comeback to $2.31 from a brutal drop to $1.90. Storage level bottomed out the week of March 9 and began to tick up very early in the season. An overfill scenario is a real possibility.
So far this spring weather has been warm, depressing residential demand.  But as we move toward the summer preliminary signs are pointing toward a higher than normal coal-to-gas switching by power plants. There are news that chemical plants and manufacturing plants are moving facilities back to the US to capture the cheaper feedstock. Industries are recognizing the staying power of domestic gas resource from shale plays and hydraulic fracking. Liquefied Natural Gas (LNG) operators have also proposed or started building facilities to export natural gas. Power plants conversion from coal to gas on a temporary basis can happen fairly quickly but the rest of structural adjustments in the marketplace will take years. Eventually this arbitrage will create equilibrium between supply and demand.
The latest storage level as of April 27 was 2576Bcf vs total working storage of 4200Bcf. At normal injection rate there will be excess gas before the end of injection season is reached. Many producers announced gas production cuts and shifting of rigs to oil or liquids rich fields but most of these drilling will produce associated gas, which offset the gas production cut to some extent.
Over the next few months we expect gas and oil prices to remain almost decoupled and we will closely monitor the amount of production reduction in the US and the summer cooling demand. Barring a busy hurricane season that disrupts the Gulf of Mexico production we do expect to see the pace of power plant fuel switching pick up and gas wells being shut in at a fairly rapid pace. Many industry experts who predict low gas price for the next few years but we believe the supply and demand equilibrium can be reached within a year, especially if we have a normal or cold winter.
For right now, we are bearish on gas but are watching several important trends closely so as to spot the inflection point. Gas price will turn around but we believe until production gets cut back enough to match current demand the price picture in 2012 is not going to be pretty. In addition, the consistent pattern of summer downtrend in gas price in eight of the last nine years (except for Hurricane Katrina) strongly suggests another year of summer doldrums.
 
 
Others
Oil refineries are currently enjoying fairly strong demand but high crude oil price. We believe the demand for refined products is likely to slow down in the coming months but this group has been generally moving sideways. It does not look like there is a lot of upside but we are not ready to bet on the downside yet.
Oil/gas equipment and service sectors are currently strong. Drilling and construction activity levels are staying elevated. However, we believe the demand could be slowing down toward the summer as more rigs are laid down or moved to more crowded spaces (oily basins), squeezing margins. Operators are already reporting disinflation in several areas. We remain cautious and are looking to enter some downside positions.
With natural gas price at 10-year low, coal demand is getting assaulted from multiple fronts – uncertainty in the economy and power plant fuel switching from coal to gas. The explosive effect of shale gas production has created a strong correlation between natural gas and coal prices. We expect coal prices and producers to remain depressed for a long while.
Solar energy has been taking a beating for a while. The politics of green energy subsidies and the competition from domestic natural gas seem to have dampened the development of green energy sources. Witness the steady decline of First Solar (FSLR) from $175 in February of 2011 to just above $18. Not only has green energy investment fallen out of style, the fundamentals of the industry have also undergone a major shift. The marketplace is now dominated by low cost providers from China. Without active help from the government we continue to view this sector unfavorably.
 
 
Special Discussion - Liquefied Natural Gas
The day of the US exporting natural gas by LNG is not that far-fetched. Oversupply of domestic natural gas has created an opportunity for companies to capitalize on the price differentials in the world market. Europe is paying above $10/Mcf and Asia in the mid-teens. There are also many opportunities for natural gas to replace other fuel types in power generation, heating worldwide. Not too long ago the US could not get its hands on enough natural gas that companies like Cheniere Energy spent billions building regasification terminal at Sabine Pass to supplement existing sources and Canadian imports. Now Cheniere is constructing an add-on liquefaction plant to export up to 2Bcfd, in the process attracting foreign capital investment.
The long term outlook for LNG export seems bright. There are multiple proposals now in the pipeline in the US and Canada to get in the game. The permitting process could take years and project costs are in the billions. However the impact on gas price may not be that great. According to a 2011 Deloitte report on LNG, with the continuing of shale gas development, the export of 6 Bcfd could theoretically raise the Henry Hub price by $0.22/MMBtu (roughly equivalent to Mcf), 10% of current price.
While we keep an eye out for LNG development, bear in mind that this is only a small part of the market rebalancing of supply and demand. Major shifts in production technologies, consolidation of oil/gas producers, fuel switching for power plants, the revival of domestic manufacturing to take advantage of the new cheap fuel, and climate politics will all reshape the gas market in the years to come. On a global level, major development of shale gas in China, Australia, and potentially Europe promises to bring sources closer to uses and alter the economics of natural gas. LNG operators and fleet owners will have to adjust to the changing landscape. In the near term, we are moderately bullish on the domestic LNG prospects.
Cheniere Energy (LNG) has been on a 4-month tear since October. Right now it is the only operator that has the approval to export domestic gas. The signing of long-term contract will surely generate a lot of interest for institutional investors to fund the project. The company has been a dog for years due to the heavy debt burden from betting in the wrong direction building an import terminal when the shale gas revolution is happening in the backyard. There seems to be plenty of upside from here now that people are realizing the long-term viability of the business.
Golar LNG (GLNG) the LNG fleet operator is the other LNG stock that we are following. It has followed a similar pattern as Cheniere since October but has recently slipped from a double top of $47-$48 range and breached the 200-day MVA. The failure to take out previous high raises a red flag for us. This is an example of us liking the prospects of a company but not the technical picture. Maybe its time has not come, but we are not sticking around to find out. See charts below.
 


 
 
Current Theme
Our current theme (Base Scenario) remains unchanged. However we are constantly on a lookout for significant developments on the macroeconomic, geopolitical, and commodities supply/demand fronts to check if we are staying on the right side of the trade.
The following scenarios represent our views of likely development for the rest of the year and beyond. Situations can change rapidly especially as related to geopolitical events or government actions that can carry significant consequences. We closely monitor developments and continue to review the scenario we are in to ensure we are in sync with the markets.
 
 
Base Scenario:
-          US economic growth continues but sluggishly through this summer;
-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;
-          Crude Oil follows macroeconomic trend and stays above $100;
-          Weather this summer relatively hot but not extreme;
-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013;
 
Our current theme calls for the following strategy. While this is a road map for our investment direction, we do not necessarily hold all of these positions at one time nor do we believe every company in the sector exhibits the same characteristic. In execution of this strategy, we incorporate pricing analysis, market sentiment, technical analysis, liquidity, timing, and many other portfolio construction / optimization considerations.
-          Oil Futures: long summer
-          Natural Gas Futures: short September/October
-          Oil focused producers: long small to mid-sized companies that operate in liquids/oil rich basins.
-          Gas focused producers: short small to mid-sized companies that operate in gas rich basins.
-          Equipment/Service companies: short drillers, flat materials suppliers; activities likely to slow down.
-          Refiners: flat; demand likely to slow down soon but offset by lower feedstock prices.
-          LNG: long companies that are positioned to export/transport North American gas.
-          Alternative Energy: flat on wind; short solar players; weak sector economics.
Our current target portfolio construction is as follows.
Red = short bias
In constructing the portfolio, we aim to arbitrage the relative values of different commodities and sectors or companies within the sectors to generate alpha. We project the continuation of downward movement for natural gas toward the peak storage season and the continuing net positive economic growth powering oil price through the summer. Natural gas currently trades on its own overwhelming demand/supply factors and provides non-correlated returns, whereas crude oil’s immediate concern is largely macroeconomic conditions, which is correlated to the equities market.
Within the energy sector, we seek to pick the optimal long/short pairings to generate alpha independent of the equities market movement. Stocks tend to be highly correlated to the general market regardless of sectors except for very specific sectors. Sectors such as pipelines tend to provide higher yield craved by investors in this environment. Service/Equipment providers are not seeing much growth from this point on. Coal has been dragged down by the destruction of demand. We exploit our knowledge of energy sector dynamics and build our positions based on our confidence level for each trend and its duration.
Within individual producers, oil weighted producers and gas weighted producers are currently on different trajectories. Companies that failed to diversify beyond dry gas such as Exco Resources (XCO) are operating at below breakeven price have been on a long downtrend and we expect it to continue. Oil weighted producers betting heavily in specific basins such as Whiting Petroleum (WLL) in the Bakken Shale are faring a lot better and we expect the oil/gas divergence to continue as long as the oil and gas prices remain split. With the significant liquid/gas price differential, producers continue to move toward liquids-rich acreage drilling so the asset composition of these companies will be changing. Some companies are also better hedged than others. We will continue to watch the transition of these companies.
Gas weighted producers such as SWN, XCO, BBG, UPL, CNX, EQT, ECA have been bouncing around in a well-established downtrend and we anticipate the trend to continue. See charts below.

 
Service/equipment providers are holding steady or beginning to see drilling activities slow down. Their pricing power is also showing signs of weakness in several plays in the onshore space. PTEN, NBR, HP are some of the players in this sector that have begun their decline. We do not anticipate the picture to improve and we are looking to add to the downside. See charts below.

 
Refineries are moving sideways and we do not anticipate making a move until we see signs of cracking. This is especially true when we approach the summer driving season when demand for refined products is high. See TSO chart below.
We anticipate entering some short positions in the coal sector in the near future, when the timing presents itself. The valuation has deteriorated a great deal but we believe there is further downside. We opt to stay on the sideline for now from a technical analysis standpoint.
The bottom line is we do not have to hold positions in all subsectors in the energy space at all time, nor do necessarily deploy 100% of capital at all times. Sometimes we do use moderate leverage when confidence level is high on certain opportunities.


 
 
Alternative Development
We see several potential scenarios that could play out for the rest of 2012. There are many uncertainties associated with the nascent economic recovery in the US and Europe. The emerging economies appear to have run into a slow patch. Certain supply disruption events such as Iranian sanction on oil and hurricanes in the Gulf of Mexico are likely to cause violent but short term price volatility. We will evaluate these events on a one-off basis as the magnitude and duration of impact are hard to incorporate into the scenarios. 
We think any of the following scenarios could take hold. As soon as we realize that we’re heading down the wrong track with our current investment theme, we will switch gear and reposition our portfolio.
 
Scenario O1:
-          US economic growth continues but sluggishly through this summer;
-          US stock market continues uptrend since Oct 2011 but reverses in 3rd or 4th Quarter 2012;
-          Crude Oil follows macroeconomic trend and stays above $100;
 
Scenario O2:
-          US economic growth expectation slows down before summer;
-          US stock market breaks uptrend and corrects for the rest of 2012;
-          Crude Oil follows macroeconomic trend and declines for the rest of 2012;
 
Scenario G1:
-          Weather this summer relatively hot but not extreme;
-          Natural Gas downtrend continues through October storage peak, and rises toward winter and 2013.
 
Scenario G2:
-          Weather this summer relatively hot but not extreme; but coal to gas switching at power plants pick up significantly, or production slows down faster than expected;
-          Natural Gas price bottoms out before October storage peak, and rises toward winter and 2013.
 
 
 
 
 
 
 
This publication is solely for informational and educational purposes. Where the results of analysis are discussed in this publication, the results are based on application of specific assumptions and personal opinion. These results are not intended to be predictions of events or future outcomes.
Kronos Management is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services to any person. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your investment. Before making any decision or taking any action that may affect your investment, you should consult a qualified professional advisor. Kronos Management shall not be responsible for any loss sustained by any person who uses or relies on this publication.
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