The Nature of Natural Gas: EIA-914 - Shut-ins or natural declines?

Yesterday the Department of Energy,'s EIA released their EIA-914 Monthly Natural Gas Gross Production report. Fist a little background: prior to Jan-05, the EIA had published estimates of natural gas production based on data supplied by or collected from individual State agencies and the Minerals Management Service. Because these production estimates were not considered sufficiently timely nor accurate to meet customer needs the EIA instituted this monthly survey, which collects production data directly from well operators.

This month's 914 report was modestly bullish, showing continental U.S. gas production to be approximately -1.4 bcf per day (a negative number is bad, positive is good for gas prices) out of balance (in from nearly -3.5bcfpd during massive Aug-09 production builds)

However, it is unclear whether the sequential decline is driven by either production shut-ins (operators such as CHK and ECA stated their voluntary shut-in volumes, and it is likely that others followed suit as spot gas prices declined to sub $2/mcfe in early Sep-09, and only gradually improved to ~$3.5/mcfe by the end of the month) or natural declines in production capacity (TPH had estimated 0.5 bcf/day of natural wellhead declines back in late Nov-09).

Net-net, the 914 data seems inconclusive and ~1.5 bcf/day of production shut-ins seems statistically unrealistic based upon historical trends. Additionally, the latent winter weather is not helping to clarify the demand side of the situation - I will be watching the weekly storage data tomorrow morning for implied supply-demand, which will no longer be disguised by full storage effects.

Trade Update: "Going for the Gold" - Part II

Well, I left money on the table. What can I say. I exited the directionally long GLD and long GLD Gamma trade a day too early, and missed out on an additional 1.35 of upside today alone.

While I am thrilled with how well the trade worked out already, my naivete reminds me of Lefevre's old adage to follow the path of least resistance; I had been to caught up in the short-term horizon of this trade, that I forgot to acknowledge the influence of the longer-term momentum.

It is bitter sweet to have closed out of the position. This has been my largest trade to date, on a risk-weighted basis, comprising ~12% of portfolio 20-day VaR / PML - the upper threshold of my internal trading guidelines. Now without another week of sleepless nights, I can re-focus my efforts back to my core strategies.

While I still believe there are reasonable fundamentals underlying the demand for Gold, I do believe there is a non-negligible probability of jump risk given that this rally seems to be catalyzed by a crowded USD-carry trade and the potential for a strengthening dollar (Friday's job report will be key). A short squeeze on the Short Dollar-Long Risk trade, as talked about in Mauldin, seems inevitable but not imminent. If the U.S. economy begins to mend itself ahead of schedule, the potential for rate increases will be dollar positive-gold negative; again, the unemployment rate will serve as our barometer for indications of FOMC posturing. Now that I have reduced risk, I am thinking about ways to quantitatively express my fundamental views on this jump risk, particularly in E.M., perhaps via deep OTM puts and long-vol expressions on E.M. ETFs? Brazilian puts (EWZ) or short Chinese Real Estate (TAO) anyone? I also want to re-shift my focus back onto natural gas as we get into the winter draw season. More to come...