This is what I wrote on June 15 ...
At first glance, you might think that somehow getting peak storage this year down to 3.8 Tcf would be hugely bullish for NG pricing in 2013. Indeed it would be. The incredible production decreases and demand increases that would be required to achieve that, except to the extent that they are related to exceptional weather (either massive heat for A/C demand or huricane shut-ins for production curtailment), would presumably continue past the point of storage peak and make the possibility of running out of stored NG before May quite real.
So either way, and any scenario in between, the pieces are now in motion and it is virtually certain that we are going to see very high NG prices in the next 6 to 9 months. The only question is whether if we see the high prices before the end of 2012 (that's the first scenario) will it be enough to reverse the production decline disaster that would be looming. Because if storage is too high this fall, and prices too low, the continuing production declines that will follow that will come at a very bad time and result in even higher prices than in the first scenario, and ultimately too little gas, in the early spring of 2013.
It later became clear that the "first scenario" discussed above wasn't going to happen. The "second scenario" is that of high NG prices in late winter, early spring, 2013.
On the issue of associated gas ..
Even the cost of flaring the gas from the liquids shales isn't zero. The cost of doing anything else with it, like bringing it to market, is definitely not zero (otherwise, people wouldn't flare it now, and a lot of people do flare it). However small the cost of bringing this gas to market, and a lot of time that cost is not small at all, unless the returns make it worth doing, it won't get done. Even if profitable to do so, what is the opportunity cost of not deploying that capital and manpower on even more profitable projects, that is the true question.
On the issue of the NG inventory low of spring 2013 ...
But slicing and dicing the terms of the supply/demand equation, and looking at very realistic "what ifs", it seems to me that "under 1 Tcf by end of March 2013" may be the understatement of the decade. This can very easily shape up to be a train wreck of generational proportions (in terms of going from a perceived "glut" of NG this spring to pilot lights going out across the nation next spring, and prices of practically no upper limit).
On what to expect from NG pricing going forward, this is what I wrote on July 20 ...
1. we are in a short term "bullish scenario" for NG right now. There are actually quite a long list of bullish factors at play right now, and the NG traders who move the market are notoriously influenced by very short term effects. I could go into a long list of short-term bullish factors, but I think we all know what they are.
2. there is a medium-term bearish case to be made, which you have outlined, that centres around a new record storage this November. The traders won't wait until they see the record storage number print before they tank the NG futures market, they will tank it well before that -- but not just yet. So there is an excellent swing trade setting up for those who ride the current bullish trend to get out at the right time and turn short.
3. the real bullish scenario that I see is for next March and April. Because the NG price crash that I described above will also be a short-term trading event, when it hits the market, it will take some time for the market to wake up to the extremely bullish fundamentals that are then set up in its wake. Namely that NG drilling has LONG SINCE been far too inadequate to meet the requirements of the very real treadmill, but this has been disguised by the massive inventory of uncompleted wells and backlog of pipeline tie-ins or lack of gathering lines. Once these backlogs are used up, the market appears desitined to be "very surprised" that the NG price will have then been inadequate to support the necessary drilling for almost a whole year already, but the then missing gas will be needed "now". It will be a very bad situation for NG buyers then (March-April 2013), which is simply a delayed "gotcha" for having underbid the NG price required for long-term supply for the whole of 2012. It is the boom-and-bust nature of the NG business played out larger than ever before.
Regarding my own investment, though, here is what I wrote on June 27 ...
I went long NG futures via the HNU.to 2x ETF on February 17. I was expecting a spike upwards to happen within a week or two after that date. My plan was to take profits on that spike, then switch to an NG short (via HND.to).
It was a bad plan. I could have exited the trade with a 5% profit on the first day, but of course I thought it would go much higher. Instead, it continued to grind lower for the next eight weeks, and I just stubbornly continued to hold.
However, despite the contango grinding down the value of my holding during each contract roll, and despite the "volatility loss" that occurs when a 2x ETF goes through rapid up-and-down price movements, like we've had in May and June, my HNU holding wasn't killed.
I'm currently down 28% on the trade, up from being down 60% on April 19. My break-even price on the August futures is now 3.42, which is only 0.52 away, and I think I can realistically expect to eventually be profitable.
However, the opportunity cost is a shame and I do feel stupid for missing out on such a good move down and up again.
Since then, I missed three great opportunities to switch to a quick short, in order to reposition my long at a better entry price, one at the start of July, and even more so at the end of July and the start of August.
So, just to avoid anyone freaking out, knowing how bullish I am on NG for spring 2013, it has always been my plan to be short for the storage peak this fall, in order to better position myself with a long NG position for the winter. I have every intention of closing my long NG position in the next few days and initiating a short NG position, in anticipation of an NG pricing low sometime in November or December. I do think we will have production increases between now and then.