Holdings Watch:

• (HK) - Sold 1/3 of the July $45 Calls (HKGI) for $4, up 105%.

• (CHK) - Sold 1/3 of the July $60 CHK Calls (CHKGL), also for $4 for a 41% gain.

The Wiki Holdings Tab is updated. We continue to hold a number of July positions at present (normally I'd be out or almost out of the front month by this date) and will no doubt register two or three scuds at the end of the coming week.  

Question From Crysball on the Friday Post: Subscriber question regarding a post on another energy site regarding natural gas prices. The author had three main points:

1. He saw BTU convergence between natural gas and oil. On a BTU basis, gas should trade on a 1 to 6 ratio; it currently trades at a 1 to 11 ratio.
2. He says N. American NG prices are strongly driven by Europe and Asia pricing, says U.S. production is up 5% YoY, and that pipeline and drill rig shortages and rapid depletion rates are limiting production gains.
3. Finally, he writes NG demand to strengthen as utilities stop adding coal capacity in favor of solar and wind which have their own set of gas demand drivers. Also, talks about substitution of natural gas increasingly for gasoline as a demand driver for natural gas in North America. 

Here are my thoughts: 

1. I don't see the BTU ratio moving the price of gas. I see oil as an upward dragging influence to be sure but the ratio has been higher than heating value for many years and I'd bet it stays at a 1 to 9 to 1 to 12 ratio for the next several years UNLESS oil were to really crack lower.
2. On the LNG comment: exactly my point in pointing out each week that the LNG simply is not coming here. Not when the winter strip in Europe, for example, is over $20.
3. On the production comment: We are running a little hotter than 5% annualized natural gas marketed production growth. More like 9%. This is unheard of growth and gives me cause for pause. However, in raw numbers, taking the dearth of imports and the rise of exports into account, gas available in the U.S. is up only about 2% relative to year ago levels. So as long as Mexico demands increasing volumes from Texas and the Western border states and gas prices in Asia and Europe keep tankered volumes headed in directions other than the Western Hemisphere I'm not overly concerned.
4. The decline rates in the shale plays are asymptotic as the author indicated. Which is why the dominant producers punch more wells each year. The risk in these plays is next to 0 from an exploratory standpoint so it is really just a function of capital and return. The big players, who represent an overwhelming majority of the production ramp will eventually get the rigs to carry out these accelerated drilling programs at the expense of a lower IRR. Right now the reduction in return is a pittance as the IRR's are in the high double and in some cases triple digits on the newer shale plays at this gas strip.
5. On his final points: Long term I agree. Near term natural gas demand for electricity generation continues to gain market share on competing fuels. In terms of transportation natural gas consumption is very small and I would not expect it to be a significant price driver for another 5 to 10 years at best. 

Another Question RE The Bakken and TFS: I'll put this one in the comments section on Sunday.

On To The Weekend Wrap