Natural Gas Decoupling From Crude; Take Chesapeake Energy Comments With A Grain Of Salt, Especially If Long-Range Winter '08 Forecasts Pan Out True

Implications: This article has three main issues: 1) Aubrey McClendon, the CEO of Chesapeake Energy Corp, the second-biggest U.S. independent natural gas producer, says that up to 400 drilling rigs might shut down by the end of 2008; 2) There are worries that natural gas winter supplies will be less than anticipated after hurricanes Ike and Gustav caused havoc in the Gulf.  Even though no winter forecast is given, it will be interesting to note what does happen with natural gas prices especially with a couple of early to mid-Fall and mid-winter Canadian blasts well below normal likely occur; 3) Will natural gas decouple from oil?

Analysis: 1) Mr. McClendon Wishes He Had Bigger Cowboy Boots But Fortunately He Does Not

You know what can be scary?  When a corporate officer knows or thinks they have a large herd following them, and then s/he says things that are 'reverse-logic' or aim to shock in order to expand the herd because many rush-in on a new trend because they panic.  If you're asking 'what are you talking about'? then this is exactly what McClendon wants.  McClendon doesn't want you to deeply analyze this, he just wants you to follow his three-toed hooves.  Tell me you are not one of the supposed large herd that drops your pants when Audrey, oh wait, Aubrey talks?  Heck, it might be so that "every analyst, trader and producer takes their cue from this guy" (as one research director in the original article says).  But -- read my lips -- when McClendon leads "everyone" down the long bumpy path that ends up going only into a swampy marsh, and nobody has a boat to get across it, I think it's highly advisable to happily research (i.e., for your own profit) what the ulterior motives are of this CEO and what could happen when and if "everyone" does follow him and it is proven that the chief composition of his words are just methane gas.

Roughly just 4% of the so-called "400 drilling rigs that might shut-down" are owned by Chesapeake, and the 400 rig count is only about 20% of the total oil and gas rigs, of which less than 1% is owned by Chesapeake.  McClendon's agenda is typical for a person whose boots are too big for the boss he thinks he is.  Rigs are not going to just close-down in this energy-trying-to-become-more-efficient era we have just 'hit', and b) other companies are not unintelligent comparably to plan to cut output and exploration. 

2) It Happens A Lot:  The Famous 10-Day Wait-N-See Period (After A Hurricane Landfalls On The Western Or Central Gulf), Then Natural Gas Spikes.  With A Cold First Half To The Winter, Natural Gas Could Panic.

Every time a hurricane impacts energy along the Gulf Coast, traders almost always expect less disruption, fewer delays and less problems compared to what actually happens in about 8 out of 10 cases.  You can't blame the majority for being optimistic.  But for the storms that really do make an impact, like Ike and even Gustav this season, price increases are much more likely in the period starting 10 days after disruption.  In 10 days, a more thorough assessment can be performed, and based on a more detailed inspection whereby everyone gets to see what has not happened (as quickly as expected), that is when gas prices tend to go up the most.  It seems to be a good opportunistic window.  Obviously, this only accounts for those hurricanes that actually DO damage to the energy industry.  There does not seem to be any "signal" up or down related to fish storms.

As disruptions continue, and natural gas continues to rocket-away off its post-hurricane launch-pad, and as stronger than usual Fall frontal passages get leading markets chillier than usual in October and again in December, it's likely that a lot of traders will become increasingly worried on the price and the future of natural gas.  But hopefully we'll awaken from this dream, and realize that we need these natural gas rigs...more of them, not less.

3) Will Natural Gas Trade On Its Own Merit?

You betcha.  Not yet entirely...at least not starting until early '09, but there's going to be increasing efforts to have natural gas decouple from crude.  The main reason is that there is a conflict as to which energy will be our future, and the greater the conflict, the more the decoupling.

Summary

Watch this subject matter carefully:  my wisest intuition and research tells me, and now you, to watch out for this great charlatan McClendon and to run the other way:  natural gas IS our next phase of becoming more energy-independent.  Shutting down the gas rigs won't happen -- and if it does -- it will be just Chesapeake's and maybe a few others that soon quickly reverse their decisions once they know that their "leader" has duped them.

It won't make sense, but watch for colder than usual bouts on the horizon (and sharper changes from Canada to come swooping down earlier than usual, much in contrast to the milder air brought up by east-coast storms from the Caribbean currently) to come at the same time as many join the McClendon herd and close down their natural gas rigs.  When the second cold waves attack in December, watch for many in the herd to scratch their heads in disbelief in what they have done, and then watch natural gas really become as volatile as the Dow has done in the past week.