A Mini Natural Gas Market Analysis

The recent natural gas (NG) price free drop triggers interests in this market. A contrarian view is that a strong rebound in NG can be expected when NG's potentials are fully explored. Indeed, NG has gone through a volatile decade while huge swag, from over $8 to current about $2 per unit. The warm weather is commonly considered the culprit of the recent drop as well as larger supply from shale gas. However, overall NG demand has also been up since 2001. So how is the big picture ?

We start with the U.S. market then look at the global market. The resources involved here are mainly from NSGA (www.naturalgas.org) and EIA (referred by NSGA).

NG is not currently regulated product in the U.S., unlike years ago. So NG is much more open to competition and choice. After NG is collected by producers at the well, wellhead prices are no longer regulated; meaning the price of natural gas is dependent on supply and demand interactions.Interstate pipelines once participate NG ownership. Now interstate pipelines no longer take ownership of the natural gas commodity. Pipelines only provide transportation means, which is still under federal regulation. Local distribution companies (LDCs) offer bundled products (electricity and gas) to end customers. End users may purchase NG directly from producers or LDCs.

Besides the roles of producers, LDC, pipeline transportation, end users, there is another player, NG marketer, in NG food chain. Marketers help to store, move, and trade NG in the market. It is important to note that the actual ownership pathway of the gas may be significantly more complicated, as the marketer or the LDC are not the final users. Either of these two entities may sell directly to the end user, or to other marketers or LDCs. That makes the NG market actually very open and very competitive. Price drops may weed out weaker players in the market so investors need to look for the ones who laugh at the end.


According to the Energy Information Administration's (EIA's), the United States accounted for over 25 percent of total worldwide consumption in 1999. Most of the natural gas that is consumed in the United States is produced domestically, with the balance of dry natural gas being imported mainly from Canada. LNG (liquefied NG) is also imported to serve demand.

The biggest domestic supply is from TX and LA, which comprise of over 50% capacity. NG is currently largely used in electricity generation and industrial usage, which take up to about 60% demand. Even NG vehicle use has been steadily grown in the past years, it is in its infancy. But it is rather very promising, especially when NG price is low. This is from NGSA's statement:

Demand from the transportation sector accounts for 3 percent of total U.S. natural gas demand, and most of this demand is for natural gas to fuel the pipeline transportation of hydrocarbons. Natural gas supplies barely a fraction of the total energy used in the transportation sector, and the demand for natural gas to supply natural gas vehicle operation is almost negligible compared to the energy requirements of traditionally fueled vehicles. The demand for alternative fuel vehicles (including natural gas vehicles) is expected to increase in the foreseeable future primarily due to new legislation and regulation surrounding emissions from the transportation sector. As more stringent emissions standards are adopted, both at the federal and state level, the automotive industry will have no choice but to devote significantly more resources into the development of feasible production line natural gas vehicles; vehicles that are environmentally sound and meet consumer preferences. However, the technology required to do so, including the need for a natural gas refueling infrastructure, are current barriers to the widespread proliferation of natural gas vehicles in the United States.

Although lower NG prices ignite hope of larger demand and thus higher price, there are known cases that we are not taking this advantage at our benefit. An example is that one of the largest NG producing state, Texas, was found using less and less NG. 

A report just out by University of Houston professor Michael J. Economides and consultant Philip E. Lewis, “Texas Natural Gas: Fuel for Growth.” The report indicated that Texas oddly has been using less and less natural gas to make electricity while the rest of the country has been using more and more. The numbers are dramatic. Nationwide, the amount of electricity generated from coal dropped roughly 20 percentage points, from about 80 percent in 1995 to about 60 percent in 2011, while the gas-generated share climbed from about 20 percent to almost 40 percent. In Texas, despite the superabundance of local shalegas, the trend has been almost the opposite. The gas share in electricity production, instead of increasing by 15-20 percentage points since 1995, has dropped a couple of points. And coal’s share, instead of shrinking by 15-20 percentage points, has contracted by only a few points

There is no obvious explanation why this happened. The professor conducted this report suspected that it may have something to do with regulation. The document chain is much longer to open a new gas-fired generating plant than a coal one in TX than other states. TX thus lost tax revenue to other states along this path. Hence, NG regulation regulation is important to price. President Obama has proposed a NG roadmap as part of national energy policy. So we should see improvement in this regard in the coming years.

Now we look at the global NG market.

Because LNG shipment has become safer, an LNG market opened up in the late 1980s and 1990s. More efficient gas-fired power plants were built and became popular. Since 2001, the total volume of LNG shipped has doubled to reach 496 million cubic meters, the energy equivalent of about one and a half billion barrels of oil. Between 2009 and 2010 alone, world trade grew by 22.6 percent.
 The jump in 2010 certainly link to Japan's earthquake and nuclear plant leakage threat.

Qatar is the largest NG exporter, who exports about a quarter of the world’s LNG—all of which travels through the recently troubled Strait of Hormuz. The country harvests its supply from the South Pars/North Dome gas field, the largest in the world, which it co-owns with Iran.
 A strained U.S.-Iran relationship may threaten NG supply.

On the demand side, Japan is responsible for nearly a third of total imports. Gas-fired power has risen so sharply that it recently edged out oil-fired generation in terms of megawatts of electricity produced. Post-Kyoto and post-Fukushima, that trend will surely continue. Again, energy safety may be undermined if Strait of Hormuz is in trouble.

Here are some concluding remarks:
The lower NG prices will further open up this market. Reduced production due to lower price will also help price rebound. All involved parties, producers, LDCs, marketers, are reacting to predicated warmer weather and higher supply. So we think NG prices stay below $2 is not sustainable.

Resources:
www.naturalgas.org
http://naturalgas.org/business/analysis.asp
http://naturalgas.org/business/demand.asp
www.ieee.org

Why are some frugal?

Benjamin Franklin once said, "Industry, perseverance, and frugality make fortune yield". Obviously, he perceived growth as a balance sheet, when income is greater than spending, you make fortune. Frugality is a goal keeper along the path. 

Being frugal may be just a habit, regardless of personal wealth. Famous examples are Warren Buffet and Carols Slim. They have been living in the same houses for a long time. They can certainly afford more expensive houses and life style, but they don't. Another example, Bill Gates receives McDonald's coupons from Buffet and uses them regularly. In fact, in their recent trip to China together, the two reportedly used coupons together. Many of us discard these coupons regularly. By the contrast, some overspend to an extent way beyond their means. These cases may be habitual examples. 

However, when frugality mixes with logical and creative thoughts, things become very thoughtful, even funny for those deal with money all the time.


Every first week after the New Year, academic economists gather some place to hold the American Economic Association's annual meeting. Picking this time, of course, is university holiday. But a more important unspoken cause is, this weekend flights are usually the cheapest. You have to admit these guys have good brains to figure this out.


The author of a 2009 book, "In Cheap We Trust", Lauren Weber, told this story about her economist father. Her father used to keep thermostat so low in winter that her mother threatened they would move to a motel. Her father gave in eventually because he figured out moving to a motel was much more expensive than turning the thermostat higher. 


In a research by University of Washington, it is found that economics majors are less likely to donate money to charity than students in other fields. One of UoW professors who conducted the research, happened to also be an economist, had this comedy one-liner: "You might be an economist if you refuse to sell your children because they might be worth more later." They might have pulled a spread sheet and figured out cash flow, PE, revenue, and profit etc in their mind before the deal or even the children were born.


Economists may more concern about efficiency, monetary efficiency on their time and resources. When efficiency equations make sense to them, they will spend. But efficiency is a good way to explain frugality, consciously or unconsciously that make use of resources on better places. We can learn from them: 

• No matter how much you make, you still need to save
  
• Embrace frugality. Many have done that. You just don't see them doesn't mean famous people don't do that.
• If you're smart, find creative, logic ways to save money
• Turn frugality into one life style
  

Stanford and Silicon Valley, who made who?

There is a long article on the New Yorker, titled "Get Rich U. --- There are no walls between Stanford and Silicon Valley. Should there be?"

http://www.newyorker.com/reporting/2012/04/30/120430fa_fact_auletta#ixzz1tMzN7EIU

The 8-page paper detailed Stanford's history and connections in SV. The complete article link is here. Here are some cut-and-pastes:

About Stanford history:

Leland Stanford was a Republican governor and senator in the late nineteenth century, who made a fortune from the Central Pacific and Southern Pacific railroads, which he had helped to found. Stout and bearded, he could be typecast, like Gould, Morgan, and Vanderbilt, as a robber baron. Without knowing it, this man of the industrial revolution spent part of his legacy establishing a center for what would become the Age of Innovation. After his only child, Leland, Jr., died, of typhoid fever, at fifteen, Stanford and his wife, Jane, bequeathed more than eight thousand acres of farmland, thirty-five miles south of San Francisco, to found a university in their son’s name. They hired Frederick Law Olmsted, who designed Central Park, to create an open campus with no walls, vast gardens and thousands of palm and Coast Live Oak trees, and California mission-inspired sandstone buildings with red-tiled roofs. Today, the campus extends from Palo Alto to Woodside and Portola Valley, spanning two counties, three Zip Codes, and six government jurisdictions.

Stanford University opened its doors in 1891. Jane and Leland Stanford said in their founding grant that the university, rather than becoming an ivory tower, would “qualify its students for personal success, and direct usefulness in life.” From its early days, engineers and scientists attracted government and corporate research funds as well as venture capital for start-ups, first for innovations in radio and broadcast media, then for advances in electronics, microprocessing, medicine, and digital technology. One of the first big tech companies in Silicon Valley—Federal Telegraph, which produced radios—was started by a young Stanford graduate in 1909. The university’s first president, David Starr Jordan, was an angel investor. 

Frederick Terman, an engineer who joined the faculty in 1925, became the dean of the School of Engineering after the Second World War and the provost in 1955. He is often called “the father of Silicon Valley.” In the thirties, he encouraged two of his students, William Hewlett and David Packard, to construct in a garage a new line of audio oscillators that became the first product of the Hewlett-Packard Company.

About the "modern" or industry-tied Stanford:

William F. Miller, a physicist, was the last Stanford faculty member recruited by Terman, and he rose to become the university’s provost. Miller, who is now eighty-six and an emeritus professor at Stanford’s business school, traces the symbiotic relationship between Stanford and Silicon Valley to Stanford’s founding. “This was kind of the Wild West,” he said. “The gold rush was still on. Custer’s Last Stand was only nine years before. California had not been a state very long—roughly, thirty years. People who came here had to be pioneers. Pioneers had two qualities: one, they had to be adventurers, but they were also community builders. So the people who came here to build the university also intended to build the community, and that meant interacting with businesses and helping create businesses.” 

President Hennessy believes that the entrepreneurial spirit is part of the university’s foundation, and he attributes this freedom partly to California’s relative lack of legacy industries or traditions that need to be protected, so “people are willing to try things.” At Stanford more than elsewhere, the university and business forge a borderless community in which making money is considered virtuous and where participants profess a sometimes inflated belief that their work is changing the world for the better. Faculty members commonly invest in start-ups launched by their students or colleagues. There are probably more faculty millionaires at Stanford than at any other university in the world. Hennessy earned six hundred and seventy-one thousand dollars in salary from Stanford last year, but he has made far more as a board member of and shareholder in Google and Cisco.

Stanford stats:

Like other élite schools, Stanford has become increasingly diverse. Caucasian students are now a minority on campus; roughly sixty per cent of undergraduates, and more than half of graduate students, are Asian, black, Hispanic, Native American, or from overseas; seventeen per cent of Stanford’s undergraduates are the first member of their family to attend college. Half of Stanford’s undergraduates receive need-based financial aid: if their annual family income is below a hundred thousand dollars, tuition is free. “They are the locomotive kids, pulling their whole family behind them,” Tobias Wolff, a novelist who has taught at Stanford for nearly two decades, says.

A quarter of all undergraduates and more than fifty per cent of graduate students are engineering majors. At Harvard, the figures are four and ten per cent; at Yale, they’re five and eight per cent. Some ask whether Stanford has struck the right balance between commerce and learning, between the acquisition of skills to make it and intellectual discovery for its own sake.

Stanford's politics tidbit:

In February, 2011, a dozen members of the Bay Area business community had dinner with President Obama at the home of the venture capitalist John Doerr. Steve Jobs, who was in the late stages of the illness that killed him, eight months later, sat at a large rectangular table beside Obama; Mark Zuckerberg, of Facebook, sat on the other side. They were flanked by Silicon Valley corporate chiefs, from Google, Cisco, Oracle, Genentech, Twitter, Netflix, and Yahoo. The only non-business leader invited was Hennessy. His attendance was not a surprise. “John Hennessy is the godfather of Silicon Valley,” Marc Andreessen, a venture capitalist, who as an engineering student co-invented the first Internet browser, says.

The title question, answered from both sides:

Gerhard Casper, who is a senior fellow at Stanford, is full of praise for Hennessy, and the two men clearly like each other. Nonetheless, it wasn’t hard to find a few daggers in a speech that Casper gave in May, 2010, in Jerusalem. The United States has “two types of college education that are in conflict with each other,” he said. One is “the classic liberal-arts model—four years of relative tranquility in which students are free to roam through disciplines, great thoughts, and great works with endless options and not much of a rationale.” The second is more utilitarian: “A college degree is expected to lead to a job, or at least to admission to a graduate or professional school.” The best colleges divide the first two years into introductory courses and the last two into the study of a major, all the while trying to expose students to “a broad range of disciplines and modes of thought.” Students, he declared, are not broadly educated, not sufficiently challenged to “search to know.” Instead, universities ask them to serve “the public, to work directly on solutions in a multidisciplinary way.” The danger, he went on, is “that academic researchers will not only embrace particular solutions but will fight for them in the political arena.” A university should keep to “its most fundamental purpose,” which is “the disinterested pursuit of truth.” Casper said that he worried that universities would be diverted from basic research by the lure of new development monies from “the marketplace,” and that they would shift to “ever greater emphasis on direct usefulness,” which might mean “even less funding of and attention to the arts and humanities.”

John Hennessy is familiar with Casper’s Jerusalem speech. “It applies to everyone—us, too,” he says. Getting into college is very competitive, tuition is very expensive, and, with economic uncertainty, students become preoccupied with majoring in subjects that may lead to jobs. “That’s why so many students are majoring in business,” Hennessy says, and why so few are humanities majors. He shares the concern that too many students are too preoccupied with getting rich. “It’s true broadly, not just here,” he says.

“At most great universities, humanities feel like stepchildren,” Casper told me. Two members of the humanities faculty—David Kennedy and Tobias Wolff, a three-time winner of the O. Henry Award for his short stories—extoll Stanford’s English and history departments but worry that the university has acquired a reputation as a place for people more interested in careers or targeted education than in a lofty “search for truth.”

Stanford and NYC:

One demand that particularly infuriated Stanford was a fine of twenty million dollars if the City Council, not Stanford, delayed approval of the project. These demands came from city lawyers, not from the Mayor or from a deputy mayor, Robert Steel, who did not participate in the final round of negotiations with Stanford officials. However, city negotiators were undoubtedly aware that Mayor Bloomberg, in a speech at M.I.T., in November, had said of two of the applicants, “Stanford is desperate to do it. Cornell is desperate to do it. . . . We can go back and try to renegotiate with each” university. Out of the blue, Hennessy says, the city introduced the new demands. 

 To Hennessy, these demands illustrated a shocking difference between the cultures of Silicon Valley and of the city. “I’ve cut billion-dollar deals in the Valley with a handshake,” Hennessy says. “It was a very different approach”—and, he says, the city was acting “not exactly like a partner.”
Yet the decision seemed hasty. Why would Hennessy, who had made such an effort to persuade the university community to embrace StanfordNYC, not pause to call a business-friendly mayor to try to get the city to roll back what he saw as its new demands? Hennessy says that his sense of trust was fundamentally shaken. City officials say they were surprised by the sudden pullout, especially since Hennessy had an agreeable conversation with Deputy Mayor Steel earlier that same week.

Steel insists that “the goalposts were fixed.” All the stipulations that Stanford now complains about, he says, were part of the city’s original package. Actually, they weren’t. In the city’s proposal request, the due dates and penalties were left blank. Seth Pinsky, the president of the New York City Economic Development Corporation, who was one of the city’s lead negotiators, says that these were to be filled in by each bidder and then discussed in negotiations. “The more aggressive they were on the schedule and the more aggressive they were on the amount, the more favorably” the city looked at the bid, Pinsky told me. In the negotiations, he said, he tried to get each bidder to boost its offer by alerting it of more favorable competing bids. At one point, Stanford asked about an ambiguous clause in the city’s proposal request: would the university have to indemnify the city if it were sued for, say, polluted water on Roosevelt Island? The city responded that the university would. According to Pinsky, city lawyers said that this was “not likely to produce significant problems,” and that other bidders did not object. To Pinsky and the city, these demands—and the twenty-million-dollar penalty if the City Council’s approval was delayed—were “not uncommon,” since developers often “take liability for public approvals.” To Stanford, the stipulations made it seem as if the goal posts were not fixed.
Three days after Stanford withdrew, the city awarded the contract to Cornell University and its junior partner, the Technion-Israel Institute of Technology, the oldest university in Israel. Not a few Hennessy and Stanford partisans were pleased. “I am very relieved,” Gerhard Casper said.
 

Another person who is pleased with the withdrawal is Marc Andreessen, whose wife teaches philanthropy at Stanford and whose father-in-law, John Arrillaga, is one of the university’s foremost donors. Instead of erecting buildings, Andreessen says, Stanford should invest even more of its resources in distance learning: “We’re on the cusp of an opportunity to deliver a state-of-the-art, Stanford-calibre education to every single kid around the world. And the idea that we were going to build a physical campus to reach a tiny fraction of those kids was, to me, tragically undershooting our potential.”

Business dining rule

Business dining can mean general business dining. Business partners, customer working lunches, even interviews all can be such events. So the rules summarized here are very general.

• Before picking a restaurant, make clear if there are food and location preferences
• Because dining focus is not the food but conversation, make sure the restaurant is not too loud or tables placed far apart, even better, private rooms
• If large dining group, the host needs to select round table or long table. The host or hostess should ask the guest of honor or business partner to sit on his or her right side.
• Avoid complicated to eat or request half-size dishes
• Don't let waiter take the plate away if you finish entree early.
  
• If the other dinners aren't ordering tea or dessert, the host will skip too.
• Order inexpensive or midrange wine because otherwise attention will be on the wine, not the business topics
• Don't let phone on the table or let it ring.
• Chitchat topics can be anything unless they get heated. This prevents getting into business right away.
• Time to discuss serious business matters before dessert.
• End the meal with a causal note.
  

A bubble in bad economic time

On April 1, 2012, the 60 Minutes show presented a story, "Even in tough times, contemporary art sells". Here is the open words from Morley Safer,

Even if contemporary art seems alien or odd to you, consider this: the market for this art has outperformed the Standard & Poor's list of 500 common stocks since 2003. Morley Safer is back on the art beat, attending the most important contemporary art fair in the world: Art Basel Miami Beach. It's a matter of taste whether the paintings, sculpture, and what-nots are good art, but as a good investment, art is indisputably hotter than ever. In fact, elite art buyers - many from Russia and China -- are so ravenous that the contemporary art market raked in over $5 billion in auction sales last year.

The $5 billion mark was actually the tip of the iceberg. It was only from the auction records, not included art show transactions. It is estimated to be another a few billion dollars. In these art shows, price tags such as $750,000 aren't rare. Some arts are "difficult". How they are sold in such time is a amazing. The follow dialog tells how the shows target not even the 1% but 0.001%:

Tim Blum: The real fundamental thing is we're here to sell a lot of art.

Tim Blum, a partner in Blum & Poe, a Los Angles gallery renowned for discovering the sharpest of cutting edge art.

Morley Safer: Some of the art that you sell could probably be described as difficult?

Tim Blum: Oh, absolutely. 100 percent. I mean, we kinda specialize in that.

Morley Safer: You have to explain to a potential buyer--

Tim Blum: Yes.

Morley Safer: --why he or she might learn to love this?

Tim Blum: Yeah, often you do. A lot of folks are just buying. It's more like, "We need one of these things because everybody's getting one."

Morley Safer: Status.

Tim Blum: It's a status symbol. It's a speculative op-- mechanism.

Morley Safer: Do you sometimes have to grit your teeth? Even when you're making a sale?

Tim Blum: Yeah. We're very good at that. We're from Hollywood. We're in the acting game. Yeah. It's theater. This is all theater.

And Blum knows all the A-list collectors.

Superriches always look for alternative investments, gold, real estate, art. But let's remember what Graham said in The Intelligent Investor:

Quite a few categories of valuable objects have had advances in market value over years --- such as diamonds, paintings by masters, first editions of books, rare stamps and coins, etc. But in many, perhaps most, of these cases there seems to be an element of the artificial or the precarious or even the unreal about the quoted prices. Somehow it is hard to think of paying $67,500 for a U.S. silver dollar dated 1804 (but not even minted that year) as an "investment operation." We acknowledge we are out of our depth in this area. Very few of our readers will find the swimming safe and easy there.

Graham maybe aghast on this news. Again, this is the game for very few of us.

A weak market

JP Morgan and Wells both presented strong, relative to Wall Street expectations, performance yesterday. However, the Street didn't appreciate it at all. The market dropped by more than one percent.

Often, when the markets act astray to expectations, it is time to consider it will turn around the trend. Given the current situation, it is indeed a logical reaction. Look back from October 2011, the market has been up almost non-stop up 30%. The uptrend was largely motivated by Fed's loosened monetary policy promise and fund rebalanced to equity market. Capital influx was impressive. More than once we heard fund managers and investors said they had to buy stocks because other investments couldn't make up expected returns. They were emboldened to take risk.

Some five months after that, we can review what companies and overall economy have been achieved. House builders have less construction. Housing market sees a bottom but may have another tide of foreclosure. Alcoa had a profit but will continue to cut capacity. China slows down their pace. After a quiet period of Europe debt problem, attention turns to Spain again, even though it seems it is orchestrating with bearish view in the market. The two banks mentioned above did well in terms of revenue and profit but at the expense of reducing reserved capital. Here is a read from Wells' report from the New York Times:

For Wells Fargo, which recently supplanted Bank of America as the nation’s leading mortgage lender, home loans were also a source of strong growth, as was lending to corporations. Revenue at Wells Fargo rose 6 percent, to $21.64 billion, the highest level in more than two years. Until now, the bank’s revenue had steadily declined for several quarters. In the first quarter of last year, for instance, the bank’s revenue dipped 5 percent.

All indicates that the market is weak and deems for a correction. However, long term speaking, the U.S. market is still bright.