Bull/Bear Summary December 2015

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BEAR DRIVERS – Factors driving prices lower

· EIA gas drilling productivity report

January shale/tight gas drilling production reported at 44.8 Bcf/d; 17.9% increase Y/Y and 1.3% increase M/M
Feb shale gas drilling forcasted at 45.4 Bcf/d; 18.0% increase Y/Y and 1.3% increase M/M

· Natural gas speculation- Funds' position

o Position for Non-Commercial futures & swaps was short 81,835 contracts on Feb 10, an increase of 25.4% from Jan. 27. This is the largest short position since Mar. 2012

· Energy storage

o Advanced Rail Energy Storage is a new technology to provide grid-scale energy storage by replicating pumped-storage hydro with rail cars going up and down a hill.

· ERCOT transmission development

o ERCOT announced $950 million in transmission improvements for the west load zone's growing Permian Basin load by 2020.

o West zone's peak load has increased over 40% since 2010.

· LNG export capital

o Lower oil and natural gas prices are putting completion of LNG export projects at risk, reducing future demand of natural gas by up to 5 Bcf/d.

Bearish economic indicators

oBaltic Dry Index: 530 on February 13, 2015, the lowest level since 1986.

BULL DRIVERS – Factors driving prices higher

· Short term weather

o the 1-15 day is forcasting below normal temps for the eastern half of the U.S.

· Nuclear Energy decline

oFitch Ratings is forcasting 8,000 MW of nuclear generation to retire before the expiration of their operating licenses.

Coal stockpile inventory

oNov. U.S. electric power sector coal stocks estimated at 41,742 thousand short tons, a 9.0% decrease Y/Y. U.S. coal production for Jan. is estimated at 85.8 million short tons, up 3.4% Y/Y.

MISO offer price cap waiver

o FERC approved MISO's request to temporarily waive their $1,000/MWh offer price cap this winter to allow generators to recover verifiable costs due to extreme fuel costs.

Bullish economic indicators

o U.S. freight carloads up 4.7% Y/Y for week ended Feb. 7

o Dow Jones Index at 18,019.35 on Feb. 13, up 12.4% Y/Y

o GDP Projection: 2014=2.4%; 2015= 3.2%; 2016= 2.5%

o Jan unemployment rate increased 0.1% to 5.7%

o Jan total nonfarm payrolls increased by 257,000

o Jan Manufacturing ISM reported PMI at 53.5%

· Natural gas storage level

o Current storage level at 2,268 Bcf

o Y/Y surplus of 542 Bcf; deficit to 5-yr. avg. of 11 Bcf

o March 31, 2015 estimate of 1,600 Bcf

MARKET OBSERVATIONS

Hedging: Understand your risk tolerance and hedge accordingly
- NYMEX natural gas Mar-Dec 2015 trend indicates that $2.75 - $3.05 is the current “hedge something” range
- Indiana Hub electric wholesale Feb-Dec 2015 trend indicates that $32.00 – $34.50 is the current “hedge something” range

< Bulls and Bears Report- November 2015

Bull/Bear Summary January 2016 >

Bull/Bear Summary December 2015

December 23rd, 2015 at 12:42 pm

BEAR DRIVERS. FACTORS DRIVING PRICES LOWER.

 Natural gas storage level

 Short term weather

 Energy subsidies



Natural gas speculation – Funds' position

 EIA gas drilling productivity report

 Bearish economic indicators

BULL DRIVERS. FACTORS DRIVING PRICES HIGHER.

 LNG exports

 PJM offer price cap

 Domestic energy policy

 Mercury and Air Toxics Standards

 EPA Clean Power Plan

 Bullish economic indicators

MARKET OBSERVATIONS

Hedging: Understand your risk level and hedge accordingly.

NYMEX natural gas Jan-Dec 2016 trend indicates that $2.13 - $2.43 is the current "hedge something" range

Indiana Hub electric wholesale Jan-Dec 2016 trend indicates that $28.00 - $30.00 is the current "hedge something" range

BEAR DRIVERS

Factors driving prices lower

Natural gas storage level

Current storage level at 3,846 Bcf

Y/Y surplus of 541 Bcf; surplus to 5-yr. avg. of 322 Bcf

March 31, 2016 storage estimate of 2,050 Bcf

Short term weather

The 1-5 day forecast is much above normal for the eastern half of the U.S.

The 6-15 day forecast is above normal for the eastern half of the U.S.

Energy subsidies

Congress passed a bill to extend federal tax credits for wind and solar generation for five years.

GTM Research estimates the credit extension will produce $40 billion in solar production investments.

Natural gas speculation – Funds' position

Positions for Non-Commercial futures & swaps were short 82,880 contracts on Dec. 15, an 11.5% decrease from Dec. 1.

EIA gas drilling productivity report

Nov. shale gas drilling actual at 44.7 Bcf/d; 4.3% increase Y/Y and 0.6% decrease M/M.

Dec. shale gas drilling forecasted at 44.3 Bcf/d; 1.7% increase Y/Y and 0.9% decrease M/M.

Bearish economic indicators

U.S. freight carloads down 13.2% Y/Y for week ending Dec. 12 and down 5.4% for year to date Y/Y

Baltic Dry Index: 477 on Dec. 18, down 39.5% Y/Y

Nov. ISM Manufacturing index 48.6%, a 1.5% decrease

BULL DRIVERS

Factors driving prices higher

LNG exports

Lake Charles LNG export project received FERC approval. The project is authorized to export 2 Bcf/d of natural gas to non-free trade agreement nations.

Final investment decision is expected in 2016, with LNG exports beginning in 2020.

PJM offer price cap

FERC approved PJM's proposal to double its energy-market offer cap to $2,000/MWh from $1,000/MWh.

Domestic energy policy

On Dec. 18, the U.S. ended their 40-year ban on U.S. oil exports.

Mercury and Air Toxics Standards

The federal appeals court ruled the EPA rule can remain in place while the EPA revises the standards to consider the cost of implementation.

EPA Clean Power Plan

MISO expects the cost to compliance to range from $5.8 billion to $104 billion with 7 GW to 28 GW of coal generation retirements.

MISO's final cost estimate is expected Feb. 2016.



Bullish economic indicators