Bull/Bear Summary July 2016

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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

< Bull/Bear Summary June 2016

Bull/Bear Summary July 2016

July 5th, 2016 at 3:32 pm

BEAR DRIVERS. FACTORS DRIVING PRICES LOWER.
 Natural gas storage level
 Solar generation
 Energy storage
 Hydraulic fracturing regulations
 Bearish economic indicators
 EIA gas drilling productivity report

BULL DRIVERS. FACTORS DRIVING PRICES HIGHER.
 Long term weather
 Power plant retirements
 Power generation
 Natural gas rig count
 Bullish economic indicators
 LNG exports

MARKET OBSERVATIONS
– Hedging: Understand your risk level and hedge accordingly.
o NYMEX natural gas Aug-Dec 2016 trend indicates that $2.80 - $3.10 is the current “hedge something” range
o Indiana Hub electric wholesale August-Dec 2016 trend indicates that $28.80 - $30.80 is the current “hedge something” range

BEAR DRIVERS
Factors driving prices lower
 Natural gas storage level
o Current storage level at 3,140 Bcf
o Y/Y surplus of 582 Bcf; surplus to 5-yr. avg. of 637 Bcf
o Oct. 31, 2016 estimate of 4,100
 Solar generation
o The June ERCOT Generator Interconnect Status report shows 2,077 MW of solar generation will be installed by 2017, a 915 MW increase Y/Y and 150 MW increase from May's report.
 Energy storage
o The White House announced 33 state and private sector commitments expected to result in 1.3 GW of new energy storage over the next 5 years as part of an energy summit.
 Hydraulic fracturing regulations
o A federal judge in Wyoming overturned the Bureau of Land Management's authority to regulate hydraulic fracturing on public lands.
 Bearish economic indicators
o May Industrial Capacity Utilization 74.9%, down 0.4% M/M
o June Michigan Consumer Sentiment 93.5, down 1.3% M/M
o Baltic Dry Index at 677 on July 1, a 15.4% decrease Y/Y
 EIA gas drilling productivity report
o May shale gas drilling actual at 46.7 Bcf/d; 3.5% increase Y/Y and 0.9% decrease M/M
o June shale gas drilling forecasted at 46.2 Bcf/d; 1.3% increase Y/Y and 1.0% decrease M/M

BULL DRIVERS
Factors driving prices higher
 Long term weather
o The forecast for July and August is above normal temperatures across most of the U.S.
 Power plant retirements
o PG&E announced it plans to retire its 2,160 MW Diablo Canyon California nuclear plant by 2025 and replace it with more energy efficient resources.
 Power generation
o A proposed 1,105 MW natural gas fired generator planned for Wellsville, Ohio received two favorable utility board reports. The plant is expected to add 125 MMcf/d of natural gas demand.
 Natural gas rig count
o U.S. natural gas rig count at 89 on July1, a 59.4% decrease Y/Y and 3.5% increase from June 17.
 Bullish economic indicators
o GDP Projection: 2015 = 2.4%; 2016 = 1.8%; 2017 = 2.0%
o May retail sales up 2.5% Y/Y
o June ISM Manufacturing Index 53.2, a 1.9% increase M/M
 LNG exports
o LNG exports to Mexico are up 275% in the last 3 months as demand for natural gas power generation increases in that country.

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