UNG has real chance to sink below $5 by the end of year.

From Yahoo board


As for the contango that UNG gets to dance with starting tomorrow, the OCT/NOV settled Friday at -$1.051, or 35.5% of the actual cost to consume OCT on Friday. It’s only 10 cents out from its all-time wides from two weeks ago. I do not necessarily think that we will breech those wides during the roll this coming week, but, as Chevy Chase would say, “do you really think it matters, Eddie?”

I do not expect the OCT/NOV to be the worst roll for UNG, but rather next month’s NOV/DEC, which settled at -$0.758 on Friday, also about 10 cents in from its all-time wide. With NOV getting rolled in mid-Oct, when we will in all likelihood be inventing places to put and things to do with gas in the producing region, and the fact that the average storage use (withdrawal) in December is 506 Bcf over the past 5 years, versus the 56 Bcf over the past 5 years in November (yes, 9X more gas is withdrawn from storage in Dec than Nov), the potential for the NOV contract to crater into a historic cash pricing situation in mid-October and for DEC to remain more tethered to the rest of the curve is very high.

This is why I expect the NOV/DEC roll to be worse than the already eye-popping OCT/NOV roll – horrible cash conditions in mid-October and the fact that December has a 9X greater average monthly draw of gas than November.

I do not think it is outside of the realm of serious discussion to question the ability for UNG to make it out of these next two rolls looking anything like it does today. I suspect this is one reason the 8K on Friday was so cryptic with regards to who new baskets will be available to – Hyland et al know what they are facing, and to sell new units of this to anything but sophisticated players at this time, given what they are facing over the next 30-50 days, is to be inviting potential lawsuits like a matador invites the bull con cape de rojo. (I will also marvel at any sophisticated investor who will actually demand new baskets at this time. But as I often say, wonders never cease.)

As for the balance of the curve, the contango situation is astounding. The next 16 months are all pricing under the one preceding it (yes, through Feb 2011). I believe this is most remarkably shown in the MAR 10/APR 10 spread, which has now been in contango for the entire month of September, the earliest this spread has ever reached contango….by months. Let’s put this into perspective:

The average storage change over the past 5 years for the month of March is a withdrawal of 199 Bcf of gas. In April, the average change over the past 5 years has been an INJECTION of 195 Bcf. A month that will register an injection is pricing at a premium to a month that will register a withdrawal, literally half a year before gas will flow for that month.

Nothing on the forward curve illustrates the limited potential for sustained upside for gas over the next 4-7 months than that right there. And this is what makes comments by the likes of yahoos like “Mad Hedge Fund Trader” on SA so dangerous.

Contango is not showing signs of receding, and with already 3.4 Tcf in the ground, it won’t for sometime, baring a reduction in production of 10 Bcf a day starting now, which carries a probability characteristic of pigs flying.