Danny a Dud; New England in For a Soaker

Tropical Storm Danny continues to struggle in the face of strong shear. The storm’s center has been devoid of heavy thunderstorms since its inception, and it is unlikely that the storm will have time to organize before it gets swept northward. Wind speeds are set at 40 mph and these are likely found only to the east of the center.  Tropical cyclones are decidedly un-sexy when they are naked, like Danny is right now, since a blanket of convection over the center of a storm is what allows it to maintain a core area of low pressure, and strengthen. Without a center of low pressure, a pressure gradient cannot develop, and there is no wind-field. The very asymmetric storm is shown in Figure 1 below.

Figure 1: Tropical Storm  Danny. Ugly.

While the system is moving very little right now, it is expected to get swept up by an approaching cold front and accelerate northward. Danny will pass over, or just east of North Carolina, where tropical storm watches have been issued. Because all of the heavy convection is located well east of the center, it is unlikely the state will experience tropical storm conditions, or even very much tropical moisture.

Danny will continue northward, passing over, or just east of, Massachusetts as it transitions to an extratropical storm. Tropical Storm watches have been issued for Cape Cod and the Islands, but once again, I expect few reports of sustained tropical storm force winds. Danny’s forecast path is shown below in Figure 2.

Figure 2: Projected Path of Danny

However, the combination of Danny’s moisture and an approaching area of Low Pressure will dump prodigous rains over all of New England. The interaction of Danny and the Low will energize a large swath of moisture. Massachusetts, Rhode Island, and southern New Hampshire can expect upwards of 4-5 inches of rain. Areas further west, including New York City, Connecticut, and Long Island will see 2-3 inches, with Philadelphia and Washington seeing 1-2 inches. A map of projected precipitation totals is shown in Figure 3 below.

Figure 3: Projected 60 hour rainfall totals for the Northeast

While such totals may cause some urban flooding and the overflowing of small streams and rivers, they will not be record-setting by any means. However, it will pretty much wipe out a second consecutive beach weekend, one week after Bill.

Elsewhere in the tropics, a wave located at low latitudes (10N) between the Lesser Antilles and Africa shows signs of development and has been designated Invest 94l by the NHC, which gives the system a “medium”, or 30-50% of developing over the next 48 hours. The system is cruising westward at 23 mph, and is currently being impacted by dry air to its north. Most of the computer models develop this system and strengthen it to a strong tropical storm or hurricane by the the beginning of next week. By the middle of the week, it may be a threat to the northern Lesser Antilles. I give 94l a 50% of becoming TS Erika by Monday.

I bought some Western Refining (WNR) at $6.34, as it seems to be the hip thing to do around here. I like the double bottom at ~$6.00, and the improving crack spreads. I also have a larger Valero (VLO) position that I’ve held for about a month from $17.25.

The spreads on Natural Gas are insane right now. The front month contract (Oct ’09) is trading at 7 year lows at $3.00, the Nov ’09 at $4.00, and the Dec ’09 at $5.00. Some has to give; it is inevitable that such a contango will break down. Rig counts have risen for 4 consecutive weeks to 699, indicating that the industry believes in recovering prices. Additionally, this week’s injection of +54 BCF was below the average of +67 BCF, the first time we’ve seen a below-average injection in over a month. However, before you go out and buy UNG to take advantage, realize you are buying an ETF that is 16% overvalued!

Note I: DPeezy is hosting an iBC fantasy football league, with the draft coming up next Monday at 7pm. Seeing as fantasy football is the greatest thing since sliced bread, everybody should join up.

Note II: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note III: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

DPeezy on a roll. Somebody step up and stop him…

1. DPeezy-12

1. Wabisabi-10

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

6. BuffaloUdders-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

Comments »

Tropical storm Danny continues to struggle with dry air. The center is isolated from deep convection and appears to be weakening. The intensity is set at 50 mph, but I feel this is pretty generous. Danny has been drifting westward, but appears to have turned to the north over the past few hours. A recent satellite image is shown below.

The next 12-24 hours will be very important for Danny’s survival.

While it is possible that convection could re-develop under its exposed center, a more likely scenario is the center jumping eastward under the deeper convection. This would necessitate an eastward shift in the track guidance, which, as of now, is very similiar to yesterday, taking Danny into Mass and then Nova Scotia. I have concerns about Danny’s odds of survival and I give him a 30% chance of dissipating in the next 24 hours. That being said, the models are still quite aggressive with several intensifying Danny to a 75 mph hurricane. I give this a 25% of occuring.

Tropical storm watches have been issued for the Outer Banks of North Carolina, although I doubt they will see such conditions. Looking at the storm right now, I honestly don’t see it being that great of a threat to the US. I will have a full update should something change overnight…

Previous Post

Hurricane Bill was merely Mother Nature’s first shell in the epic war that is Hurricane Season 2009. Having adjusted her aim, the second shell has been primed, loaded, and the fuse lit, and its name is Danny. This one won’t be a threat to the oil infrastructure of the Gulf. Rather, it will be another threat to the east coast, just one week after Bill.

Danny was born from the area of disturbed weather north of Puerto Rico I mentioned in my last post. Right now, it is an unimpressive and extremely asymmetric 45 mph tropical  storm, with nearly all of the convection located to the east of the center. A visible satellite image is shown below in Figure 1.

Figure 1: Latest Visible image of Danny show convection displaced to the east of the center.

Actually, Danny appears more subtropical than tropical right now, and I am a little surprised that the National Hurricane Center didn’t classify it as such. This asymmetry is due to an interaction between Danny and an upper level low to its southwest that is dragging dry air over the center preventing convection from wrapping around. This entanglement is shown below in Figure 1.

Figure 2: Latest Water Vapor Image of the western Atlantic showing the interaction between Danny and an upper level low.

Until the interaction ceases, it will be difficult for Danny to become a symmetric storm, and intensify. It is unlikely Danny will see much intensification over the next 24 hours at all and will be lucky to just hold its own. However, indications are that this upper level low will weaken and drift south away from Danny over the next 24 hours. Additionally, inhibitory wind shear is very low (5-10 knots) and Danny will be moving over the progressively warmer waters of the Gulf Stream. Thus, the model consensus strengthens Danny to a minimal category 1 hurricane with maximum sustained winds of 75 mph in 48 hours when it is centered somewhere near, or east of North Carolina. A few models strengthen it into a Category 2 storm.

However, Danny only have a short window to intensify, as it will begin interacting with a trough in about 60 hours (much as Bill did) which will impart 20 knots of westerly shear over the system, rapidly weakening it back to tropical storm strength.

The track forecast is more problematic. Here is the broad picture. Danny will move generally WNW to NW around an extension of the Bermuda High over the next 24-36 hours, bringing some thunderstorms and gusty winds to the northern Bahamas. Beyond this time, a developing trough over the great lakes will induce a southerly flow ahead of it that should cause Danny to bend rather abruptly northward tomorrow evening. The exact timing of this turn remains to be seen, and will have great implications towards US impacts. Because the storm will be paralleling the coastline at this time, even a slight shift in the track left or right will result in many more areas being affected, or not affected.

In the end, it basically comes down to a game of which computer model do you trust, as they all initialize the storm using a different set of variables and conditions. The NAM and the CMC models are most westerly and take Danny into the outer banks of North Carolina and then northward, affecting the entire eastern Seaboard. The GFS and HWRF are the most easterly and keep Danny offshore the US before a landfall in Nova Scotia. The other models are in between. Figure 3 below shows some of the model tracks.

Figure 3: Computer model tracks

The official NWS forecast splits the model  difference with a slight westerly bias and takes Danny offshore the Carolinas and Mid-Atlantic before making landfall as a minimal category 1 hurricane in eastern Massachusetts. This is shown in Figure 3 below. Such a forecast seems reasonable to me, although I have doubts if Danny will have enough time to become a hurricane, given how disorganized it is right now. It should also be noted that should Danny remain symmetric as it is now, areas on the west and south side of the storm will likely see minimal impacts, while areas north and east of the storm will see stronger impacts.

Figure 4: Official Track of Danny

Generally, the track has trended westward in the 36 hours since the low that became Danny developed. While anywhere from the Carolinas northward needs to keep an eye on the storm, I feel that areas from Long Island northward are under the greatest threat right now, although the outer banks are not out of the woods yet. I expect tropical storm or hurricane watches to go up for North Carolina tomorrow, with these watches being expanded northward as Danny continues to evolve. I give Danny an 80% chance of making landfall somewhere, and a 60% chance of that landfall being in the US.

With regards to hurricane plays, Danny has a less than 5% chance of affecting the Gulf of Mexico energy infrastructure. While there are some refineries in Canada that may be affected, Danny will not be a Deacon of Death. However, I doubt a hurricane heading in the general direction of NYC is a particularly good thing for the market…

Elsewhere in the tropics, a series of strong waves are emerging off of the African coastline. It is likely that at least one of these will develop over the next 3-5 days.

Note I: DPeezy is hosting an iBC fantasy football league, with the draft coming up next Monday at 7pm. Seeing as fantasy football is the greatest thing since sliced bread, everybody should join up.

Note II: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note III: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

DPeezy on a roll. Somebody step up and stop him…

1. DPeezy-12

1. Wabisabi-10

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

Comments »

Update: The disturbance that I mentioned north of Puerto Rico has become more organized in the last 36 hours. Hurricane hunter aircraft flying in the disturbance could not find a closed low-level circulation (the defining characteristic of a tropical cyclone), but found 60 mph winds. Thus, as soon as this system works its way to the surface, it will immediately become Tropical Storm Danny (skipping the Tropical Depression stage). I fully expect this to happen, perhaps as early as tomorrow, at which time I will have a full post. I give the system a 75% of becoming Danny in the next 48 hours.

This system will be…interesting. Unlike Bill, which was was steered by a very defined flow, the track for proto-Danny is very up in the air right now. However, there is a threat to the East Coast–anywhere from the Outer Banks of North Carolina northward to Maine. A satellite image of the disturbance is shown below.

Previous Post

This week’s weather in a word: pleasant. After sweltering temperatures and three tropical systems over the past two weeks, the upcoming week will provide a respite from active weather heading into the final weeks of summer and the peak of hurricane season.

Temperatures

Most of the country will see a considerable cool-down week due to an unseasonably strong dip in the jetstream that is pulling cool air down from southern Canada to near the Gulf Coast.  Areas of the deep south will see high temperatures only in the low 80s and lows falling into the mid-50s for the first part of the week. Not only will temperatures be cooler, but a northwest flow will keep the humidity down, making it feel even more comfortable. In fact, this airmass is more typical of late September than it is of mid-August. A map of projected cooling degree days is shown below in Figure 1.

Figure 1: Total Cooling Degree Days for the upcoming week

These CDDs represent a significant decline in cooling demand  for most of the nation compared to last week. Everywhere east of the Mississippi will see declines in demand, with the greatest cool down coming in the northeast and Ohio Valley where cooling degree days will fall by over 40. The only area seeing increased cooling demand will be in the rather sparsely populated upper Midwest and eastern Great Plains. A map of week-over-week changes in CCDs is shown below in Figure 2.

Figure 2: Projected change in CDDs this week compared to last week

Based on this data, the upcoming week is projected to accumulate 5533 population-weighted cooling degree days, or 23.8% fewer than last week. This projection would make it the coolest week this summer, out of nine weeks, and the coolest dating back to the week of June 12. I project a  natural gas injection of +77 BCF for the EIA supply report to be released September 3^rd based on this week’s forecast.  This is above the normal of 67 BCF, but below last year’s injection of 90 BCF.

Frankly, this is the last thing the beaten up natural gas sector needs right now, with front month prices below $2.80, a seven year low. I don’t feel prices can get much lower, but numbers are just fuel for the fire.

Below is a chart comparing the forecasts of my simple, temperature-based model to the actual reported injections for the summer thus far. All forecasts are made 10 days in advance.

Figure 3: Comparison of my injection  projections, made 10 days in advance, with the actual reported injection

The model has done a good job in its projections, with an average error of 10.2%, which I consider to be quite good considering the range of the forecast.

I am projecting an injection of +60 BCF for this week’s storage report, which takes into account last week’s temperatures. This would be below the 5-year average 0f 64 BCF and way below last year’s injection of 102 BCF.

The Tropics

Bill: An epilogue

Hurricane Bill grazed the shoreline of Nova Scotia this afternoon as an 85 mph category 1 storm after passing roughly 200 miles east of Cape Cod last night. The highest wind gust in New England was 46 mph on Nantucket, over tropical storm force. Several areas of the Massachusetts south shore picked up over 3″ of rain due to Bill’s outer rainbands. Areas of Nova Scotia have experienced heavy rain totaling over 5″, tropical storm force conditions, and heavy surf approaching 30 feet. A radar image out of Halifax is shown below, just as Bill was passing by and dousing the region with his rainbands. The center can be seen just offshore.

Figure 4: Halifax radar showing Bill just offshore

Bill will zip northeastwards, making a final landfall in Newfoundland this evening, before transitioning to an extratropical cyclone over the North Atlantic tomorrow.

The Tropics This Week

Elsewhere in the tropics, most of this week should be quiet, as there are no imminent areas of development to discuss. However, as the title to the post suggests, this will be the deep breath before we head into the brunt of the season. It appears that by this time next weekend, things will once again become much more active. A map of threat areas for the upcoming week is shown below in Figure 5 and discussed below.

Figure 5: Map of the Atlantic showing areas of possible development for the upcoming week

There is considerable computer model support that the cold front that passed through the East yesterday will stall out near the Bahamas, and could act as a breeding ground for tropical cyclones. It appears that conditions will be favorable for a tropical low to develop near the Bahamas and track northwestward by Friday of this week. Should it develop this would be “Danny”. Several models also project development of one, or possible two, African waves by next weekend or the beginning of the following week. Finally, the western Caribbean is forecast to become more active and this could be a seeding ground for a cyclone as well. The map below shows the potential areas of development for the upcoming week. None of these will be an imminent threat to the Gulf of Mexico, but they will all need to be watched. Overall, I give the Eastern Atlantic a 40% chance of producing a storm by this time next week, the Bahamian region a 30% chance of producing a storm, and the western Caribbean a 15% of producing a storm. Overall, I give a 60% chance that we will have Danny (at least) by this time next week.

In conclusion, while this week should be quiet, it is just a brieg respite. Good luck trading this week.

Note I: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note II: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

DPeezy takes the lead. Wabisabi, where art thou?

1. DPeezy-11

1. Wabisabi-10

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

Comments »

I find it rather ironic that Bill Clinton is currently vacationing in Bermuda with Hillary at the same time Hurricane Bill is taking potshots at the island. I’m actually rather impressed that he is sticking it out. Additionally, the Obamas will be vacationing in Martha’s Vineyard this weekend, where Bill’s effects will also be felt. I’m guessing Bill is a Republican storm. This is only fair, since around this time last year Mother Nature sent Hurricane Gustav, a democrat storm, to wreck the Republican National Convention…

Data from a recent hurricane hunter aircraft mission indicates that Bill has weakened to a 110 mph category 2 storm this afternoon. Flunctuations in intensity are likely over the next 18 hours and I would not surprised to see Bill regain Category 3 status for a time. Regardless, Bill remains a very large, dangerous hurricane capable of generating enormous waves well away from its center. Hurricane-force winds extend out 115 miles and tropical storm-force winds nearly 300 miles. Bill will pass about 250 miles west of Bermuda this afternoon before paralleling the coast (passing about 225 miles east of Cape Cod) and making a final landfall in either Nova Scotia or Newfoundland Sunday morning. A map showing the projected path and maximum wave heights is shown below.

Figure 1: Hurricane Bill track and Maximum Wave Heights

Bill is currently locked in an unusually well-defined steering pattern and it is unlikely that he will pull any sort of hocus-pocus in the next 48 hours. A strong trough that has been well-anticipated by the computer models is currently generating a south-to-north flow ahead of it that is causing Bill to bend from a NW to N and then NNE track over the next 48 hours. This is shown below in Figure 2.

Figure 2: Current Steering Pattern

Even though Bill will not make a landfall in the US, its large size will result in widespread impacts, primarily from surf. The National Weather Service has hoisted High Surf and Coastal Flood Advisories up and down the East Coast this weekend and has stated that Bill’s “swells will likely cause extremely dangerous surf and life-threatening rip currents.” So use caution if heading to the beach!

Otherwise, there are no strong hurricane plays on this one. Perhaps if a few overly-adventurous fund managers get swept out to sea this weekend in the Hamptons, we will see a low volume week next week. Not sure how to play that one.

Here is a list of expected impacts up the east coast.

Bermuda: Bermuda is currently under a tropical storm warning and a hurricane watch, although it is unlikely that the latter will be upgraded. The island will see its worst weather today and tonight, as Bill passes about 250 miles to its west. Wind gusts over tropical storm force will be accompanied by thunderstorms from the outer rain bands of Bill. The big story will be the massive surf, with waves approaching 40 feet.

South Carolina-New Jersey: High surf from Bill has already reached the Carolinas and will spread north this afternoon. High surf advisories are in effect for most southeast-facing beaches in the Carolinas, and it is likely these will spread northward today. In the Carolinas, waves will build from 6-8 feet today to 10-12 feet by tomorrow and early Sunday. Further North, from Virginia to New Jersey, waves will begin building this afternoon, peaking at around 12-15 feet late Saturday night. Coastal Flood Statements have already been issued for these areas as water rises may reach 3 feet. Conditions will be mostly cloudy with thunderstorms, due to the passing of a strong trough, not  Bill.

Long Island-Rhode Island: Waves will reach southern New England tonight and continue to build tomorrow, peaking at about 15 feet on the south-facing beaches. Winds may pick up slightly tomorrow afternoon as Bill makes its closest pass, with gusts to 25 mph. Conditions will be rainy as the trough passes by, although all moisture from Bill should remain offshore.

Cape Cod, Martha’s Vineyard, Nantucket: Bill will make its closest pass to the United States States overnight Saturday, passing about 225 miles east of Cape Cod. Waves in this area will be enormous, reaching as high as 24 feet. The Massachusetts coastline can expect substantial beach erosion from this event and localized water rises as high as 4-5 feet. These conditions will be hazardous for even the strongest swimmers. Cape Cod and the Islands will probably see wind gusts over tropical storm force, in the range of 40-45 mph. However, these are not severe enough to do any damage. Areas of the East Cape may see some outer bands spiral through, providing brief heavy rain, in addition to the rainfall from the passing trough.

Coastal Maine: Due to the somewhat sheltered coastline of Main, waves will generally only be around 15 feet. However, coastal Maine will also likely experience heavier rainbands associated with Bill and could receive up to half an inch.

Novia Scotia and Labrador, Canada: Bill’s impacts will be most strongly felt here. The storm will likely skirt the coast of Novia Scotia, remaining either just onshore or just inland, before making a final landfall further north in Labrador. Coastal areas will see impacts characteristic of a weak Category 1 hurricane or a strong tropical storm. Rainfall will be heavy, over three inches in many areas, and winds will occasionally gust over hurricane force. Wave action will be enormous, with wave heights approaching 30 feet. These areas will likely see severe beach erosion and moderate coastal flooding.

Elsewhere in the tropics, a wave off Africa has become more organized today. The National Hurricane Center is giving it a “low”, or less than 30% chance of developing over the next 48 hours. I give it a 40% chance of developing in 72 hours, as it has some computer-model support.

As for trading, I continue to enjoy big gains in Chesapeake (CHK) and Southwestern (SWN). As I mentioned before, I currently prefer holding NG companies over the commodity itself (UNG).

Note I: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note II: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

Deadlocked at 10…

1. Wabisabi-10

1. DPeezy-10

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

Comments »

Two part post: Natural Gas admonishments followed by Hurricane Bill admonishments. This one is going to be close, boys.

For those wanting the rapid-fire cliff notes version, FOLLOW Dr.Cane09 on Twitter for regular updates regarding the Tropics, Trading, and misc other weather stuff.

.

UNG–Cave Emptor

With September ’09 natural gas approaching $3.00/MMBTU, a level not seen in seven years, one might think that UNG, the ETF that tracks this commodity, would be very attractive, especially with cane season moving into gear. Erroneous!

On July 8th, the UNG Fund ran out of shares due to increased investor appetite that resulted in a volume spike beginning in May.  Looking at Figure 1 below, average daily volume has gone up more than 10x  since the beginning of the year. Total shares issued increased to 281 Million, more than 8x the start of year total.

Figure 1: 1 year chart of UNG showing a surge in volume and an intermediate volume when UNG ran out of shares

Amidst CTIC investigations into  commodity-driven speculation, the fund has not yet re-issued shares. The basic argument regarding cracking down on speculation is this. Approximately a week before the front month contracts expire, UNG sells all of its front month contracts and rolls over those assets into next month’s contracts. For example, this past week UNG has been selling all of its Sept ’09 calls and buying up the same value in Oct ’09 calls. Some believe that massive selling and buying has been driving volatility and should be illegal. It is estimated that the UNG Fund holds up to 80% of the contracts in the front month period. While the SEC last week announced it was permitting the fund to release one billion more shares, the fund is planning to hold off awaiting CTIC clarification regarding caps and restrictions.

As a result of limited shares, the fund has been performing more as a stock rather than as a tracking fund, meaning that it is driven not only by the underlying commodity, but also by investor demand. With a last price right at $12.00, UNG  is now trading at a 12% premium to its NAV, or net asset value of $10.70. In other words, UNG is trading as if the price of September natural gas is about $3.50, rather than the actual $3.10.

Thus, while natural gas may be “cheap”, UNG is actually about 12.5% too expensive. This is terrific if you have been a holder of UNG, as your money has significantly outperformed the underlying commodity. However, if you are a prospective buyer looking to get into the fund, this puts you at risk.

There are a couple of different outcomes in this situation. First, should the CTIC decide that market speculators have not been responsible for commodity volatility and does not plan to impose restrictions, the UNG fund will likely ssue new shares. As a result, the commodity would immediatly revert to its NAV and all shareholders would take at least a 12% haircut. Ouch.

Second, the CTIC determines that funds like UNG are responsible for destabilizing the markets and introduces harsh restrictions and regulations. Not only can UNG not issue more shares, but the fund is too large as it is and must divest some of its assets, or even shut down. As this must be done at the NAV, investors would again lose the 12% premium.

Lastly,  a sort of middle ground. UNG somehow gains permission to issue new shares at the current premium under certain CTIC restrictions. I’m not entirely sure how this could happen within the current framwework of the fund. However, if the premium does remain in place, investor appetite will likely decline as fewer and fewer are willing to pay increasingly high premiums. This might drive the price back down towards the NAV as the market finds itself overwhelmed with shares that are no longer in such high demand.

In conclusion, I still believe that natural gas is undervalued, given the low rig count, production cutbacks, the oil:gas ratio, hurricane season, etc. However, I do not believe that UNG is the best way to play the commodity right now due to the inherent risks I have just discussed. Additionally, the contango, or spread between each month is over 10% for each months. Each time UNG rolls over its contracts, investors thus lose a further 10%.

Rather, I believe that playing individual stocks is the way to go. Since UNG dropped below my cost basis of $13, I have been trimming my position in the fund and have been allocating some of those assets to some big producers, including Chesapeake (CHK) and Southwestern Energy (SWN) during the course of this pullback. Other smaller cap plays such as OMNI and NGAS that are more heavily influenced by the price of NG may be attractive as well. I have also built up my cash position as I believe the market to have downside risk right here. I still have a  position in the fund and will likely continue to hold these shares, but it is not one of my top 5 positions.

In regards to tomorrows supply report, I am projecting an injection of 55 BCF, above the average of 42 BCF, but way below last year’s 88 BCF injection. If realized, it would be the lowest injection of the summer. For a good (yet bearish) analytic discussion of natural gas inventory injections heading into the winter withdrawal season, see CavemanForecaster’s latest post on his blog.

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The Tropics

Hurricane Bill has put on an impressive burst of intensification and is now a dangerous 135 mph category 4 storm. This is about as organized as a storm can get and looks downright gorgeous on satellite. As it enters warmer waters, Bill may continue to intensify further and could approach category 5 strength over the next day or two. Bill has a tropical storm-force wind radius of nearly 400 miles that is generating waves estimated at an almost biblical 80-90 feet near the center.

The storm has finally turned to the Northwest, with a heading of 315 degrees, in response to the trough that I mentioned in my last post. Overnight the the computer models have shifted slightly westward, increasing the potential impacts of Bill to the extreme Northeast coastline. The most westerly models, the NGFDL and the NOGAPS, take Bill within 100 miles of New England.  Shown below in Figure 3 is the GFS model run for Sunday at 8am showing Bill at his closest approach to the Coast.

Figure 2: Latest GFS model run showing Bill side-swiping the Northeast

The explanations and tracks provided in my post last night still hold true, just shifted west. The degree to which the track shifts west will depend on its speed. A faster foward motion would allow it to “beat” the trough to the east coast and move further west before it gets turned away. On the other hand, a slower motion would allow the trough to make more eastward progress and steer Bill away from the coast earlier.

Most of the East Coast will likely see moderate to locally severe beach erosion and Eastern Massachusetts and Long Island will likely see some wind gusts approaching tropical storm force and the occasionally heavy outer rainbands. Fortunately, Bill will not be Category 4 storm at this time, and will probably pass by as a lopsided Cat 1 or Cat 2. Bill will then likely make landfall in Nova Scotia or Newfoundland as a rapidly weakening Category 1 hurricane or strong tropical storm where impacts will again be modest. On a scale of 1 to 10, where a 10 is Katrina and a 1 is Claudette last weekend, I project Bill’s affects on the US to merit a 2.5.  Should the computer models shift any further west, I would begin to get concerned as this is a very large and dangerous storm.

Right now, I see the affects of Bill being similar to to those of Hurricane Edouard in 1996, shown below in Figure 3.

Figure 3: Hurricane Edouard, 1996

Both Edouard and Bill were classic Cape Verde hurricanes. Both peaked as strong Category 4 storms had very large wind-fields. Edouard passed within 90 miles of New England as an 80 mph hurricane doing $6 Million in wind damage and drowning two people. Right now, it looks like Bill may stay further offshore.

Elsewhere in the tropics, the remnants of Ana have entered the Gulf and are diminishing. Re-development is unlikely. A wave off of Africa needs to be watched for development over the next three to five days.

Stateside, the Pacific Northwest has once again entered the sauna. Temperatures in Portland today could approach 100 as a strong offshore flow is pushing hot air down from the high deserts of the interior Northwest. Additionally, the east coast is basking in some of the hottest weather of the summer. Highs in Boston and New York have eclipsed 90 over the past two days. Additionally, the large dome of high pressure that has brought these temperatures is also responsible for stagnating the atmosphere and allowing for a build-up of pollutant-laden haze. Some people may have noticed that it was more difficult to breathe over the past few days.

Warm temperatures and the risk of poor air quality will continue for the next few days until a strong trough of low pressure sweeps through the area Friday afternoon ushering in cooler temperaures. It is this same trough that is forecast to sweep Bill out to sea.

Note II: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

1. Wabisabi-10

2. DPeezy-9

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

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Hurricane Bill has continued to intensify and is now a strong Category 2 storm with winds of 110 mph, just 1 mph short of a Cat 3 storm. What that number fails to explain is its size. Bill is the poster-boy of classic Cape Verde storms–highly symmetrical, of long duration, and above all, very large.

Figure 1: Central Atlantic satellite of Hurricane Bill

The diameter of Bill’s tropical storm force winds is 300 miles. That is to say, if Bill were to strike the Louisiana Gulf Coast tonight (which it won’t, tonight or ever),  New Orleans and Houston would experience TS conditions (>39 mph sustained) at the same time. He’s got some firepower.

And though this firepower might not be utilized bashing oil and gas rigs to smithereens, it will be spent generating some epic surf. Based on buoy observations, Bill is generating waves 50-60 feet tall. Larger storms like Bill are obviously more adept at making large waves as their “fetch” or the length of water over which strong winds have blown, is very large due to their expanded windfield. An experimental NOAA model predicting wave heights projects shoreline waves of 10-15 feet from Cape Hatteras northward by this weekend. This map is shown below in Figure 2.

Figure 2: Maximum wave heights (in meters) predicted for Sunday morning

Thus, if you are a surfer living along the coast, this is your weekend. Live it up. Just remember, if caught in a rip current, let the current carry you out and then swim parallel to the shoreline until you escape the current, which based on Figure 1, should be somewhere in South Carolina…

As a short aside, storms like Bill illustrate one of my problems with the aging Saffir-Simpson Index, which only takes into account wind speed as a measure of storm severity. If I was an insurance company faced with the un-enviable situation of having my policy-holders get hit with a storm, I would rather have it be a small compact category 4 storm like Charley (2004) than a large, slightly weaker storm such as Bill. It is highly likely that if Bill, as he is right now, struck Punta Gorda, overall damage to the state of Florida would be greater. Hurricane Ike (also a Cat 2 storm) is a great example of this. No disrespect to Mr. Saffir and Mr. Simpson, but what we need is a better “official” index that takes into account additional variables such as wind-field, population density, etc. The Carvill Hurricane Index and Integrated Kinetic Energy Scale are two such calculations. I plan to discuss these and some others in a post at a later date.

Of course, this ramble is purely academic because Bill isn’t going to be making landfall anytime soon, as shown in the map below.

Figure 3: Broad forecast map of all systems currently in the Atlantic

A pair of troughs will be interacting with Bill over the next 48 hours instigating a south-north flow turning Bill’s heading from WNW to more NW. By Friday and Saturday, a final “trough of doom” will sweep down from Canada (thus ending the hot, muggy weather in the northeast) and lift Bill away from the US.  This situation is shown below in a water vapor image below in Figure 4.

Figure 4: Latest water vapor image showing Bill and a trio of troughs that are forecast to shield the US

It will be a relatively close thing however. Maritime Canada will likely feel some direct effects from the storm, and both the extreme Northeast and Bermuda are still within the standard forecasting margin of error. Coastal areas of Massachusetts, Rhode Island, Long Island, and Maine may even see some wind-driven showers from Bill. At this time, I give Bill a 20% chance of making a direct landfall in the US. However, Bill really can’t be called a “fish storm” because the US coast will definitely feel his effects. Before he does check into the Big Blue Ocean in the Sky, Bill is likely to become the season’s first major hurricane, and may even reach Category 4 status.

So, no hurricane play this time around, unless you happen to know of a company with exposure to the beach-sand-replenishment industry. Sorry guys. But its just as good to know when you should sit on the sidelines and not recklessly go all in and pray. However, hurricane season is just beginning and I am sure there will be opportunities aplenty in the upcoming weeks. If you want to load up early, check out my Candex picks, Fly’s picks (I like/own VLO),  or The PPT later tonight.

Elsewhere in the tropics, the remnants of Tropical Storm Ana are interacting with an upper-level low over Cuba kicking up a fireworks show of convective activity. As seen in Figure 5 below, it looks impressive, but it is not very organized.

Figure 5: Gulf of Mexico infrared satellite map showing the remnants of Ana interacting with an upper-level low near Cuba

The system will continue to move quickly to the west and should enter the Gulf of Mexico by tomorrow morning. None of the computer models are giving the system any love, and I give it only a 20% chance of regenerating. However, remember that she already rose from the dead once and these are the same warm waters that spawned TS Claudette in under 15 hours, so you never know… Regardless, it has a minimal chance of affecting the drilling rigs in the Gulf.

Additionally, a strong wave has recently moved off of the African Coastline and appears to have some spin associated with it. It will have to be watched as conditions in that part of the Atlantic have become increasingly favorable. Several of the computer models develop the wave (and even another behind it). I give the wave a 40% of becoming Danny in the next 72 hours. Regardless, we will have a long time to watch it.

Apologies for the lack of investment content in this post. This situation will be remedied in my next post.

Note I: With the hurricane season heating up, Dr. Cane is now on Twitter as DrCane09 since this is often a faster way to provide updates as things quickly change. FOLLOW ME for regular updates regarding the Tropics, Trading, and misc other weather stuff.

Note II: Major Karma Points to the first person to correctly identify the storm shown at the top.  This is going to be a common theme of posts for the foreseeable future. A small hurricane warning flag will be awarded to the individual with the most points at the conclusion of the hurricane season, provided that they have at least 12.

We are now exactly half-way through the competition (which runs through September 30). No all-star break this year. Lets power on… Its a tight race.

With regards to today’s storm, I think it had perhaps the best hurricane name. A pity it will never be used again…

1. Wabisabi-10

2. DPeezy-8

3. TraderCaddy-4

4. Yogi and Boo Boo-3

5. Jim-1

Disclaimer: Forecasts and Opinions are my own and are subject to error. Please rely on official National Weather Service forecasts.

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