However, before we go there, let’s put last week’s run-up in the NYMEX Henry Hub pit into perspective.
Over the previous twenty sessions the market closed lower fifteen times.
In the process the contract for August delivery dropped by one quarter ($1.141 a decatherm) or $11,410 per contract. Then last Thursday, in the wake of an above-normal EIA report of all things, the market for August gas spiked by a life-of-contract high 11.2%. More to the point, the contract’s dollar volatility, 43 cents, was more than double the 20-day average, 20.7 cents. The market then rallied an additional 3.2% by early Friday afternoon.
Thus, at one point on Friday the differential in between that session’s high and Thursday’s low was 53.5 cents.
Was this justified? Given how oversold gas was… perhaps. Furthermore, given that the spike occurred in the middle of the UNG roll, perhaps someone got caught trying to be cute, i.e. over-leveraging to the short side (imagine?) in anticipation that the UNG roll would further depress the front-month. When this did not occur, their covering then triggered a severe short-squeeze rally.
That seems plausible to us. That is to say, last week’s rebalancing was technical in nature without an underlying shift in the fundamentals. After all, as we have stated, ad nauseam, in previous issues ofThe Schork Report, core fundamentals, short of a major disruption to supply, cannot shift that fast to justify such a swift and violent move in price. However, there are… dare we say… green, uh, on second thought… grey shoots on the horizon.
According to data provided by the American Iron and Steel Institute (AISI), weekly U.S. steel production has been trending higher since May.
As of the week ended July 13th, production topped 1.2 million tons for this first time this year. Over the last three months output has been growing on average by more than 21,000 tons a week. That is encouraging, but it is also a stark reminder of how far we had fallen and how far we still have to go… or to put it into the parlance of James Taylor, there are ten miles behind us and ten thousand more to go.
As we noted in last week’s issue of The Schork Report, capacity utilization in manufacturing bottoms at the end of the recession. In other words, even though manufacturing’s share of the U.S. economy has been steadily shrinking since World War II, we have yet to come out of a recession without a rebound in this sector.
In this vein, manufacturing was still shrinking as of last month… and there no amount of elocution, be it from the White House or from Goldman Sachs that can cover this fact up.
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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.