Schork Oil Outlook: Fundamentals Don’t Support Price Volatility
Natural Gas: Injections over the next four-or-so reports will continue to come in below 70 Bcf per. Yesterday’s report and next Thursdays tend to be the lowest of the summer. As far as next week goes, last year the EIA reported a 50 Bcf injection for the corresponding week (08-Aug-08). For the first half of this week, implied weather demand was unchanged, i.e. strong in Gulf Coast and western markets, particularly in the PG&E and Sumas market areas.
Elsewhere, demand was virtually nonexistent.
Refill Season Recap: To date, a total of 1,438 Bcf of molecules have been injected thus far. The year-on-year surplus moved out for a second straight week, but it will likely narrow further before moving back out in October.
The EIA expects this refill season to end with a record 3.67 Tcf of gas in the ground. To get there, injections from this point on only have to average 71% of the 5-year average.
Furthermore, as we see in the Chart of the Day in today’s issue of The Schork Report, injections over the next couple of weeks will begin to rise, gradually, as we ready for the transition to the third and final time bucket of the refill season.
So… what are the odds we will hit the EIA’s record estimate?
According to futures traders on the NYMEX, pretty darn short. To wit, the term structure on the NYMEX continues to weaken, this week’s early strength [sic] notwithstanding.
Three Thursday’s ago the NYMEX contract for October delivery (the last contract on this season’s refill strip) was trading at 86.2 cents on the dollar to the November (the first contract on the winter heating strip).
Last night the October finished at 84.0 cents on the dollar. More importantly, as far as the market’s outlook for winter demand is concerned, over the last three weeks the winter strip (Nov’09 to Mar’10) was virtually unchanged from 93.5 cents to 93.2 cents compared with next summer (Apr’10 to Oct’10). This backdrop provides the segue to Monday’s pop on the NYMEX.
As we noted on Tuesday, dollar volatility over the twenty NYMEX sessions ended last Friday was 21.8 cents. Yet, inside of ten minutes on Monday morning front month NYMEX gas surged 12% or more than twice the recent dollar vol, i.e. $4,400 per contract.
There is no fundamental, outside of a sudden major disruption to supply, to explain such a sharp move in such a short timestep; especially in light of the most recent EIA-914 survey and July monthly outlook.
Yet the market spiked on Monday. But, this is NYMEX natural gas we are talking about. This market is prone to abrupt, inexplicable moves. We are pretty sure (see the chart in the nat gas section of today’s issue of The Schork Report) that the kind of jump we saw on Monday, just like the jump we saw back in mid July… just like the jump we saw back in mid June… just like the jump we saw back in early June… etc, that these kind of moves are written into the NYMEX bylaws.
Be that as it may, as is often the case after one of these abrupt jumps, the market jumps back down… and then some.
Thus, in light of yesterday’s report, there is nothing to suggest we will not see a test of support back in the mid $3s.
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.