Bottom line, the fundamentals are as bearish as ever. Our friend Alan Lammey at Natural Gas Week noted that a significant amount of production, which was shut-in when gas had a $1-handle, was hedged over the last week. If pipelines are having difficulty handling transportation today, what are they going to do in October? Therefore, the table is set for another move lower in the cash market at the Henry Hub next month.
The only question is will the NYMEX follow the fundamentals or will it continue to blaze its own path?
Here at The Schork Reportwe think it will be hard for the NYMEX to ignore the fundamentals, but as we saw in 2006, this market complex has an uncanny ability to remain deaf, dumb and blind. After all, three years ago underground storage went into the winter with a then record 3.46 Tcf in the ground. At this point in 2006, while Amaranth was blowing up, gas for delivery that winter was trading virtually on par to the following summer and at 16% discount to the 2007/08 winter. In other words, at this point in 2006 the market was not concerned regarding the availability of molecules for the pending heating season.
However, thanks to a brutal winter and strong industrial demand, gas rallied that winter. Today the curve is even more bearish. This winter is trading at an 8% discount to next summer and at a 23% discount to next winter. So, once again the market is showing little concern for supply, relative to demand expectations. However, industrial and commercial demand is a shell of its former self compared with 2006. Thus, if we are going to see a repeat of 2006, then we are going to need another ice age this winter. And, according to the latest outlook from the International Research Institute at Columbia University, the bull’s odds are rather long.
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.