CNBC Guest Blog

Published: Monday, 16 Nov 2009 | 8:23 AM ET

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Stephen Schork
Editor of
"The Schork Report"

After toying with support inside the October 15^th pivot-low (77.67 to 76.86) over the last three weeks, the crude oil bears in New York finally stamped their imprimatur on this market on Friday… sort of.

Be that as it may, it has been an absolute slog just to get us down to this (still inflated) level. Therefore, we have to question the bear’s staying power. After all, this was the part of the correction… assuming we are in a correction… that was supposed to be the easy part.  Now the bears have to step up and play the varsity.

We are still bearish, but we are skeptical. After all, forget about fundamentals, should the dollar take another tumble this week, odds are short crude oil will be right back at $80.

Meantime, as far as natural gas goes, the post Labor Day holiday pre-winter bubble has been extinguished. Recall, spot NYMEX gas for December delivery bottomed at 4.340 on Friday, September 04^th, as U.S. and Canadian markets headed into the three-day holiday weekend. When we returned to our desks that following Tuesday, September 08^th, NYMEX gas surged to a high of 4.680. Over the course of the next 31 sessions, NYMEX gas climbed higher in 2 out of 3 sessions, rising by $0.047 per session… much to the chagrin of producers.

However, since peaking on October 21^st at 5.989, in the midst of one of the coldest Octobers on record, NYMEX gas has closed lower in 12 of the last 18 sessions, i.e. 2 out of 3, falling on average by $0.064 per session. On Friday, December gas crashed through the September 04^th low to 4.287. Hence the time-tested Wall Street adage… markets fall faster than they rise.

As noted in the September 15^th issue of The Schork Report :

Keeping in mind what Lord Keynes said a long time ago… the market can stay irrational longer than you can stay solvent… we stated our fundamental case against the gas bulls yesterday. We stand by our words and our numbers. No doubt, gas is cheap.  But, if there is no value, than cheap, in and of itself, is not a reason to own something. Back in the 1980s the Yugo GV was cheap also. The car was cheap for a reason. Its Soviet-bloc engineering (see today’s G.M.) exuded the feeling it was assembled at gunpoint. Gas today is cheap for a reason. There is too damn much of it… Storage is nearing capacity… With limited shoulder month and soft industrial demand, where is excess production going to go if it cannot go into the ground in October? It has to wind up on the spot market.  …What we are seeing here is a technical bubble. For example, the underlying to the NYMEX contract at the Henry Hub lost 11 cents yesterday, while Transco Z6 inched up a penny to 3.16.

Go that? NYMEX Henry Hub gas futures closed at 3.297 yesterday afternoon, while the physical gas for delivery into New York City traded around 14 cents lower yesterday morning. NYMEX gas is a bubble… but be careful, Lord Keynes has a point.

Keynes indeed had a point. Unfortunately, bubbles can usually outlast your line of credit. Once bubbles pop however, they tend to not only retrace to whence they began, but more importantly, overshoot this area. That is the point we are at right now in the Henry Hub gas market.

Therefore, we cannot rule out further corrective weakness in spot NYMEX gas back towards the mid $2 area we saw in late August, early September. However, first things first, there is a large gap (on the continuous chart) in between the October 28^th low at 4.230 and the September 25^th high print at 4.035. If the bulls cannot protect this gap, analysts at The Schork Report are looking for further significant weakness.

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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.

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