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Schork Oil Outlook: Tough History Lesson for Gas Bulls?

If ever there were a time for natural gasto rally, you would think it would be now. Gas-fired cooling demand in key market areas has been surging since May; a circumstance that looks to remain through at least the end of July.

We have already had one tropical disturbance in the offshore GoM producing region in what is forecast to be an active hurricane season. What’s more, injections are set to ebb into the second (of three) and lowest phase of the season, i.e. over the next nine EIA reports we will see the lowest injection rate of the season as cooling load to the Grid peaks.

For example, for the five years in between 2004 and 2008, injections in between the Memorial Day holiday in late May and the 04th of July Independence holiday averaged 85.9 ±4.08 Bcf per week.

The 2004-2008 average then dropped to 60.1 ±7.8 Bcf per week in between the 04th of July holiday and the Labor Day holiday in early September. That represents a drop of 30% over the hottest part of the summer. Last year the drop in between the first and second phase was 28%, from 91.8 to 66.2 Bcf per week.

Now consider that spot NYMEX gas for August delivery rallied from a low on May 06th of 4.070 to a high of 5.249 on June 16th. The contract rallied 29% through the heaviest phase of the injection season.

In the meantime, 30-day implied volatility jumped by a third in between the Memorial Day holiday and the June 16th peak. Since then volatility has dropped by around 15% as the contract has fallen by 17% from a 5.249 high print to last Friday’s 4.339 low print.

On Friday the contract broke through psychological support at 4.500 and volatility is still around 12% above the lows we saw back in late May. In other words there is still froth in this market. Think back to this winter. It was one of the snowiest and coldest in recent memory that generated a huge drawdown in supply. Nevertheless, spot NYMEX peaked at just over 6.00 in early January and moved lower through a very cold winter.

Analysts at The Schork Report are now looking at this refill season. This has been a very hot summer, but spot gas has thus far peaked at just over 5.00 and has been moving lower.

Therefore, to the chagrin of the bulls, is recent history about to repeat?

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.