According to the American Petroleum Institute (API), domestic oil and gas production activity rose by 38 percent in the second quarter from a year ago. The API estimates that 10,358 oil wells, natural gas wells and dry holes were completed in the second quarter of 2010. These results are in stark contrast to the 22 percent year-on-year decline posted in the first quarter and therefore poke holes in the assumption producers of natural gas are ready, willing and (financially) able to rein in output.
Per the API, “For most of this decade, natural gas had been the primary target of domestic drilling. But with the pace of oil well completions continuing to surge, this is no longer the case.” This is true. Be that as it may, the API still estimated 4,396 natural gas wells were completed in the second quarter of 2010, up 22 percent from 2009’s second quarter.
Furthermore, spot NYMEX gas averaged a mere $4.084 in April. Yet, according to the latest monthly reports from the DOE (EIA-914), gas production in the Lower 48 increased by 1½ percent in April to a record 64.83 Bcf/d. Net storage withdrawal (withdrawals – additions) was minus (more gas went in than came out) 11.84 Bcf. Analysts at The Schork Report reference that that is the first time since records began in 1973 that this figure hit double digits for the month of April.
What’s more, since April 20th, when spot NYMEX gas traded at 3.975, until June 22nd, when NYMEX gas traded 4.756, the net position of gas producers (and other commercials) morphed from below 400 longs to over 25,000 shorts. As of a week ago yesterday the commercials were still holding over 21,000 shorts. Thus, as we noted a couple of weeks ago, it appears that producers have no qualms about hedging production in a sub $5 market.
Meanwhile, bullish momentum on the NYMEX Henry Hub contract has now stalled for three straight sessions below the 50 percent Fibonacci retracement at 4.503. On the other hand, bearish momentum has stalled right around the 62 percent retracement at 4.339.
In this vein, the bulls now have to scramble to defend technical support in the low 4.30s. Today’s analysis in The Schork Report indicates that the failure to do so likely clears the path for a run at the $4 critical point of reference.
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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.