Physical natural gas prices for next day delivery at the Henry Hub have dropped by 11.8% since the The Schork Reportswitched its bias to bearish (August 06th). Crude oil for delivery at the Cushing Hub is down 6.8% since we turned bearish on August 11th. Furthermore, the drop in cash values has been accompanied by rising aggregate open interest for the underlying futures contracts traded on the Nymex.
In the case of crude oil (WTI) volume has also been rising. Keep in mind, the general rule-of-thumb has it that rising volume and rising open interest confirms a trend. In other words, the bears are piling in on the current selloff. Furthermore, yesterday the spot contract for October delivery broke through and closed below the second deviation band of an auto regression channel.
Therefore, the current trend is most definitely not the bull’s friend; as such, they are scrambling. That is not to say we cannot see a pre-holiday (Labor Day, September 06th) run-up in price. Be that as it may, oil is technically weak, and post Labor Day we will be heading into a fundamentally weak part of the season as refinery demand wanes through fall turnarounds.
As such, crude oil bulls still look vulnerable.
In the case of natural gas, the rise in open interest has been accompanied by declining volume. Thus, the picture here is muddled. The rule-of-thumb holds that decreasing prices and rising open interest are bearish. That is to say, new sellers are coming into the market exerting downward pressure. On the other hand, volume has been trending lower, thus this selling pressure is drying up, although the market is still a well-defined bearish channel.
As go the fundamentals for gas, the times, they are a-changing. According to the latest numbers from the DOE, consumption of natural gas to produce electricity increased by 9½% in June compared with a year ago. No doubt demand in July and August was even stronger given this summer’s heat. Although, just like in oil, once we pass the Labor Day holiday, weather related demand fades, leaving industrial and commercial demand to pick up the slack.
In this vein, according to the latest numbers from the Fed, non-weather related demand for gas, inclusive of commercial and industrial interests (NAICS 2212) increased, on average, by 14% in the three months ended July. Over the same period, gas for next day delivery at the Henry Hub averaged $4.520.
In the first two months of this year gas at the Hub averaged $5.583 and non-weather related demand fell by 17.4% over the following two months. Nymex gas is now trading back down at levels last seen in the spring, i.e., before the rebound in industrial demand and well before the spike in weather demand.
The Schork Reportis not ready to switch our bias in gas out of bearish just yet. With weather related demand set to ease over the next two months we can see gas yo-yoing around the $4 critical point of reference, in between the low from the spring, 3.810 and the mid $4 area. As goes winter heating demand, our friend Matt Rogers, senior meteorologist for Commodity Weather Group is not nearly as bullish for winter weather this year as he (correctly) was at this time last year.
Nevertheless, you have to think $4 is attractive to industrial and commercial end-users, regardless of the weather… and assuming we do not “double-dip.” Bottom line, we remain bearish the energy complex, it is just that, at this point we are more bearish the liquids than we are gas.
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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.