Waiting for Godot...
Nymex natural gas never looked weaker at the end of last week. Analysts at The Schork Report changed their technical bias to bearish on August 06th. Since then, the spot contract for November delivery has closed lower in 24 of 39 sessions (62%) with an average loss of $0.07 per dekatherm, per session.
Of the 15 sessions when the contract finished higher the return was only $0.05 per dekatherm. To wit, the bearish skew has been dramatic as the contract has dropped from a peak settle on August 06th at $4.727 to last Friday’s $3.797 close for a drop of 20%.
Be that as it may, at some point we do expect this market to rally… as it normally does prior to the winter. Even last year, when a number of underground storage facilities were at capacity and the economy was in the tank, the market rallied. Even to the point where some large fund was reported to have purchased $9 million worth of winter gas $10 strike calls.
All for naught, as winter gas peaked on January 07th at $6.108. To add insult to injury, that peak occurred despite one of the strongest (if not the strongest) heating demand seasons for natural gas ever recorded.
In this light, as always is the case in October, it behooves us to take a look at history. In fifteen of the last twenty heating seasons, the winter high in the Nymex Henry Hub contract was posted in the fourth quarter. In other words, in three out of every four heating seasons the high on the Nymex was put in three weeks prior to the coldest period of the season, the fourth week following the solstice (January 21st). Furthermore, as we can infer in today’s Chart of the Day, on average the winter’s high is posted on December 07th with half of the highs occurring before November 30th.
Counter to intuition, we tend to see the highest price for consumption commodities, especially natural gas and gasoline, in the run-up to the season. This is because fear and uncertainty regarding the market’s ability to offset looming, unknown demand, is priced into the front end of the curve.
In this vein, we have to wonder if we are ever going to see a rally in gas this season. We are waiting for it, but by current indications it is not happening. For example, on the heels of a record heating demand season we segued into one of the strongest cooling seasons ever. As a result refills (for this winter’s gas demand) in July and August were 38% below the 2001-2009 average.
Nevertheless, the premium of this winter’s gas to next summer’s gas peaked at $0.35 on June 15th. Last Friday, winter gas settled at a $0.23 discount to next summer!
We will say it again: the historical tendency is for this market to rally (and peak) in the fourth quarter. However, bulls are now scrambling to defend this year’s $3.610 low print (posted on August 27th). We are waiting for the rally, but we are not seeing it yet. Therefore, analysts at The Schork Reportare holding their bias and remain vigilant; this market has a propensity of lulling you into a false sense of security… and at that point, it can crush you.
- Read CNBC's Guest Blogs- Great People, Great Ideas...
- CNBC's Energy Page - Trends, Trades & Hot Topics
- Energy Market Overview
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.