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Schork Oil Outlook: NatGas Net Short Position Jumps

Wednesday, 13 Oct 2010 | 10:31 AM ET

The Producer keeps producing!

Natural gas production in the Lower 48 U.S. increased for the sixth time this year in July. According to the EIA’s 914-Survey, month-on-month output rose by 0.3% or 0.17 Bcf/day.

Production in New Mexico posted the largest increase, 5.2%, of the major producing states while output in Wyoming rose for the first time in eight months. On the other hand, production in the Federal Offshore Gulf of Mexico continued a 5-month string of monthly declines, down 2% month-on-month and down 19% from a year ago.

Overall production in the Lower 48 increased to 64.4 Bcf/d in July, up 3.3% from July 2009. The strong production helped somewhat mitigate the spike in gasfired cooling demand. The contiguous United States had its fourth-warmest summer (June-August) on record, according to NOAA.

Injections of natural gas into underground storage for July and August were 39% below normal as a result, i.e. 365 Bcf as opposed to the 2001-2009 average of 566 Bcf.

What’s more, net storage movements (withdrawals less additions to underground reservoirs and LNG tankage) suffered the worst July, -7.31 Bcf/d, since 2006 (see banner, p.1 of Tuesday’s issue of The Schork Report).

Be that as it may, the strong demand and the weak inventory re-build could not incite any bullish interest in the market. Nymex gas for delivery next month (the start of the heating season) peaked at $5.534 on June 15th and closed last night at $3.605 (-35%).

Worse still, according to last Friday’s report from the CFTC, the net short position in futures on the Nymex held by producers, processors and other commercial users jumped by 20% to a two-month high, 20,541 short contracts. This should be a concern for bears.

For example, over the last year there has been a strong relationship between natural gas prices on the Nymex to hedging activity by commercial users, i.e. as prices rise, producers sell.

Therefore, the big question now is, with gas seemingly unable to break $4, why are producers hedging?

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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.

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