It has been three weeks since analysts at The Schork Reportswitched our technical daily bias in the NYMEX liquids to bearish and eleven weeks since we did the same in natural gas. Our confidence in our liquid’s view increased last week, but with QE2 potentially a week away, we can assure you that we are not overconfident. As far as natural gas goes, the market never looked more bearish. Therefore, our confidence here remains high.
We said it a few weeks ago (TSR, October 4, 2010) and we will say it again… we are waiting for the pre-winter rally in natural gas, but we still see no signs of it developing. There is a historical tendency for this market to rally (and peak) in the fourth quarter. Be that as it may, we are a week away from November and the market is closer to $3 than to $4!
Over the last eleven weeks the spot Henry Hub contract for November delivery has close lower in 32 of 55 sessions (58%) with average losers outpacing winners by 2.3 cents per dekatherm, per session. In the process the market has dropped from a high of $4.825 on August 05th to Friday’s $3.290 low print; a peak-to-trough loss of 32% or $15,350 per contract.
Therefore, we will continue to wait for the rally and do our best to avoid getting lulled into a false sense of security.
Because once we do, that is when this market will take off.
Meanwhile, the Fed’s next policy meeting takes place next Tuesday and Wednesday.
We will then find out if the U.S. central bank will embark on a fresh round of Treasury purchases (as is the overwhelming assumption in the market) in an effort to stave off deflation and presumably (see Bank of Japan) stimulate the economy.
The $64 question is whether or not this event has been priced into the value of the U.S. dollar?
If this move has been baked into the cake (as the punditry loves to say), our confidence in our bearish skew will increase. Given the extant inverse relationship with oil values and the dollar we assume that the dollar will firm and pressure oil prices lower. Otherwise we can look forward to another run towards $85. Thus, analysts at The Schork Reportmaintain our bearish view as we begin the new week, but as always we will have one eye on our oil screen and the other eye on the dollar screen.
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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.