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Schork Oil Outlook: Natural Gas Moving Towards $5 Handle

Better late than never.

"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, we must remain vigilant, this market has a propensity of lulling you into a false sense of security… and at that point, it will kill you."
The Schork Report – October 10, 2010

In the 42 Nymex sessions in between the time we wrote the above two months ago and when we switched our daily bias in natural gas to bullish on December 02nd, the Henry Hub contract for January 2011 delivery closed higher in 21 of those sessions by an average of $0.070 per dekatherm and closed lower in 21 of those sessions by an average of $0.069 per dekatherm. As such, on October 01st the market closed at $4.261 and on December 01st it closed at $4.269.

To say the least, it was an inauspicious two-thirds of a quarter that usually produces the highest prints of the season. However, the spot market has now closed higher in 4 of the 5 sessions since December 01st and is trading above $4.500 for the first time since early August.

Therefore, at the risk of jinxing the bulls, it does indeed appear that we are in the midst of the annual pre-winter rally in gas. In this vein, this morning we are bound to see the first material drawdown from underground storage of gas.

Furthermore, judging by the graph in today’s issue of The Schork Report, we will see another large draw next Thursday.

In other words, the future is now for gas bulls and bids towards the $4.90 and $5.05 range cannot be ruled out.

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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.