Counter to the historical tendency for Nymex natural gas values to peak in the fourth quarter, the spot market in New York kicked off the first quarter yesterday by surging 6½% to a new winter high, 4.689. This event was likely spurred by two factors.
In the second half of December money managers were sitting on their largest bearish position (net short 135,411 futures contracts, i.e., enough gas to keep U.S Steel’s furnaces burning for the next 12 years) in two months. The last time managers were this bearish was back in late September.
Furthermore, non-commercial net shorts were at the third highest level, 202,096, ever. As such, speculators were overextended and the table was set for a short-covering rally.
For example, the last time (and only time) non-commercial shorts topped 200K was back in late April/early May when July 2010 gas was trading down around $4. By the time this contract expired (7 weeks later) non-commercial shorts had narrowed by 20% and the market had rallied 24% (from below $4 to above $5).
In hindsight speculators in May got short right at the point in the season when gas-fired cooling demand was ramping up. Fast forward to now, speculators this time had the patience to wait out the start of the heating season, but they could not contain themselves and got short, real short, precisely when the market is about to ramp up towards peak demand (the month following the solstice).
With this in mind, and analyzing the latest weather outlook, analysts at The Schork Reportare advising clients that it’s likely that some more covering by the bears is in the offing.
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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.