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Schork Oil Outlook: Producing Like There’s No Tomorrow

Friday, 1 Apr 2011 | 12:10 PM ET

Yesterday (Thursday), the EIA reported a 12 Bcf injection in to storage, blowing away the 2 Bcf median draw expected by analysts. However, it seems that the injection was not entirely unexpected — the largest analyst estimate came to 13 Bcf and Bloomberg’s whisper number came to a 5 Bcf injection. Put simply, expectations were all over the map.

So too, it seems, were the futures markets: Nymex Henry Hub futures prices sold off sharply in the minutes after the report and it seemed like it was all over for the bulls. Yet a late afternoon rally, due perhaps to colder weather forecasts, led prices to settle the day 0.78% higher.

From a technical perspective, prices bounced 0.5 cents above the 100 day moving average (MA) for the second time this week. On 03/29, prices hit a low print of 4.195 with the MA at 4.190, while yesterday prices hit a low print of 4.205 with the MA at 4.200.

From a fundamental perspective, the 12 Bcf injection is identical to the 12 Bcf seen for the same week last year, but this is a timestep given to wide variation. The largest delivery came to a huge 104 Bcf in 2006, but the largest injection came to 36 Bcf, likely causing the ambiguity in analyst estimates.

There was little ambiguity about production, however, as the Gulf of Mexico Producing region reported a 25 Bcf injection, the largest ever seen for this timestep and well off the 3 Bcf average injection seen over 2005-09.

Total storage in the GoM region now stands at 740 Bcf, 24.16% above last year and 26.41% above the 2005-09 average. According to the EIA, natural gas production hit fresh inter-day highs last week and currently stands at 63.8 Bcf/d, up 0.9% on the week.

We have also seen mild temperatures in the region, with heating degree days in the South Atlantic region, East South Central and West South Central region coming 28.57%, 66.32% and 88.51% below last year respectively. Fortunately for the bulls, strong industrial demand helped mitigate weather related drops in demand, and electricity output in the Southeast stands just 1.82% below last year.

As written in today’s issue of The Schork Report, yesterday’s price action seems more like a psychological bump at the end of Q1 than any fundamental trend, and optimists who believe in market rationality would look for a correction lower.

Pessimists, on the other hand, would suggest that if the bulls can rally off such a bearish report (and hold the 100 day MA), the markets are acting any which way but rationally.

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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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