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Schork Oil Outlook: Wrong Time for Bull Bandwagon

Tuesday, 14 Jun 2011 | 12:45 PM ET

Not the right time to hitch your wagon to the Bulls' train...

Natural gas production in the Lower-48 U.S. rose for the first time this year to finish the first quarter. The net storage position finished March at a 4.68 Bcf/d surplus. That was the highest high in three seasons.

Furthermore, per the government’s latest numbers, EIA-914, Lower-48 production jumped by 3.8% or 2.49 Bcf/d in March to a record 68.0 Bcf/d.

The large month-on-month gain was the result of a rebound in production that was delayed by large-scale well freeze-offs and extraordinary heating demand in February.

For instance, the amount of Nymex natural gas futuressold by producers dropped from 40,538 contacts on February 01st to 25,303 contacts on February 22nd. Thus, given that producers had unwound three-eighths of their hedges through the first three weeks of February, in the May 04 issue of The Schork Report, we noted that we “… did not think it unreasonable to expect to see these Btus show up in next month’s production report.” Indeed.

Thus, as temps moderated in March, production came back on-stream and gas-furnace demand eased. Most importantly, natural gas producers have since upped their short position on the Nymex from 25,303 contracts as of February 22nd to a record 74,544 contracts as of last Tuesday. That is a lot of forward production that has been sold over the last four months in between $4.95 (average Cal’12 strip) and $5.30 (average Cal’13 strip).

Meanwhile, financial speculators have moved in the opposite direction of gas producers... which is not a smart move. Since maxing out at a record short position of 207,413 futures contracts (i.e. 2.07 Tcf) on March 03rd, money managers are now sitting on their first long position since May 2007.

In light of producers expressed willingness to sell gas in the high $4s/low $5s, we will venture that Wall Street is jumping onto the bull’s bandwagon at the wrong time.

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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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