Summer in the Northern Hemisphere kicks off today (Tuesday), 17:16 GMT. As far as cooling demand goes for U.S. natural gas markets in Texas, the Mid-Atlantic and Northeast, the summer actually began more than a month ago. Whereas temperatures in the western third of the country posted one of the coldest Mays on record, Texas notched its 21st warmest month. Markets along the eastern seaboard, from Virginia to Maine, posted one of the warmest Mays on record.
To this effect, Nymex natural gas responded to this early a/c demand as you would reasonably expect. For example, following a bullishly construed weekly inventory report from the EIA for the week ended June 03rd, the Henry Hub futures contract for August delivery spiked to $5.
However, in that same session the contract wound up plunging to 4.601 (-8%) and finished the day at 4.704. Since then the contract has moved steadily lower, finishing yesterday's session at 4.352.
Since the start of the year Nymex gas for August delivery has essentially ranged in between 4.550 and 4.350, with a max of 5.000 and a min of 4.192. Thus, with August gas currently down near the bottom of the range, the question holds… is it time to start buying gas, or selling it?
With a strong cooling season to date and the dog-days-of-summer on the horizon, the reasonable assumption might be to buy here. However, the statistics fail to corroborate that theory.
Yesterday, one of our clients emailed us his analysis of August gas…
Since 1996 - 2010, if you sell short at the close, on or about 6/21, and exit the close on or about 7/11, the average profit is .476 cents. Worst equity in the trade over those years is $2,550 which occurred on 7/3/2008, best equity is $14,180 which occurred on 7/11/2008.
Thought you might find this of interest.
Indeed we do. Therefore, we ran the numbers going back to the introduction of the Nymex contract in 1990. As it turns out, a short position placed on the 21 summer solstices (?June 21st of each year) and liquidated approximately three weeks later, yielded a profit 19 times (90½%) for an average gain of 7.4%.
Of course, past performance is not indicative of future results… yada, yada, yada… but a 7.4% decline from last night’s settle in August gas puts the contract down around 4.030.
That is a level that we do not think is unreasonable, hence, analysts at The Schork Report continue to advise clients that we are maintaining our bearish daily bias on gas.
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Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.