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Schork Oil Outlook: The Dog Days of Natural Gas

Baby, It's Hot Outside

We are now halfway through the second phase, i.e., the dog days phase, of the summer natural gas refill-season in the U.S. As noted last month in The Schork Report, this phase of the season produces the lowest injections of the cycle as peak a/c demand siphons off molecules through July and August.

Demand for gas-fired power transmission through the first half of the current phase (30 days ended last Friday) has been abnormally strong through the eastern two-thirds of the country. To this effect, injections into underground storage in the Producing and East Consuming market areas over the last four EIA reports have been especially low.

For example, over the previous 17 summers, injections of gas in the Producing Area over the four week timestep ended the first Friday of August typically come in between 400 MMcf/d and 1.5 Bcf/d. Over the corresponding four weeks this summer, the Producing Area is averaging a net delivery of 1.4 Bcf/d.

Given the good cyclability of underground storage in this area, this gas will get replenished by Northeast utilities once the thermometer cools down next month, and therefore does not have any long lasting structural impact on price, current support in the market notwithstanding. In this vein, analysts at The Schork Report highlight that in light of extraordinary weather demand, gas bulls, rather than testing $5, are scrambling to defend $4 on the Nymex.

Bottom line, the recent rebound off of support sub $4 has pushed our daily bias in natural gas on the Nymex from bearish to neutral. However, once temperatures cool down, we anticipate price action will necessitate taking another bearish stab at the market before winter kicks in.

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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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