Energy prices were mixed yesterday. Nymex natural gas sold off hard after the EIA reported a seasonally (and absolutely) huge injection.
On the other hand, a spate of economic headlines did little to incite action in the liquids markets — crude oil and gasoline fell while heating oil marched higher.
As for today, expect little volatility as traders anticipate the evening’s CFTC release.
“Contacts say the increase in gas-directed drilling is not justifiable at current low prices, but firms are drilling based on futures prices locked in earlier, to hold leases and to learn the shale technology. There is concern that gas-directed drilling will decline in the second half of the year.”
-The U.S. Federal Reserve Bank’s Beige Book,
Eleventh District, Dallas
April 14, 2010
Thus, apropos the anecdotes from clients we spoke about in October, i.e. after spot Henry Hub futures on the Nymex doubled in spite of an absolute glut of molecules… producers did indeed sell the heck out of that rally.
What’s more, the thinking back in January was that every time gas on the Nymex approached $6, producers would sell into it, hence the steep selloff on the Nymex (despite an unprecedented delivery of molecules) after the market ticked above $6 in early January.
In hindsight, the Dallas Federal Reserve Bank seems to confirm these anecdotes… producers now have to produce in order to fulfill their futures obligations.
Therefore, it goes without saying, once Exxon et al. master the shale learning curve, producers will not be so keen to sell into a $6 market, especially when No.6 oil is trading at an equivalent $12.
Bottom line, analysts at view gas as a dog right now…but it is not going to remain a dog forever.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.