Nat Gas Traders: Know when to hold ‘em, know when to fold ‘em.
Yesterday (Thursday), the EIA reported a larger than expected 83 Bcf injection in natural gas stocks. Analysts were expecting a 70 Bcf injection and while this is not the first time expectations have been too low, it is the first time that the contract for June 2010 delivery dropped by 8½% within a day. Keep in mind that this contract went prompt in 2004, so even the pop of the commodity bubble did not see drops this large for the contract.
In the Chart of the Day in today’s issue of, analyst Hamza Khan demonstrates how much of an outlier the drop is. In statistical terms, we expect the daily return to be normally distributed around zero. This holds true for natural gas, which fits a student’s t-distribution (a normal with a higher peak) with mean 0.00%.
Given this model, we would expect the daily drop to cut off on the negative side around -4%. But an 8½% drop is outside the 65% percentile of -1.2%, outside the 95% percentile of a -2.4% drop, the 99% percentile of a -4.5% drop, the 99.9% percentile of -6.3%, and the 99.99% percentile of -7.5%.
Put simply, you do not need a degree in mathematics to appreciate that this is a huge drop. Anyone trading natural gas intra-day who bought the contract in expectations of a pull-back would have been statistically correct, but also poorer at the end of the day.
The large drop can be explained mostly on the fundamentals. Not only did the weekly estimate come in larger than expected, the EIA’s monthly report was also released. As we have discussed in previous issues of , this month’s release underwent several serious revisions in its data collection/sampling methodology.
Analysts expected these revisions to be bullish. While January did see a small 0.6 Bcf/d revision lower, production in February still rose 1.6%. What’s more, assumptions about the glut of shale plays were vindicated — Louisiana saw a 5.7% increase, the largest of any state, which the DOE placed on expansion in the Haynesville shale.
Nat gas deliveries to electric power consumers dropped by 12.1%, large even by historical standards. We will discuss the breakdown further in Monday’s issue of , but suffice it to say, the report was certainly not bullish and traders who had been buying natural gas last week in anticipation of the release likely took profits off the table amid fears of further weakness. Right now we find it hard to disagree with them.
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.