The Guest Blog

Schork Oil Outlook: NatGas Bulls Bet Big — and Lost

Stephen Schork, Editor, The Schork Report

Energy prices were mixed last week: Liquids traders ignored a bearish build in stocks to focus on the booming equities markets, a weaker dollar and resurgent consumer confidence. The Gulf of Mexico oil spill and today’s consumer spending figure will likely fuel the bulls further. Natural gas sold off hard on Thursday and has yet to see a rebound — the latest CFTC data suggests traders should not hold their breath.

Around April 22, when Henry Hub natural gas prices settled at 3.944, the bulls began to bid the contract higher. Prices rose 8.0% within 5 days to settle at 4.271 on April 28. The bulls’ reasoning was that the DOE’s monthly recap — released on April 29 — would be undergoing several fundamental changes in their favor.

In the April 7 issue of , we stated:

“The Wall Street Journal reports that these changes will lead to lower reported production levels. Currently the EIA […] assumes the smaller firms move their production in line with the majors. In reality, this is often not the case…”

As the EIA began actually surveying smaller firms, instead of regressing their output on what the majors were doing, analysts expected that small, cash-flow driven firms would report scaled back production in the face of lower wholesale prices.

Unfortunately for the bulls, who saw prices drop to 3.980 in the hours following the release, this was not the case. Marketed production saw the year-on-year surplus rise from 0.3% in January to 0.8% for February. In fact, production for February was at its highest point in 36 years, i.e., since 1974.

In fairness, traders might have expected this, given the large increases in storage seen by the weekly numbers. It was the high level data provided by the monthly report which plunged prices the most. For instance, while pipeline imports (from Canada and Mexico) for February dropped by 6.3% or 18,566 MMcf year-on-year, LNG imports increased by 64%, an almost equivalent 17,951 MMcf.

Thus, total imports remained almost unchanged year-on-year (down just 0.2%), which is neutral in the short term but will lead to continued downward pressure further out: Now that the costly infrastructure required to support LNG imports is built, producers will be unwilling to let it idle.

What’s more, the average price of LNG imports has been decreasing for the past three years, from 9.37 in February 2008 to 5.74 in 2010 – further incentivizing increased imports.

The short-term saw domestic demand grow due to extreme weather conditions and a recovering economy. Natural gas deliveries to electric power consumers and industrial consumers were up 5.7% and 10.9% year-on-year respectively, while deliveries to residential consumers were up by 9.9%.

These gains are encouraging, especially in the industrial sector which is less dependent on weather-related demand. But the majority of demand was due to weather — keep in mind that customer-weighted heating degree days were 8.81% higher y-o-y in key natural gas consuming states such as Illinois and Indiana and up 13.97% on average across the country. But traders realize that winter is over, and spring is unseasonably warm — March 2010 saw 8.07% fewer heating degree days than March 2009.

The bottom line is that stronger demand from industrial consumers will not be enough to stem the huge influx of natural gas via LNG terminals and horizontal drilling. Analysts at are projecting that the bulls will likely recover, but will need to see a tangible drop in production before joining their side.


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.