Schork Oil Outlook: Betting Against the Crowd
The vernal equinox (i.e., spring in the Northern Hemisphere) is but three weeks away. We are on the down slope of weather induced drawdowns in heating Btu stocks (natural gas, high sulfur diesel and propane). The pitch of this negative weather-demand function will steepen in the weeks ahead.
As far as the in the U.S. is concerned, aside from a potential one-off weather event, we are now past the peak drawdown season. Last Thursday, the EIA reported a much below normal 81 Bcf delivery from underground stores of supply. The five-year average delivery drops from 134 ±12 Bcf to 15 ±19 Bcf over the next four Thursdays.
At the same time implied production continues apace. Since the start of this month producers have lifted 15,235 contracts on the Nymex; thereby reducing their net short position in the market by three-eighths to a year-to-date low. This action is a so-called tell in that increased production is a corollary of producers buying back hedges.
With demand on the wane and production strong, why are we still bullish gas in the short-run?
According to the weekly numbers from the DOE, deliveries since the start of the year are averaging 25.86 Bcf/d. At this rate deliveries for January and February will top the 25.84 Bcf/d record from 2003. Despite this demand, spot Nymex gas for April 2011 delivery has dropped from a high of 4.800 on January 24th to last Friday’s 4.005 settle; a decline of 16.6%.
Along this backdrop our view is premised on the theory that the crowd is wrong on the extremes (they buy at the top and they sell at the bottom). What helped us get to sleep this weekend was Friday’s CFTC report which showed managed money accounts (a very good barometer of the crowd) holding their most bearish position in Nymex natural gas futures since May 2010; short 188,610 contracts. That is enough gas to keep U.S. Steel’s blast furnaces blasting for the next 17 years (based on the company’s reported gas usage in 2008).
The last time the crowd was this bearish gas, the NAV on the UNG ETF was 6.96. Two months later it was as high as 8.84 (+27%) as Nymex gas for July 2010 delivery rallied from $4.124 to a high of $5.196.
In other words, here at we are betting against the crowd.
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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.