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Schork Oil Outlook: Risky Business

Henry Hub Natural Gas Weekly Trend… BEARISH

What a difference a week makes? Two Thursday’s ago we were utterly confounded by a 69.6 cent (+19%) spike in the April contract in the minutes following a weekly storage report that was anything but bullish.

As we wrote the next day following the spike: That makes NO BLOODY SENSE. We appreciate markets are not supposed to make sense. But yesterday’s reaction is beyond the mathematical realm of reasonableness. We bet someone made a fat-finger mistake. If it occurred at a public company we will read about it next earnings season.(*The Schork Report, Friday, March 20th, 2009 *)

Of course, not everyone agreed with our observation. One client wrote to assure us that the move did indeed make sense. Apparently, it is all part of the reflation trade, i.e. Uncle Sam’s attempt to stimulate the economy by revving up the money printing press will depress the dollar and ignite a severe spike in hard assets.

To that client we responded… hogwash.

Not to the notion of pending inflation, but hogwash to the idea that this notion of pending inflation was responsible for NYMEX natural gas spiking nearly $7,000 a contract inside of three minutes.

In fact, we think any attempt to expend grey matter to justify that kind of move is a preposterous exercise in futility.

The NYMEX has since corrected with a vengeance. But, ours is a cautionary tale. As ridiculous as that three minute spike back on March 19th was, there was someone out their willing to spin a case for it. And, if that someone had deep enough pockets (think Amaranth or USO) than just by their sheer mass they were in position to enforce their will on the market.

Think about it. That move from the 19th was outlandish. So much so it likely invited a good number of contrarians into the market to fade it. We were one of them. Had we been wrong then our short covering would have likely pushed this market to $5 and beyond. Fortunately it did not come to that… this time.

But next time, we might not be so lucky.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.