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Schork Oil Outlook: Hard To Be Bullish

ENERGY PRICES WERE MIXED AT THE END OF LAST WEEK… crude oil futures in New York and London finished on a very strong note ahead of the holiday abridged week. Meantime, on Friday the IEA lowered its demand estimate for 2009 by 2.4 MMbbl/d (-2.8%) to 83.4 MMbbl/d. In other words, the IEA lowered its estimate the equivalent of the daily output of Iraq.

Supply levels remain unchanged: underground caverns, mines and aquifers are brimming with molecules for this point in the season. The heating season is over, the cooling season is at least a month away and industrial and commercial demand is virtually nonexistent. Given these fundamentals it is awfully hard to get bullish natural gas… which of course means, it is probably an excellent time to get bullish natural gas.

But, we are not ready to hop onto the bull’s bandwagon. Not yet at least. After all, as we see above, futures traders have discounted the front of the NYMEX Board even further. For instance, the contango on the June contract – the first month we see a significant month-on-month rise in demand for natural gas from the Grid – relative to January has fallen out of bed as it were. Over the last three weeks the ratio between June and January has plunged from 0.70 to 0.65 or to 13 percent below the second standard deviation of the long-dated seasonal mean.

More importantly, as far as next winter is concerned, the backwardation between the March 2010 (the last contract on the winter strip) to the April 2010 (the first contract on next summer’s strip) narrowed again last week. Three weeks ago the ratio between the March and April contracts was 1.052. Last Thursday that ratio stood at 1.034. To put that into perspective, a year ago at this time this ratio was at 1.187. In other words, at this time, futures traders on the NYMEX are not showing any concern with regard to supply for this summer and next winter.

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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.