Schork Oil Outlook: We Still Like Owning Natural Gas, But....

Look Who’s Buying Natty Redux:

We got a lot of feedback from yesterday’s blog post regarding the interest in the natural gascomplex by passive investors and the positive knock-on to the NYMEX Henry Hub price path. Growth in outstanding shares in the United States Natural Gas (UNG) exchanged-traded fund (ETF) have surged over the last few months while interest in the equivalent crude oil ETF, the USO, has waned. We have no doubt that the flood of money into the UNG established a floor in the NYMEX market – regardless of extant weak fundamentals – and is now propelling the market higher. We repeat, regardless of weak fundamentals this market has surged 32% from its April 30th low.

Keep in mind, the fundamentals for gas are poor. On one hand we have seen a steep, swift plunge in gas rig counts. That is an event that has received a lot of air play on the business networks and has undoubtedly enticed interest in the UNG. However, what does not get a lot of play has been the negligible (to date) pullback in gas output in spite of the fall in rig counts. Rigs have been dropping precipitously, 24 rigs per week, for the last nine months. Yet, gas production has been rising steadily.

In other words, higher yielding non-conventional plays (tight, coalbed, shale gas) and gains in rig efficiency are offsetting what would be a traditional rig-count to production-loss event. Here at The Schork Report, we supremely doubt most buyers of the UNG are aware of this.

Furthermore, industrial demand for gas lags. No where is this more evident than in the plunge in the global steel market. With all but two North American mills shuttered this year, U.S. Steel –not to mention ArcelorMittal, Nippon, JFE, POSCO… etc – are only burning a fraction of the Btus they were a year ago. Nevertheless, we still like owning natural gas… as long as we are selling crude oil against it for the time being. On April 27th July NYMEX crude oil settled at 149.1 cents on the dollar to the natural gas contract. Last night crude oil settled down at 134.7 cents. As we noted in yesterday’s issue of The Schork Report, there is still room to the downside.


In this vein, our statistical analysis indicates a bullish sentiment in natural gas relative to crude oil in the winter and early spring and a contraction of the spread during summer. February is the most bullish month for the spread (long gas/short WTI) and September the most bearish (short gas/long oil). According to our numbers, we see September as a safe short on the spread, with almost all movements causing a contraction. This has caused values to cluster around the mean, with a low standard deviation of just $0.08. February on the other hand is still the most bullish month but with a far higher standard deviation, of $0.16, meaning higher highs but also more frequent bearish days. For risk averse traders September seems the better month, and the summer months of July and August (with a standard deviation of $0.27) to be avoided.

Unlike September, which is heavily bearish, the historical data for May is open to a shift in either direction, meaning it’s the fundamentals which will define the relationship and not a statistical correlation. Thus, due to May’s clustering around either side of the mean, we can confidently say the market moves independently from year to year, and this year we’re shifting towards a bullish play on gas relative to oil.


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.