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.