Energy marketson both sides of the Atlantic finished last week on a sour note. Crude oil markets in London and New York finished lower for the first time in three Fridays. On Tuesday the bulls in New York tried to bluff the market higher with some early morning electronic bids above the $60 critical point of reference, but the bears saw right through their charade.
Then on Wednesday they had another shot at $60 after the DOE reported, what was, for all intents and purposes, a bullish weekly storage report, but they failed again.
The fact that equities had a rare down week also weighed upon the energy complex. That is to say, even the equity market’s more enthusiastic Pollyannas had a hard time spinning last week’s headlines.
Look Who’s (regretting) Buying Natty Now: Apropos our discussions regarding the shift in investor sentiment in the energies (see last Monday’s and Tuesday’s issues of The Schork Report), the number of shares outstanding in the in the United States Natural Gas (UNG) exchanged-traded fund (ETF) jumped 13½% last week to 111,300, while interest in the equivalent crude oil ETF, the USO, dropped 5.7% to 90,600. Thus, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin, today they prefer natty at 1.2… lousy fundamentals notwithstanding. Unless you are selling WTI against it, we see no other reason to own natural gas in the spot right now.
Weather related demand is dormant and industrial demand is virtually nonexistent. For example, per last week’s industrial production numbers from the Fed, capacity utilization at steel mills fell further in April, to a woeful 33.3 percent of capacity. As a result, iron and steel production declined 1.8% on the month and was 64.4% below its recent peak in December 2007! As we have noted before, U.S. Steel’s 2008 consumption of natural gas amounted to around 1.3% of the average open interest in the NYMEX Henry Hub futures contract.
Extrapolate that (U.S. Steelis probably the tenth largest steel company in the world) against the extant demand destruction for steel (and other prosaic commodities) and that is a lot of Btus that have not been burned… and that is not changing over the next few months.
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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.