ENERGY PRICES WERE WEAK ON THURSDAY… bulls in the liquids complex failed to parlay Wednesday’s “unexpected” DOE report, while Henry Hub natural gas futures in New York traded below $3 for the first time since the week end August 16th, 2002, i.e. nearly seven years ago to the day. However, by February 2003 spot gas on the NYMEX peaked at $11.899. To wit, maybe those $10 calls don’t look so dumb after all.
To date, a total of 1,553 Bcf of molecules have been injected. The EIA expects this refill season to end with a record 3.8 Tcf of gas in the ground. That would smash the previous record by ?260 Bcf or 7.3%. To get there, injections from this point on only have to average 82% of the 5-year average.
Given NOAA’s recent downgrade of the prospects for this Atlantic hurricane season, the deck is stacked against the bulls… and it shows. The bottom has fallen out from underneath the Henry Hub complex. For instance, key cross-seasonal timespreads – the Oct’09/Nov’09, the Mar’10/Apr’10 and the winter/summer strips (Nov’09 to Mar’10) vs. (Apr’10 to Oct’10) – have been posting new life-of-contract lows over the last two weeks.
Therefore, the market is paying you to carry inventory forward. However, with underground storage on the way to 3.8 Tcf and beyond, the market is running out of options on where to store that gas. Be that as it may, that is apparently not stopping some in this market from taking a shot at a rally in gas. According to an article in the Financial Times, one hedge fund manager out there thinks gas is set to triple over the next couple of months.
In between August 7th and August 14th (Friday to Friday) open interest in the Henry Hub January $10 strike call surged by 9,195 contracts to 10,984 and interest in the February $10 strike call spiked by 7,603 to 8,484 contracts. With the respective premiums trading in between $0.05 and $0.06 last week, this “trade” amounts to a $9 million lottery ticket.
As detailed in today’s issue of The Schork Report , in 2008 when U.S. Steel was running around 90% of capacity, the company’s mills burned the equivalent of 11,000 NYMEX Henry Hub contracts (110,000×109 MMBtus). Today U.S. Steel is running around 45% of capacity, yet one fund manager is purportedly taking a bet –nearly twice U.S. Steel’s natural gas load at full capacity – that gas prices – with underground storage near 4 Tcf – will triple between now and December.
This will either end up being the dumbest trade in the history of NYMEX natural gas trading… or the savviest. Time will tell.
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.