The market for October is now trading inside the 50/62% retracement area from 3.263 to 3.506. We expect the current run to stall inside this area. If we are correct we expect to see a run back below $3… towards that 2.409 low print from the beginning of the month. If we are wrong, then step aside. There is no point in trying to be a hero. Therefore, a close today above 3.506 will push us off of our daily bias, The Schork Report - September 15th, 2009
As we said on Tuesday, there is no point in trying to be a hero and sell this technical rally in natural gas. A month ago spot 10-day volatility for the NYMEX Henry Hub contract was 22%. Today spot volatility is 137%. In other words, over the last four weeks observed daily price change expectations have moved from around 4.3 cents to 32.2 cents.
The last time we saw volatility spike to current levels was back in late September, early October 2006 when Amaranth was imploding. The violent shift back then in vol signaled a significant rally in gas… despite the fact September underground storage was at a then record 3.2 Tcf. Regardless, gas for November 2006 delivery wound up rallying 43% from 5.392 on September 28th to a high of 7.693 on October 25th and expired on October 27th at 7.153. That rally occurred despite the fact we would eventually head into the 2006-07 winter with a then record 3.461 Tcf in the ground.
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Today we are again at a new record for underground storage and there is even a legitimate chance we will max out capacity in more than a few market areas before heating demand picks up. Furthermore, the economy is a hell of a lot weaker today than in 2006. Nevertheless, violent shifts in vol after a sustained trend often signal that trend has ended… not matter how bullish or bearish the current fundamentals appear.
Regardless of what the EIA reports this morning, it will not alter the fact of how bearish the fundamentals are. We reached out to a number of clients on the physical side, producers and end-users. Suffice it to say, they are both skeptical (although the producers will take it). One client in Calgary quipped that storage in Canada is so full that Edmonton is going to ban smoking in Alberta for fear of blowing up half the province.
In this vein, the fundamentals are bearish, but this market is not trading on fundamentals. Over the last five sessions the NYMEX October contract has spiked 33%. The contract is up 56% from the September 04th lows. The fundamentals do not move that fast. But, the technicals do. As such, the spike in vol suggests there are more than a few bears trapped… and here at The Schork Reportare unwilling to join them.
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.