Schork Oil Outlook: NatGas Volatility — Bullish or Bearish?

Energy prices were mixed yesterday...and weird. Nymex WTI fell despite stronger equities markets and a weaker dollar. Even weirder, the products decoupled from the complex with gains in the RBOB and heating oil market mirroring WTI’s drop. Expect continued volatility as July expires on Tuesday. Meanwhile natty rose after an ostensibly bullish 87 Bcf injection, but there’s more than meets the eye…

For yesterday’s EIA natural gas storage report, analysts were looking for a 90 Bcf injection. Bloomberg’s whisper number was 3 Bcf lower at 87 Bcf. At 10:30 am, the EIA reported a total increase in natural gas storage of… 87 Bcf, another impressive performance from the anonymous crowd over at BBG.

But how does the 87 Bcf stack up? It is well below the 114 Bcf injection seen last year, but 9.02% above the 80 Bcf injection seen over 2004-08 time-step. Interestingly, this changed the 0.53% year-on-year surplus in the previous report to a 0.55% deficit.

Compare that to the 5.05% surplus seen for the week ending April 16, and it becomes clear that the bulls were justified in pushing prices back above 4.000. But they’re having a harder time maintaining 5.000. Prices on Wednesday dropped to a low of 4.965 and settled at 4.978 – and were hovering around the 5.000 mark in the wake of the release.

If analysts truly considered yesterday’s report to be bullish, why did prices drop to a low of 4.980 in the wake of the release? In fact, this report could even be construed as bearish. Consider that, taking into account Memorial Day, we would expect the historical release to be 87 ±4 Bcf.

But this week did not see historically normal weather. As illustrated in the Chart of the Day in today’s issue of The Schork Report, every region in North America saw greater cooling degree days this year than last, an average increase of 3.87% while some regions saw even more severe changes – for instance the Pacific saw 22 cooling days compared to 2 last year, while New England saw 18 cooling degree days compared to 1 last year.

Thus, given this especially warm weather, should the injection not have been smaller than 87 ± 4 Bcf?

Rather, before readers begin to get long, we are concerned that the spike in prices to 5.150 (which came around 2pm, more than three hours after the EIA’s release) was due more to a short covering rally.

Yesterday, Reuters reported that SandRidge Capital, a $1bn energy hedge fund was down 19% due to “bad bets on the U.S. natural gas” markets. We are hearing rumors on the grapevine that SandRidge was not the only, or even the largest, hedge fund to be on the wrong side of the natural gas markets, and if significant short covering is taking place, yesterday’s rally was not due to the fundamentals.

In addition, unsubstantiated rumors persist that in addition to SandRidge, another large hedge fund is flailing on these same spreads. At this time we have no way of knowing whether or not this rumor is true, but if it is, it would explain a lot.

After all, if you flip on the light in your kitchen and see one cockroach, you know there are a bunch more that scurried underneath the refrigerator before you could see them.


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.