Schork Oil Outlook: What Drove the NatGas Rally?

Natural gas bulls are the Buffalo Bills of the commodities complex!

Over the last three months Nymex Henry Hub natural gas futures for prompt delivery have rallied from a low of 3.855 (May 06th) to a high of 5.196 (June 16th). In our opinion the rally through mid-June was predicated for the most part on three key drivers.

First, we tend to see a bid in the market through the shoulder months as utilities scramble (and traders make them pay up) to lock in load commitments. The second driver was the early (and extant) rise in temperatures throughout key gas-fired power generation markets. For example, per the latest monthly numbers available from the EIA, natural gas consumption from electric power utilities jumped by 16% to a record 18.3 Bcf/d in May (which is the highest high since the EIA began segregating the data in 2001).

What’s more, according to NOAA June was the eighth warmest on record… and speaking anecdotally, July was not any cooler. Be that as it may, we have not come anywhere close to the highs in Nymex gas that we saw in mid June.

What gives?

As observed in the July 02nd issue of The Schork Report, gas prices tend to stagnate until the start of the peak hurricane season in September, hence the distinct seasonality of the gas market. For example, despite one of the coldest, snowiest winters in recent memory, spot Nymex gas peaked in the first week of this year at 6.108 (January 07th) and moved lower with near metronomic precision through the remainder of the winter to a 3.810 bottom on April 01st.

More importantly, as noted yesterday, apparent demand for gas from the industrial and commercial markets is lagging. For instance, whereas in May demand for a/c load came in 21% above the error bar of the historical range, demand from industrials and commercials was 6.6% and 6½% below the error bar, respectively.

Lastly, the third driver the bulls seem to always fall back upon is the (yet to be proven) notion that sub $5 gas is somehow a catalyst to rein in production. This fallacy has been quite popular amongst the cognoscenti for over a year now… despite any hard evidence.

For instance, spot Nymex gas averaged a lowly $4.084 in April and $4.154 in May. Yet, according to the latest monthly reports from the DOE (EIA-914), gas production in the Lower 48 increased by 0.2% in April to a record 64.94 Bcf/d and ticked down by a barely perceptible .03% in May, 64.92 Bcf/d.

Furthermore, the net storage withdrawal for May (withdrawals – additions) was minus (more gas went in than came out) 13.2 Bcf which is 33% above the error bar (1976 to 2008).

In other words, the producers are still producing in a sub $5 market. Thus, once temps cool into the shoulder months, what do bulls have to lean on… other than praying for a hurricane?


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.