Schork Oil Outlook: Is the Natural Gas Rally Finally Here?

Apropos yesterday’s Trading the Technicals section… have the bears in natural gas hit rock bottom? Perhaps. Over the last three weeks ended Monday, spot natural gas futures for December delivery fell by 17%, from a 4.207 high print on October 7th to a 3.500 low print on October 25th. This selloff was fueled by a large influx of bearish money.

Open interest rose by 119% over this period and On Balance Volume (OBV) surged by 135%. Furthermore, coming into yesterday’s session the Relative Strength Index (RSI) had been hovering below 30 (i.e. oversold) since October 21st.

In other words, this market was ripe for a short-covering rally. Therefore, yesterday’s 7.3% trough-to-peak intraday surge was technical and had nothing, we repeat, nothing, to do with the EIA’s weekly storage report… as some rather silly headlines in the media suggested. For crying out loud, the EIA reported a 71 Bcf injection. Thus, over the last two months the year-on-year deficit (not seasonally adjusted) has narrowed from 228 Bcf (-6.7%) to 5 Bcf (-0.1%).

In August, The Schork Reportnoted that because of the summer’s sub-standard injection rate there was going to be excess storage capacity this fall. Thus, utilities would have plenty of space available to them to store molecules ahead of the heating season. Indeed, over the last four reports injections averaged 12.1 Bcf/d or 43% above the five-year average and 200% above last year’s pace when capacity was already maxed out in a number of fields.

Storage in the Producing Area (request today’s Chart of the Day) is already within 4 Bcf of our 1.196 Tcf forecast. At the current pace storage here is now on pace to hit 1.237 Tcf, i.e. just 60 Bcf shy of estimated capacity. Thus, you can’t swing a cat without hitting a molecule in the U.S.

What’s more, on Wednesday the winter strip (Nov’10 to Mar’11) settled at a 32.6 cent or 7.8% discount (!) to next summer (Apr’11 to Oct’11). This is the fourth season in a row when the winter settled at a discount to the following summer. In the prior seventeen seasons, the winter never closed at a discount to the summer. Whereas winter gas had closed at a 16.04% premium (backwardation) over the previous seventeen seasons, over the last four the spread has finished at a 5.6% discount (contango).

In other words, the market is not concerned about the availability of gas for this season. Be that as it may, a close today above 3.900 will push us off of our bearish daily bias.


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.