Natural gas production in the Lower 48 U.S. increased for the seventh time this year in August. According to the EIA’s 914-Survey, month-on-month output rose by 1.8% to a record 65.79 Bcf/day.
Got that? Despite all the Chicken Little prognostications from Wall Street (two years and running) regarding producer’s alleged inability to produce in the current price environment, production keeps rising.
As noted last month in The Schork Report, the net short position in futures on the NYMEX gas contracts held by producers, processors and other commercial users jumped by 20%. Given the strong relationship between natural gas prices on the NYMEX to hedging activity by commercial users, i.e. as prices rise, producers sell, we asked: With gas seemingly unable to break $4, why are producers hedging?
The answer is obvious. Despite Wall Street’s siren song to its investors, producers are still producing. According to the Dallas Fed, the outlook for drillers remains “optimistic… assuming a soft landing for the natural gas drilling industry. Contacts noted strong domestic landbased drilling and improved international demand has cushioned losses sustained in the Gulf of Mexico”.
In this vein, in the first three weeks of October commercial interest on the NYMEX dropped by 40%, from 20,541 net shorts as of October 05th to 12,527 on October 19th. For you bulls, you should be concerned. The only reason why commercials reduce their shorts is because they are ready to deliver against those obligations—which of course mean even more gas is coming soon to a market near you.
Strong production helped somewhat mitigate the spike in gas-fired cooling demand last cooling season. The contiguous United States had its fourth-warmest summer (June-August) on record, according to NOAA. Net storage movements (withdrawals less additions to underground reservoirs and LNG tankage) suffered the worst July, -7.31 Bcf/d, since 2006 and the worst August since 2007, -6.00 Bcf/d. Based on historical comps we expected minimum movements of -8.2 and -6.7 Bcf/d, respectively. Be that as it may, strong cooling demand and a sub-standard summer re-build could not incite any bullish interest in the market.
As in comedy, timing, is everything in this business. On Monday the spot contract for December delivery settled 5.1% (!) below Friday’s close. As such, we were pushed off our newly acquired bullish daily bias. Keep in mind, our bullish switch on Monday was predicated on the technicals and had absolutely nothing to do with the fundamentals. After all, production is surging and industrial and commercial demand is hamstrung. In other words, nearby fundamentals are as bearish as ever. Regardless, pre-winter gas always rallies… doesn’t it?
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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.