There were some very volatile moves higher in Nymex natural gas futures on Monday.For those who might be interpreting those swings as the makings of a genuine bull market, we thought we’d present some of Tuesday’s commentary on the subject.
First, our favourite, which comes from Stephen Schork of the Schork Report (our emphasis):
What we are seeing here is a technical bubble. For example, the underlying to the NYMEX contract at the Henry Hub lost 11 cents yesterday, while Transco Z6 inched up a penny to 3.16. Go that? NYMEX Henry Hub gas futures closed at 3.297 yesterday afternoon, while the physical gas for delivery into New York City traded around 14 cents lower yesterday morning. NYMEX gas is a bubble… but be careful, Lord Keynes has a point.
We stand by our words and our numbers. No doubt, gas is cheap. But, if there is no value, than cheap, in and of itself, is not a reason to own something. Back in the 1980s the Yugo GV was cheap also. The car was cheap for a reason. Its Soviet-bloc engineering (see today’s G.M.) exuded the feeling it was assembled at gunpoint1. Gas today is cheap for a reason.
There is too damn much of it. Over the weekend Alan Lammey at Natural Gas Week noted that ANR Storage was reported as 97.4% full, Sonat Storage was 97.3% full. Meanwhile, Texas Gas Storage was 96% full, Transco Storage was 83.3% full and Tennessee was estimated at 89% full… and it is only the middle of September for crying out loud.
Olivier Jakob at Petromatrix, meanwhile, once again reminded to what degree the UNG rollover will be playing havoc with the price:
The stronger part of the Energy complex was Natural Gas but we continue to discount this great volatility experienced during the roll of the indices. Natural Gas Futures were up close to +11% but the UNG which is supposed to track the NG Futures was higher by only +3.7% as arbitrageurs were busy pocketing the hot-air premium of the UNG by buying NatGas against selling the UNG.
Meanwhile retail investors will be scratching their head as to why NatGas Futures go higher but not the UNG. It was pretty savvy timing from the Fund to announce one day before the roll that it will be creating new shares at the end of the month. This forces about half of the contango roll to be done through the share price loosing its 16% premium rather than through the Fund’s market positions. On the first day of the roll most of the position cuts were done on the ICE Natural Gas Swaps.
Barclays, meanwhile, saw the ramp up in Monday’s price as reason to open up a short position. As they wrote:
…we are opening a short position in the November Natural Gas contract based on today’s closing price on HH natural gas has pushed steadily lower since early August.
The hope at the time was that inventory injections were showing signs of tightening and that this process would deliver a storage finish meaningfully different from the trainwreck 3.9 Tcf level that we and the market had expected. Hopes were quashed by a cool August, no stirring in the tropics, and a balance that did not continue to tighten incrementally on a weather-adjusted basis. Again, this hope has been introduced to the market in the form of the most recent storage injection. While higher than last year’s and five-year average injections, it was smaller than expected on a weather-adjusted basis. To us, if the balance is showing tightening (which with one week of evidence is debatable), it is for one of two reasons: higher coal displacement and/or forced producer curtailments, neither of which has bullish implications.
Post-summer power loads will not enable the same amount of switching going into the shoulder fall season. And, producer curtailments may be too little, too late in a move that implies a “forced-hand” as operational constraints push volumes upstream. With storage at nearly 3.4 Tcf, the test is now. There are eight weeks of inventory releases until the traditional injection season concludes, and more than 450 Bcf to go in implied five-year average builds during this time.
To us, this suggests weaker cash prices and pressure on the prompt contract through the end of October. We choose the November contract (which expires in late October) to exercise our view, which is currently priced 70 cents off the lows, and a full $1.80 above the lows for the continuous prompt contract.