Yet another counter-trend for the books. US natural gas prices are continuing to sell-off from their July peaks, a pattern that is exactly the opposite of what you would ordinarily expect in the market.
According to Merrill Lynch, the situation is the result of higher-than-expected storage builds in the summer due to a surge in domestic gas output:
Previous tightness evaporated quickly and prices fell as the market experienced oversupply. Not even two major hurricanes, with their corresponding gas output reductions, have been enough to tighten the market.
The bank warns prices could fall further still. A lack of global LNG meanwhile will likey keep the US market dislocated from other global gas hubs - where are prices are much firmer - for the near future.
The situation also looks to be putting-off speculators. According to Stephen Schork of the Schork Report, the amount of outstanding bets by large speculators in the futures market has fallen by 9 percentage points in the last month - which takes away some of the long liquidation risk. Open interest in Nymex natgas futures has also dropped in six of the last seven weeks. Schork writes:
Despite the disruption from back-to-back hurricanes to end the 2008 refill season, bulls trading the NYMEX Henry Hub futures contract have been unable to generate any upside interest. The spot contract closed lower for a fourth straight month. In fact, since the bubble peak back in early July, the spot contract for December delivery has closed lower in 52 out of 86 sessions (60½%). Furthermore, the contract has lost on average, 8.7 cents per decatherm over those 86 trading days. That comes out to a running loss of $7.464 a decatherm or $74,640 per contract.
The reduction in speculative positions should make the market more responsive to any cold weather forecast, while reducing the probability of length liquidation and increasing the chances of short covering says Petromatrix’s Olivier Jakob. But while a cold spike could be the only thing that changes the current downward spiral Merrill says:
Assuming a combination of normal weather, a year-on-year decline in economic demand and continued growth in US production, the storage withdrawal this winter could well be one of lowest in years. In turn, high storage levels by the end of March 2009 could end up putting significant downward pressure on prices.
Currently, the National Weather Service (NOAA) projects winter weather to be colder than last year’s, but still milder than normal.
Related Links
Global Energy Weekly - Merrill Lynch
