Gas Petrospectives – June 16, 2010

Natural gas prices continued moving higher yesterday, gaining another 18 cents per million Btu. And, for the most recent time in as many sessions, the advance was predicated on hot weather and the fear that this Atlantic hurricane and tropical storm season will be more active than last year.

A third component that has been working to help push quotes higher has been the technical aspect. Prices broke to the upside slightly less than two weeks ago, and traders have been looking to buy ever since. This is also true, it seems, of trading funds. They had been short, but the latest reading suggests they may be getting long, now. They may end up selling into higher prices, but they do not seem especially keen to try to stand in the way of higher prices here or now. For months, they helped to kill every rally and exploited weak points by hitting available bids with alacrity and aggressiveness.

Prices may now be getting slightly overbought, but there is still plenty of upside potential in this market. So far, the hot weather has existed mostly on paper, in the future in this market. At some point, soon, the hotter readings will be upon us, and we will start to see and even feel proof of the impact of these.

Some observers see this as a “short-covering rally,” - and there has doubtless been a heavy element of short-covering – but this does not look like a short-covering rally. Instead, it looks like an advance on fresh buying, with covering a factor, but a minor factor. We certainly saw it in the pullback last week into the $4.60’s, and we probably get buy-stops triggered on each new high. But, the better buying has come from fresh buying interest, from commission houses, end-users and fund.

Technical Recap

Volatility Term Structure

Volatility Smile

***From NYMEX Settlements

Significant Activity:

1. N10 4000 P

2. Q10 4900 C

3. N10 5000 C

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