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Gas Petrospective – July 6, 2010

July 6 2010, 08:18

Gas Petrospective – July 6, 2010

Nymex

Natural gas prices dropped 16.7 cents per million Btu on Friday, as traders took profits on long positions ahead of the Independence Day Weekend. Volume was light, and it looks like the trend is pointed higher – as of right now. We do have a head & shoulders top possibility, giving us an objective to the $4.12-$4.13 area, but at any point if prices break above the head of the pattern, it would be extremely bullish. We are a long way away from seeing anything like that, but we need to bear in mind that this market still has the potential for volatility. We could see prices break down towards the $4.12-$4.13 area, and they could then advance to $6.

That is our big question right now. We ultimately believe that prices will try to reach higher levels and $6.00/mmBtu seems like a logical step in that process. We see two factors leading us higher. The first is a gradual reduction in the surplus against the five year average – along with an increase in the deficit (which it is now) against a year ago. The second factor is a steady appreciation in the face of expectedly repeated hurricane threats.

The second factor relies to a very large extent upon the meteorological consensus being correct. The two or three respected sources, the NOAA, assorted private forecasters and University of Colorado, seem to agree that we should have a very active tropical storm and hurricane season this summer. If that consensus were to unravel – and we are talking about the weather, after all, - then a potential major source of expected support would evaporate. But, assuming that the consensus turns out to be correct, we should have a steady stream of tropical depressions developing like a conveyor belt from the West African coast. The constant fear of what these could become would break up any concerted bearish strategy, and could generate enough short-covering to generate a bullish trend. In any event, that is our thinking right now. A lot can change between here and the end of storm season, though.

Volatility Term Structure