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Gas Petrospective – July 19, 2010

July 19 2010, 08:33

Gas Petrospective – July 19, 2010

Nymex

Natural gas prices dropped 6.7 cents on Friday, but they still gained 11.7 cents on the week, despite falling on four of the five trading days last week. In the previous, holiday-abbreviated week, natural gas prices had surrendered 28.5 cents per million Btu. And in the Tuesday-to-Tuesday period covered by the CFTC in its weekly commitments of trader’s reports, prices had given up 32.8 cents. As we have suggested here recently, the largest amount of selling came from trading funds.

In the latest commitments report (see right above this on page 7, at the bottom), the only other category doing any selling at was Swap Dealers. But they had been buying heavily the week before, and are the only category holding more longs than shorts in natural gas. Producers have a few more shorts than longs, while Other Reportables have about two shorts for each long and managed money accounts have 2.58 shorts for each long. Swap Dealers, on the other hand, are holding 5.16 longs for every short, and we expect that a number of hedgers have found their way to that category.

In any event, the Managed Money category has been selling natural gas futures for the last two or three years. Clearly, the funds included in this group must be long something else, call options, physical gas, futures on another exchange, swaps, or oil positions. These shorts could not have survived the advances in this market without something long somewhere else. We do see that funds, as a group, are long oil and short gas. They seem to have been selling recently in an attempt to encourage other categories to sell so that they (funds) could cover shorts.

On Thursday, despite an EIA underground storage report showing a larger build than expected, buying outpointed selling dramatically, to the stage where one day higher was more than four days lower. We believe that Thursday’s advance may be the model that will push quotes higher longer-term. The funds tried to press prices down last week, but each new low was greeted with buying. There is scaled-down buying in this market coming from somewhere. The fundamental picture has improved, and a storm could really bring short-covering.