Gas Petrospective – August 11, 2010

Natural gas prices were down another 1.2 cents per million Btu yesterday. Prices seem to be consolidating before making their next move. They tried to rally earlier in the day, but they sold off and finished the day near the session’s lows. Cooler temperature forecasts have been the primary catalyst, but it certainly hasn’t hurt the bearish cause that funds have been looking for the opportunity to get heavily short again.

Over just the three sessions of Thursday, Friday and Monday – during which prices lost 42.8 cents per million Btu, open interest has increased by 40,648 contracts. We know it cannot have all been producer selling, although there may have been an element of that. Still, producers like selling into advancing prices, not falling ones, so our most likely candidates are funds. We will know on Friday, but we fully expect to learn that funds were the major sellers over those three days.

They have been big sellers at every strategic turning point, and this looks like their work, again. Doubtless, the advent of cooler, more moderate weather forecasts has seen producers and commission houses pull away bids, but funds have certainly been hitting them. In any event, we will know on Friday.

There is plenty of natural gas in storage. And production has been as heavy as it ever has been. But temperatures have trended warmer than usual since March, and storage levels have dropped.

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