Gas Petrospective – August 27, 2010

Natural gas prices dropped 5.4 cents per million Btu yesterday as traders reacted to a larger-than-forecast injection into storage levels and on the great likelihood that next week’s report will show even more of the same. Almost every sector of the market was lined up on the sell side, as fundamental traders were discounting the end of summer and a bigger build than expected, financial traders were selling on the diminished probability of there being industrial demand, and technical traders were selling as prices collapsed to new 11-month lows. Funds were selling for any number of reasons, not least being that they have been doing that for months and years now.

The most recent selling has had an element of culmination or of acceptance that this market has now run out of hope on the upside. Minor improvements – which would send oil prices steeply higher – are just not accepted as being bullish in this market. The fact that the year-on-year deficit has grown, going from 185 bcf (5.79%) to 198 bcf (6.09%) or that the surplus against the five-year average has dropped, falling from 196 bcf (6.96%) to 177 bcf (6.16%) just do not matter here. Nor have these developments mattered this summer.

Production is apparently too high and the economy apparently too weak for it to matter that storage levels have been improving. A larger-than-expected drop in unemployment may get oil prices to rally, but means nothing in this market. And, now, we are looking at the end of summer. Next week’s injection may even be larger than the year-earlier of five-year average for the week, something really not seen much if all this summer. That is sure to be bearish.

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