Gas Petrospective – August 30, 2010

Natural gas prices were down another 16.6 cents per million Btu on Friday, giving us a loss of 46.6 cents – or 11.32% - last week. We thought that this market had already discounted the end of the summer when prices reached $4.00, but it seems that it has become an ongoing process, with quotes falling quickly to $3.61 before rallying slightly.

A large part of the equation is the large speculative short position taken on by funds. These short holdings are clearly being balanced by long positions elsewhere, possibly in oil markets, and they seem to be initiated for any number of reasons, from weakness on the charts to disappointing economic data or larger-than-expected builds in storage levels. And these shorts only seem to get covered when we have strong upside activity accompanied by what seems to be a decent reason to get long. As soon as the upside seemed compromised, the moment that prices started to turn back down, funds were back in this market selling aggressively. When they saw it was working (pushing quotes lower), it only encouraged them to add more shorts.

The year-on-year deficit grew last week, going from 185 bcf (5.79%) to 198 bcf (6.09%) while the surplus against the five-year average dropped, falling from 196 bcf (6.96%) to 177 bcf (6.16%). Five weeks ago, the year-to-year deficit was 33 bcf (1.77%), and the surplus against the five-year average was 261 (9.92%). These fundamental improvements have been ignored almost all summer long, and now that summer is over in the collective consciousness of this market, they matter even less.

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