zman’s Energy Brain

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Natural Gas – Up, Up, & Away- But Why?

Posted by zmann on October 8, 2006

Despite tying the record for natural gas in storage, arguably five to six weeks ahead of the end of the injection season, gas prices have been rising. A lot. November gas rose a whopping $0.81, or 14% this week to close at $6.43 on Friday. The contract has now risen six straight sessions with excuses (ahem, reasons) alternating between short covering, rallying with OPEC threats and oil prices, and expected colder weather. See the CFTC section for an updated graphic but suffice it to say, short covering has been somewhat of a factor in the rise. The argument that winter is coming is pretty lame but that too played a part as a cold weather mass from Alberta was expected to invade the mid west and south US.

The reality of the matter is that we are going into uncharted territory for gas storage levels. Some believe we’ve run out of room and that injections will quickly peter out as it becomes impossible to inject more gas into salt caverns. That kind of talk is premature. Non-coincident peak storage (peak storage in the various facilities though never achieved at the same time) is closer to the 4 Tcf mark, according to the EIA. So let’s rule out that talk for now. Anyway, that would lead to lower, not higher prices as they have to say, “I don’t want the gas, you take the gas”, never a good statement in any commodity, oil, gas, gold, hot potatoes, etc.

What I think will happen is that we will get another injection of between 65 and 70 Bcf pushing all three storage regions into record territory (the west is already there) and producing a shock in cash prices. As cash pulls away from the contracts, and next week’s forecast firms up (which is looking warmer) then the net longs, which are at near all time record levels and certainly record 2006 levels will dump the 24 month strip, but especially the November and December contracts.

You know, I’ve never done it but it would be interesting to look at how many consecutive straight days gas and oil generally trade in one direction. A fellow could make some money when that happens in stark contract to the fundamentals. Yes, I know, it’s getting cooler outside. It’s just not cold yet. The really scary thing is that in some years, when the weather stayed warm long enough, we injected gas into storage as late as the third week of November (that’s another 7 weeks kids). If we do that this year it’s going to be hard to explain $6+ gas.Doesn’t matter though, it’ll be plenty hard to explain these prices even if we top out at the end of October with a neat 3.6 Tcf in storage as I expect.

As I wrap this up, it’s interesting to note that OPEC seems to be rehashing attempt number 13 to get their cartel to act like, well a cartel. They say they’ve got Saudi in their camp now. As you’d expect, the initial reaction out of electronic traders is to bid up oil. What’s funny is that they’re taking gas along for the ride (November’s up $0.18 to $6.61). Last I checked cartels are illegal on this side of the pond so I don’t know whose going to bail out these trades, but these guys are going to have fun on Thursday.

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