Natural Gas: Two Charts the Market Should Consider

Jan.24.11 | About: The United (UNG)

The first is a daily scatter covering Nov 08-Mar 09, Nov 09-Mar 10 and Nov 10-Current. The two measures are the daily average Producing-Region temperature plotted against that day’s spread between the daily cash settle at Henry Hub and the prompt future settlement. For example, the large green triangle is Friday, where spot gas traded that day averaged 1.2 cents under that day’s prompt future close and a Producing Region temperature average of 32.8F. This cash-prompt future spread is quite important to multiple market participants, including merchant storage operators who position their assets to take advantage of large premiums (to withdrawal) and discounts (to inject) in this spread.

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As you can see, over the past three winters, the trend of these scatters is moving distinctly to the left. We are seeing less and less of a premium paid at Henry Hub during periods of lower temperatures and more and more of a discount at warmer temperatures. In fact, we’re seeing cash-prompt premiums some 30-35c lower than what we were seeing last winter at similarly low temperatures. Even more intriguing – we’re generating the same daily premiums in this spread as we were seeing a few months ago at temperatures significantly warmer. There appears to be no sloping feature to the pattern at more extreme cold temperatures this winter – thus far (the outlying points from 09-10 series are the storage congestion event that bled into November that fall).

So, what does this mean? Think of the fact that we’re a dollar lower in prompt gas price than this time last year. Couple that with the fact that the first 23 days of this month have been the coldest Jan. 1-23 in the U.S. since 1994 and the fourth coldest since 1985.

And we can’t generate anywhere near the cash premium to the prompt contract that we saw just last year (in a very oversupplied market) at low temperatures. That means there is a lot of gas.

The second chart is the Calendar 2013 strip price since inception in 2007. If Cal 13 can’t get above $5.40 – which it hasn’t been able to do since October – what can the front do? Notice the ... meteoric reaction ... in Cal 13 to the current developments in the front.

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The only way I see this market trading through and establishing above $5.00 is for it to get substantially short. It isn’t there yet. We’re finally getting flat-price back to a level (and far enough in the calendar) where you don’t get canned for shorting it, so this market will be building a short here. But I don’t know if there’s enough time to get an explosively short market formed and then have it catalyzed with a surprise-cold end of February into March forecast (which we will start seeing unfold over the next two to three weeks). And I’m not at all sure a cold March will rattle anything but a sizably short market: Biggest March storage pull in history is 100 Bcf lower than the average February pull.

I don’t see how NYMEX gas is going to break its 30-month perpetual string of bull traps here. And if this winter along with the absorption of $3.1 billion in commodity-index rebalancing the first half of this month (which works out to 675 Bcf of non-molecular demand, or 2 weeks of average total demand in April) cannot do it ...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.