Natural Gas

While the commodity complex has been on a tear ever since the global recession cooled, there is one commodity that has been going nowhere: Natural Gas! Yet, we have been receiving hints that this game is about to change.

More trouble for Italy, whose CDS has surprisingly not spiked in OTC trading yet. In addition to a "technical glitch" halting its stock exchange, now Reuters reports that the country's natural gas deliveries may be compromised. "Political unrest has hit Libya, which is Italy's biggest oil
supplier and covers about 10 percent of its gas needs. Gas is
carried via underwater pipeline Greenstream, which is controlled
by oil and gas major Eni. "Supplies have not been interrupted, but the situation is
very complicated," Industry Undersecretary Stefano Saglia told a
conference on Tuesday. Gas flows from Libya into Italy through the 510 km pipeline
have been slowing since late Monday, and the situation is
worsening, Italian energy publication Staffetta Quotidiana said,
quoting sources close to the situation. Who would have thought that African revolutionary butterflies can flap their wings and cause the price of that most hated of products - nattie, to be on the verge of surging.

Natural gas has long been touted as a cleaner alternative because natural gas releases about half as much of the greenhouse gas carbon dioxide as coal does. However, a new research by Dr. Robert Howarth at Cornell University says otherwise.

Natural gas posted the first weekly increase this month in the week of Nov. 14, on forecasts of colder than normal temperatures. However, the unprecedented inventory level means LNG could be the only exciting aspect of the natgas marekt in the meduim term.

Margin calls from losing positions have forced hedge funds to free up cash by covering shorts in natural gas. Real demand isn’t coming until we have vastly more pipelines, power plant conversions, and above all, storage, than we have now. Until then, the big production companies are going to race to out produce each other, praying they can use volume to offset price cuts, creating a huge weight on prices. (CHK), (DVN), (UNG).

Bentek Energy managing director Rusty Braziel sees a great divide developing in U.S. natural gas. Bentek are one of the leaders in tracking and analyzing American gas pipeline flows. Where gas is flowing, who's using it, and at what price. Speaking at the LDC Gas Forum Northeast in Boston this week, Braziel told industry professionals that America may have made some mistakes in designing its gas pipeline network over the past several years. He notes that the boom in shale gas has created a price disparity between east and west. Shale gas plays are located mostly in the east, and carry lower breakeven prices. Between $3.10 and $4.00 per mcf, according to Bentek estimates.

Discussing the natural gas market outlook and some mitigating factors prompting oil and gas companies to drill their gas shales even in the face of weak natural gas prices.

This week has been playing out as expected with prices grinding their way higher and lots of sharp intraday sell offs and rallies which is indicative of a market getting toppy.

Seems like the masses feel as though they are getting left behind which is why we are starting to see the panic buying in the market (new money buying at these lofty overbought prices).

Each time there is a new intraday or daily high on the major indexes there is a renewed bullishness created as breakout traders and novice traders buy into the market hoping for the next surge in price. It is these volume surges of new money entering the market which the big guys (smart money) are selling into. You can see it clear as day light on the intraday charts as new money gets sucked into the market new high and then 2 minutes later larger waves of selling hit the bids.

Last week was nothing special as stock market continued to drift higher on light volume and the Volatility Index (VIX) reaching a new multi-year low. This mix of higher prices on light volume, multi year lows in the VIX and an overbought market paints a clear picture to a market technician – Be Ready for a Pullback! Last Wednesday I sent out a report covering sector rotation comparing the price performance of these sectors from the January peak with last weeks price action. It was very interesting and it pointed to a sharp sell off Thursday or Friday.

The press has recently been flooded with exaggerated reports of widespread well poisonings and forest destruction. A blank check to render toothless any Cap & Trade legislation, block subsidies for natural gas, dilute environmental legislation, and promote the myth that the whole global warming thing is nothing more than a leftist hoax. The ghost of the Swift Boat Veterans for Truth returns to haunt. Thanks Dick Cheney! Tell it to the 23,000 Americans coal emissions will kill this year. (BTU), (RTP), (ACI).

Natural gas has become an almost forgotten commodity with poor market fundamentals keeping a lid on the price. But the fuel is not forgotten by Exxon Mobil (XOM). Exxon just announced this morning that it will buy XTO Energy (XTO) in an all-stock deal worth $31 billion as the oil giant moved aggressively towards the abundant unconventional natural gas source at home.

On Sept. 4, the NYMEX October futures contract for natural gas closed at $2.73/mmbtu, a 7-year low, as the ratio of oil to natural gas prices ballooned to 25-to-1, compared to its energy conversion ratio of 6-to-1.

Now, just one month later, natural gas has rebounded 75% to close at $4.77/mmbtu for NYMEX November delivery last Friday on record high levels of natural gas in storage, leaving investors to wonder if prices have bottomed out and it's time to jump back into the market, or if the sector is dead.

In my last article, I discussed two of the major factors to this week’s run-up in natural gas - Operation Flow Orders (OFOs) and pre-configured stop orders being hit. Here, I’d like to take a look at some other concurrent distortions in the natural gas market.

Natural gas price has spiked almost 60 % since Labor Day and prompted investors to believe a V-shape recovery might be near for the brutally battered U.S. natural gas market. However, don’t break out the champagne just yet until you learn more about two of the major factors driving this latest spike, Operation Flow Orders, and the trader's perspective.

The market's upward momentum this year has hordes of investors still looking for opportunities with good entry points. With crude prices hovering around the $70/bbl range, even with reduced demand, oilfield services remains one of the more promising sectors still with room to grow.