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The natural gas market is finally beginning to show fundamental and technical signs of a major bottoming. While it might be folly to rely on swift enactment of policy by the U.S. government that would serve to expand the use of natural gas in the energy supply chain, the relative price advantage of natural gas versus many petroleum inputs looks to facilitate an increase in demand. Recently the BTU price of natural gas reached 16 month lows versus crude oil, and that should begin to get the attention of users and maybe even someone in Washington who is willing to look beyond the tip of their nose.
Clearly, the natural gas market is being weighed down by supply, but a bull market has to begin somewhere, and seeing the EIA revise its 2010 US electricity demand upward by 1.9% is certainly a start. Throughout most of the declines in natural gas prices from early 2008 to the 2009 low, the trade was seemingly factoring in a sustained lull in industrial usage. The slide from the 2008 high price of $13.69 per MMbtu to the 2009 low of $2.40 was blamed on fears of a recession or even a depression. Now that a depression has been averted and the recession is seemingly lifting, we suspect that the trade will have to move to reinsert some premium back into natural gas prices.
The latest weekly EIA report indicated that natural gas in storage was below to year ago levels, and the recent Commitments of Traders report showed speculators holding a net short position of 50,365 contracts. While US natural gas rigs in operation have risen off the 2009 low levels, they are still running at nearly half of their peak levels. Therefore, while natural gas stock levels are to be considered flush, it is possible that increased cyclical demand could be joined by “new” demand from petroleum users who are looking for a cheaper fuel alternative.
Colorado State University’s hurricane forecast team is calling for four of the expected eight hurricanes this coming season to be classified as “major” storms, which could serve to spook out some position shorts. With hurricane threats tamped down over the last two seasons, the energy markets might not be overly concerned with the “potential threat” of weather at this time. However, if there are some signs of storm activity in May, attitudes could begin to change. As the accompanying chart of tropical storm frequency indicates, some minor activity has historically occurred during the month of May. While we are barely half-way through the month of April as if this writing, the natural gas trade has already seen enough fundamental change and enough momentum in the overall economy to begin to have some respect for weather-related threats. In the meantime, we think that corrective action back down to the $4.00 level in the June natural gas contract should be considered a long term buying opportunity, especially if the spec net short positioning expands beyond the 65,000 contract level.
