February 12, 2007
Weâre Not Running Out of Gas, So Why Be Bullish?
Ever since the December 27th low of $5.740, the market has had a nice run-up to highs last week of $8.035 with some of the best pure weather related volatility seen in quite awhile and after todayâs sell-off, the question that lingers is where to next?
In the bears argument is the fact that we have such a large amount of gas still in storage and will not get to an uncomfortable level this winter. I did see one analyst throw out some numbers in his weekly report on how we might end up the season matching withdrawals of last years remaining period (ending 1.787 TCF on a â70 average of last 8 weeks), and also matching the five year average (ending at 1.619 on a â91 average of last 8 weeks). I will concede that if we did indeed finish at a level of 1.619 or higher, it would look a little bearish.
Now from a bulls perspective, this market has had a nice move to the upside but failed to close over the 7.93 area that would have attracted sizeable short covering into the market, I say this in light of seeing the COTâs depicting an epic battle with the net non-commercial position changing very little from an even divide telling me that the big bears rode this large move higher without closing out. How close were we to seeing a sizeable short squeeze? Now that we have sold off to the current 7.20âs on a warming trend, I would like to point out a few things. First, to use the storage math above at this point in the game depicts more âtalking the bookâ than reality. The reality is that we have a fairly good idea that Thursdayâs withdrawal will be around â250, taking us down to 2.097 TCF. Next weeks withdrawal is estimated to be roughly â218, which would take us to 1.897 TCF. Now letâs estimate the last six weeks using the above favored method of matching last years average withdrawal of â75. That would leave us with 1.429 TCF, a far cry from 1.787 TCF. If we matched the five-year average for the remaining six weeks of â82, we would be at 1.387 TCF or 232 below the bearâs estimate, and â308 from last years finish.
Letâs do some projections on where we finish injection season now. Last year we injected 1.766 TCF over 29 weeks. We had no supply disruptions and for the first time, had two mid-summer withdrawals on peaking loads due to the ever-increasing power demands. Projecting a carryout of 1.429 and just matching last years rate would take us to 3.195 or â88 below the five-year average. If we were to carryout 1.387, that would put us at 3.153 or â130 below the five year average and â308 below last years level of 3.461 TCF. Is this in the âcomfort zoneâ? I think not as the âcomfort zoneâ needs to be adjusted for the sizeable build out of the demand base of the last few years. So the old 3.1 TCF to 3.3 TCF target area should now be 3.3 TCF to 3.5 TCF. As a reminder of how fast we can draw on stocks, letâs go back to the recent winter of 2002-2003. We started that winter with a âcomfortableâ 3.172 and ended with only 642 BCF remaining.
With the El Nino signal now neutral, it is likely that we will not have the conditions this summer that impeded the Atlantic basin last year. Also with power demand increasing near 3% year over year, I would suspect that we have a hard time reaching traditional comfort levels.
The forward curve at this point is looking relatively undervalued with such a fast switch of underlying fundamentals witnessed over the last several weeks, and the front of the curve will follow. Longer range forecast has a return of some arctic sourced air into the lower 48 at the end of February, and into the first half of March thus making it likely that we will exceed last years remaining withdrawal rate and create a larger hole to fill than what was depicted. Furthermore, March has yet to price withdrawals out of the ground as it trades in discount to April creating the potential for a volatile finish to the 2007 March/April spread that has caused so much pain. I fully expect another assault on new highs before this month is over as it is now about forward valuation. If youâre looking to lock into protection, I would start to scale in at these levels.
-Comanche
Weâre Not Running Out of Gas, So Why Be Bullish?
Ever since the December 27th low of $5.740, the market has had a nice run-up to highs last week of $8.035 with some of the best pure weather related volatility seen in quite awhile and after todayâs sell-off, the question that lingers is where to next?
In the bears argument is the fact that we have such a large amount of gas still in storage and will not get to an uncomfortable level this winter. I did see one analyst throw out some numbers in his weekly report on how we might end up the season matching withdrawals of last years remaining period (ending 1.787 TCF on a â70 average of last 8 weeks), and also matching the five year average (ending at 1.619 on a â91 average of last 8 weeks). I will concede that if we did indeed finish at a level of 1.619 or higher, it would look a little bearish.
Now from a bulls perspective, this market has had a nice move to the upside but failed to close over the 7.93 area that would have attracted sizeable short covering into the market, I say this in light of seeing the COTâs depicting an epic battle with the net non-commercial position changing very little from an even divide telling me that the big bears rode this large move higher without closing out. How close were we to seeing a sizeable short squeeze? Now that we have sold off to the current 7.20âs on a warming trend, I would like to point out a few things. First, to use the storage math above at this point in the game depicts more âtalking the bookâ than reality. The reality is that we have a fairly good idea that Thursdayâs withdrawal will be around â250, taking us down to 2.097 TCF. Next weeks withdrawal is estimated to be roughly â218, which would take us to 1.897 TCF. Now letâs estimate the last six weeks using the above favored method of matching last years average withdrawal of â75. That would leave us with 1.429 TCF, a far cry from 1.787 TCF. If we matched the five-year average for the remaining six weeks of â82, we would be at 1.387 TCF or 232 below the bearâs estimate, and â308 from last years finish.
Letâs do some projections on where we finish injection season now. Last year we injected 1.766 TCF over 29 weeks. We had no supply disruptions and for the first time, had two mid-summer withdrawals on peaking loads due to the ever-increasing power demands. Projecting a carryout of 1.429 and just matching last years rate would take us to 3.195 or â88 below the five-year average. If we were to carryout 1.387, that would put us at 3.153 or â130 below the five year average and â308 below last years level of 3.461 TCF. Is this in the âcomfort zoneâ? I think not as the âcomfort zoneâ needs to be adjusted for the sizeable build out of the demand base of the last few years. So the old 3.1 TCF to 3.3 TCF target area should now be 3.3 TCF to 3.5 TCF. As a reminder of how fast we can draw on stocks, letâs go back to the recent winter of 2002-2003. We started that winter with a âcomfortableâ 3.172 and ended with only 642 BCF remaining.
With the El Nino signal now neutral, it is likely that we will not have the conditions this summer that impeded the Atlantic basin last year. Also with power demand increasing near 3% year over year, I would suspect that we have a hard time reaching traditional comfort levels.
The forward curve at this point is looking relatively undervalued with such a fast switch of underlying fundamentals witnessed over the last several weeks, and the front of the curve will follow. Longer range forecast has a return of some arctic sourced air into the lower 48 at the end of February, and into the first half of March thus making it likely that we will exceed last years remaining withdrawal rate and create a larger hole to fill than what was depicted. Furthermore, March has yet to price withdrawals out of the ground as it trades in discount to April creating the potential for a volatile finish to the 2007 March/April spread that has caused so much pain. I fully expect another assault on new highs before this month is over as it is now about forward valuation. If youâre looking to lock into protection, I would start to scale in at these levels.
-Comanche