…according to Stephen Schork, the analyst behind the widely-read Schork report on energy markets, it certainly is. In fact, he provides the following illustration of the communist-era car in his Monday report to emphasise the point:
As Schork points out, if spot gas can go from 2.409 to 5.318 — with no discernible fundamentals backing such a move — then there’s no reason it can’t go back to 2.409.
This is especially so given that natgas has been retreating gradually lower over the course of the last two weeks — which proved to be one of the coldest Octobers on record in the US:
In short, natgas — traditionally one of the most responsive commodity markets to supply and demand fundamentals — has been acting hugely out of character.
So is this a sign the natgas bubble might be popping? Schork suggests it might be, reminding us that when bubbles pop they tend to crash more quickly than the pace at which they inflated (our emphasis):
Unfortunately, bubbles can usually outlast your line of credit. Once bubbles pop however, they tend to not only retrace to whence they began, but more importantly, overshoot this area. That is the point we are at right now in the Henry Hub gas market.
For example, in August 2007 spot crude oil was at $75 a barrel. That was right at the time everyone was becoming keenly knowledgeable on the definition of subprime. Knowing how bad the coming storm was going to be, the Fed telegraphed to the market that September its intention to take nearby rates to zero.
That in turn set the dollar into a freefall and commodity speculators into a buying frenzy. But with all of that said, it took the market 10 months, from September 2007 to July 2008 to push price from $75 to $150. In the subsequent post bubble correction, it took the market only 3 months (until mid October 2008) to push spot oil back down to $75. It then took the market only two more months after that (until mid December) to push crude oil down by more than 50%, from where the bubble started at $75, down into the low $30s.
Therefore, we cannot rule out further corrective weakness in spot NYMEX gas back towards the mid $2 area we saw in late August, early September. However, first things first, there is a large gap (on the continuous chart) in between the October 28th low at 4.230 and the September 25th high print at 4.035. If the bulls cannot protect this gap, we will indeed look for significant weakness below here.
We’ll be watching.
And from the WSJ:
Almost half the exploration and production (E&P;) companies followed by Deutsche Bank analyst Shannon Nome raised forecasts for 2009 production.(…)
The natural-gas rig count, an indicator of drilling activity, bottomed in mid-July and has since climbed 10%, according to Baker Hughes. The number of operating "horizontal" rigs, used in the more-prolific gas shale fields, has jumped 28%.
With producers still collectively pursuing growth, the chances of a rebound in gas prices next year looks more remote than ever. Yet the S&P; Supercomposite oil and gas E&P; index—weighted 69% to gas production—commands a forward price/earnings multiple of 22 times. Such confidence is the very thing causing the industry to drill its way into trouble.
What many people forgot to consider when nat gas prices hit the floor last summer is the importance that auto and chemicals production has on gas demand (see my Aug 9, 2009 post NATURAL GAS STILL DISCOUNTING THE OVERHANG). demand from these two industrial sources strengthened during the summer months but …
… shipments of chemicals have weakened since, …
… and motor vehicles could be peaking at a low level in the aftermath of the cash-for-clunker program.
Charts from the Association of American Railroads