will new short side speculators drive natural gas prices higher ? and how soon ?
Managed Money Accounts
Speculative traders in the managed money segment have been consistently net short in the NYMEX natural gas contract for more than 2 years. So why should we concern ourselves about recent trends for this group of traders? We generally view this group of traders to be knowledgeable and rationale because they have sufficient risk to be reportable to the CFTC. During the past 16 weeks, the number of traders (or trading groups) who report short interest positions doubled. Most of the increase in the number of traders occurred duirng August and September.
During August and September, we note storage injection rates were above historic averages in every week except one. The surge in storage injection rates averaged 2 BCFD above the historic average. We suspect the surge in storage injection rates attracted many smaller managed money account players into the natural gas contract. With six weeks remaining in the storage injection season, we expect total inventory will, most likely, reach a peak of no more than 3.7 TCF. At this level, inventory in working storage will be 100-150 BCF below 2010 levels.
Weather will turn cold enough to require withdrawals from storage and a seasonal increase in imports from Canada. At this point, bearish supply/demand pressures will disappear and prices will rebound from current levels. How will new short side speculators react when prices are $1.00 per MMBtu higher than they are currently ? We look for short covering to add to bullish seasonal considerations -- probably during the last few trading days before Thanksgiving.
