NYMEX is not a happy place at the moment. Today’s weekly storage report came through above expectations, and a sustained rally that had pushed prices over $4.00 is evaporating by the minute. Seems that a week of nothing but good economic news…solidly good economic news at that…isn’t enough to overcome the current hair-trigger response to the storage report. Prices currently look set for a 10% drop by end of day.
And there is a new wrinkle to storage: the question of capacity. NYMEX appears to be keying in on the storage numbers as the one dependable sign that natural gas production has finally dropped enough to meet the low demand. But there are indications that the storage infrastructure is simply nearing capacity, and the low numbers are a reflection not so much of limited supply as of limited space left to put it.
If you’re looking for sure things in natural gas right now, you’re looking in the wrong place.
Which brings us to the week’s most interesting development. With fundamentals and market forces holding steady for the past few months, we have been watching the one piece of the overall price puzzle where there has been movement: speculation. The Commodities Futures Trading Commission (CFTC) is continuing to hold hearings on the role of speculation in commodities markets, and every indication points to new restrictions being put in place.
You’ll never guess who gave testimony in favor of this. John Arnold, a former Enron trader.
What makes this even more unexpected is that Mr. Arnold is currently a manager at a hedge fund that trades in energy commodities. And he’s not the only hedge fund manager saying this. Admittedly, he’s parsing his words…recommending restrictions on forms of trading that are not his firm’s bread and butter…but a year ago, the notion of anyone within the financial sector speaking publicly in favor of restriction and regulation would have been laughed out of the room. We are living in interesting times.
Chances are he’s just trying to get a good word in ahead of the curve. There are strong indications that the CFTC is going to release a report soon that will reverse it’s previous position and conclude that speculation DID play a role in last year’s price spike. Better late than never. That would set the stage for tightening regulations moving ahead. But the current administration has thus far done a better job of setting goals than meeting them, so we’ll see. As we’ve said, nothing is certain in the energy markets.
And yes, energy Exchange Traded Funds (ETFs) are still at the center of the discussion. For us at Cost Containment Intl., this is an interesting example of how the same idea can be used to different ends. We work the same way as ETFs: aggregating thousands of individuals into a single group, then using the power of the group to benefit each member. But we aim for very different results. At Cost Containment Intl., we use the power of our aggregated customers to lower prices on thousands of contracts individually negotiated in a free market. There are no losers here. The ETFs appear to be using the combined assets of their members in a single play, to gain control of one part of the energy futures market. When one group calls the shots, the market isn’t free any more. A win for them, but a loss for everyone else. Which is making them some unexpected enemies.
When people start saying things you never thought you’d hear, it’s time to keep your eyes, and your ears, open.
We’ve been thinking this week about lessons learned from the recent financial meltdown. But first, the NYMEX.
Another week, another storage report just slightly below expectation, another market jump. Last week, shortly after the newsletter went out, NYMEX decided that a weekly report 2 Bcf under projection was a bad sign, and sunk by almost 15% by end of day. Today, a nearly identical report is kicking NYMEX back up about 15%. It is difficult to put your faith in one indicator when that indicator refuses, week after week, to give you a definite sign one way or the other.
Meanwhile, the recession is over. At least, that’s what Newsweek magazine said, though president Obama took a moment out of his schedule to state his disagreement. But overall, this marked the second straight week with good signs. Housing sales, and even housing prices, are up. Banks are posting gains…somewhat inflated gains, as we’ve mentioned in previous weeks, but gains nonetheless. The stock market is resurgent.
So now is as good a moment as any to look ahead to better times and a stronger economy and ask: what have we learned from the mistakes we made leading up to the economic meltdown?
Not much, it seems. People are still buying houses with 100% financing. People are still buying more house than they need. Financial institutions are rushing to pay off their TARP money so they can go back to paying out bonuses that are only marginally tied to job performance. Congress seems determined to pass a health care bill that won’t substantially change a health care system that everyone agrees is a boat anchor on the economy.
And people are pouring money into what many are beginning to think will be the next bubble. ETFs.
Right now, people can’t get enough of them, just as they couldn’t get enough of mortgage backed securities two years ago. Buy-in is low. Profit potential, compared to investment, is high. And there’s no danger, because this time, everyone will get out before the bubble bursts.
At Cost Containment Intl., we’re big fans of the open market. Competitive markets allow us to negotiate the best prices and grab you the best savings. But open markets must be fair markets, and open markets must be truthful markets. EFTs make their money on month-to-month turnover of the NYMEX, not the natural give and take of natural gas supply and demand. When profit is decoupled from actual value, markets start leaking truth. We already did it with homes. Now we’re poised to do it with energy.
A few people, however, appear to have learned a few lessons, and they happen to work on the SEC and other trading commissions. In stark contrast to their minimally invasive approach over the past decade, regulator agencies appear to be moving to set limits on the new energy funds, beginning with United States Natural Gas Fund, which has made frequent appearances in this newsletter over the past few weeks. The fund has been making noises that it might even decrease its position in NYMEX natural gas based its current restrictions and the threat of future restrictions.
We’re keeping a close eye on these developments. You should as well. You might just learn a few things.
Another week, another weekly storage report that comes in just…slightly…below…the expected level. And the gains in NYMEX pricing that jumped off of last week’s report appear to be holding.
It appears that, in the absence of any other consistent predictor, the natural gas market has found its bellwether, and it is the weekly storage report. And it appears that the signs it is choosing to see from this bellwether is that the drop in rig count and production has finally caught up with the oversupply of natural gas on the market.
Would a large injection next week puncture this? Based on the year so far, probably. It is perilous business to base your investment strategy on a single marker. But this appears to be the course the natural gas market has taken, and as a natural gas consumer, this is the price reality you face. A market that has always been notable for its week-to-week volatility now rises like a shot of drops off a cliff at 10:31am EST every Thursday. Two or three Bcf in the report is apparently enough to shift the market by 15-20% in a matter of hours.
Meanwhile, on the sidelines, there sits the United States Natural Gas ETF, which we have discussed in several previous posts. This fund is getting a lot more attention in the business press these days. About time for that. The fund is currently tied up in hearings with SEC as to whether it can issue more shares…at the moment, it has no more to sell, which has minimized its impact on the market for the past few weeks. Market price dropped sharply when this happened. If the new shares are approved, the results should be easy to guess.
Which means that by this time next week, NYMEX could be back down in the $3.20 range, which is where many experts believe it belongs, or pushing back up above $4.00. An awful lot of this will apparently hinge on a few Bcf of injection.
What does this mean to you? As an energy consumer, your message hasn’t changed. A NYMEX that rises and falls with a speed that would impress the riders in the Tour de France, and that triggers itself off of signals that once were only part of a bigger picture, is no place for your energy budget. Cost Containment Intl. looks for a longer path and a straighter course. Save your bike riding for the weekends.
If Mark Twain were alive, he would probably look at this week’s headlines and the reaction from the markets, shrug his shoulders, and say “told you so.”
On the face of it, there was some very good news. Several major banks showed impressive earning reports. Today’s unemployment figures were the best in several months. The stock market has been climbing all week.
Unfortunately, most of these statistics are smoke and mirrors. The major banks are showing good earnings because they have been allowed to write their books in a way that minimizes the real effect of the toxic assets they still own…which, we are told, are now to be referred to as “legacy” assets…and the unemployment figures largely reflect the complex effect of furloughs and rolling layoffs, particularly in the massive auto industry.
Natural gas, on the other hand, might be reaching its “real” price for the first time in months. This means that while Wall Street has been heading up, NYMEX has been heading down. It is interesting to note that the protracted slide of the past few weeks coincides with the SEC investigation into the United States Natural Gas Fund EFT. Basically, the fund is oversubscribed, and when it applied to be allowed to sell more shares, the SEC said “no” and decided to take a closer look at how, precicely, the fund operates. Meanwhile, it can’t buy new contracts. During this time, the NYMEX price has dropped closer to the level predicted earlier in the year.
As you can well imagine, we will watch the outcome of the SEC’s action, and the market reaction, with a keen interest.
Meanwhile, depending on which statistics you choose to believe, today’s storage report was either right on target or well shy of expectations, as predicted injection levels varied from 89 to 106 Bcf (the actual injection was 90 Bcf). Storage levels appear to finally be responding to the massive shutdown of drilling and production…the natural gas rig counts is down to 672, less than half of the high of 1,606 in September of last year…and this is putting a damper on the record injection levels.
The NYMEX is, as we write this, choosing to believe the higher prediction, which makes today’s injection a call to buy. We are seeing an “injection bump” of about 10% at the moment. We have tracked these before, and will report on how well this rally holds up over the week. If you have been keeping track of posts over the past few months, you can guess what we’re thinking here at Cost Containment Intl. Our goal is to build an energy plan based on the big picture. We know a statistic when we see one.
Since we seem to be in Classic Rock Song mode for our titles, this week could also be seen as “When The Levee Breaks.”
The mood shifted this week. After months of guarded, if impatient, optimism, the natural gas market finally gave in to the continuing flow of bad news on the economy and turned pessimistic, following virutally all the other markets. The story across the board was a gradual slide downward. Wall Street down. Oil down. Natural gas broke below $3.50 and kept right on going.
Today’s storage report, which came in well under expected levels and lost ground to the historic levels for the second week in a row, has done nothing to improve the mood of investors. And while this is good for energy consumers, we’re not getting a sense that their mood is all that good right now, either.
On the one hand, we’ve been expecting this for a while. As we mentioned last week, the resilience of natural gas prices since early Spring has been largely at variance to the facts. On the other hand, the American economy has been willed out of bad situations by sheer optimism before. There is a component to any open market that has nothing to do with what the facts indicate.
This week, however, it appears that the facts won out.
We’re going to keep an eye on the storage reports. Three straight weeks below expected levels, even at the current record pace, is worth watching. We’re also going to be keeping a close eye on economic indicators. It seems, for the moment, that everyone is paying attention to what they have to say.