This week, for a change of pace, we’ll feature some thoughts from one of our consultants, Larry Kauf.
Ever since July 08, when the NYMEX started its tumble from a high of almost $15,00, you’ve been hearing traders talking about a “support” level. That’s not life support they’re talking about, though some of them probably need it. It’s price support.
Support, simply put, is the market telling you it’s time to stop waiting an BUY. It’s that point where the natural gas investors, who want prices high, and the people like you who actually use the stuff, who want it low, both come to the conclusion that this is as low as it’s gonna go, so it’s time to get in.
The last few months have seen the NYMEX blow through a lot of predicted support levels. $12.00….$10.00…..$7.00. Every time they said it couldn’t go lower, it did. Every time they predicted that “support” had been hit, the support collapsed.
Here’s the problem right now: with so many support levels getting blown through, everyone is just sitting around waiting. There’s a bit of a “fool me once, shame on you, fool me twice, shame on me” feeling. Very similar to what’s going on everywhere in the economy. Banks are still too scared to lend, commercial paper is still operating at a trickle. Everyone is looking for that “sign” that it’s time to get back in the game.
Why is this a problem? Because the folks who sell gas like making money. You might have to bite the bullet when prices are high, but when the prices get low these guys pick up their marbles and go home until its time to play again. Wellers shut rigs. Production plants shut.
This has already happened. Rig counts are falling faster than the NYMEX: 15% in the past month. Plants are cutting back. Their aim isn’t to get down just to the current demand level, but to create a “shortage.” Plus, they know a few things most buyers don’t. When Nuclear Power plants go offline for maintenance in the spring, utilities have to use gas to offset the loss of generation. Hurricane season has been giving people the willies ever since Katrina.
What happens then? Price spike. Gas prices tend to go up a whole lot faster than they go down. You could say the pendulum swings back, but in this case, it’s going to be like someone gave it a big shove. And I don’t need to tell you what happens to somebody who’s sitting when a spike happens, do I?
As I have been saying, now is the time to lock. Consider the next 12 months with a close eye on prices going into April 2010.