Gas Petrospective – October 12, 2010

Natural gas prices dropped five cents per million Btu yesterday, and they established their lowest settlement price in a year in the process. We had heavy buying on Friday, with a 9,000 surge in open interest, but it was apparently not enough to turn this market back up, again. Prices finished yesterday just above $3.60, and the support is at $3.58. A break below that level and two consecutive closes below it would end any probability of last week’s decline being a “bear trap.” That possibility is still open, but the probability has dropped markedly.

Once again, it was shoulder month logic that pressed quotes lower, embellished with the very old and by-now-thoroughly-discounted story of high storage levels and abundant shale-gas production. It has become this market’s favorite song, but it is about as fresh as the “Macarena” right now.

It does not seem to matter, though. In the latest CFTC report, funds were huge buyers, but they were replaced by Swap Dealers as big sellers. Just about everyone seems to have a net short position, and it is not altogether certain if funds and swap dealer positions are entirely separate. Nonetheless, it certainly looked like managed money accounts were finally getting out of their long-term short holdings – only to be replaced by equally determined sellers.

With little hope on the storage front, it may be difficult building a solid bottom foundation.

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