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Supplies are at record highs, and weather-driven demand is nonexistent. Yet, despite these bearish cost drivers, Henry Hub gas on the NYMEX rallied on Monday. Why not? After all, this market can only fall as far as its nearest substitute.
Recall our conversation from last Friday, following the record 15.780 print on December 13th, this market sold off over the next seven weeks. Since mid February front-month gas has trended sideways with prices seesawing in between the mid $6s and $7s. The erosion in selling interest on the heels of the mid December to early February selloff indicates that buyers have moved into equilibrium with sellers. Now every time either the bulls or the bears attempt a breakout, the other side absorbs the blow.
Such is the current case. We are now back near the bottom of the mid $6 basing area. Hence, we expect we will continue to see solid support down in this area. Specifically, we like support in between the March 08th (K’06) low at 6.660 and the continuous low from the same session at 6.450. |  |
Per last Friday’s CoT report from the CFTC, the funds intentions are pretty obvious. After all, the Large Specs (hedge funds et al.) in the NYMEX WTI pit are now sitting on their longest position in eight months. So beware, the last time these guys decided to get bullish they stayed that way 11 out of every 12 weeks stretching over a two-and-a-half year period. In the prcess they pushed front-month WTI from below $30 to over $70 a barrel.
We think the odds are better than even money frontmonth WTI for May’06 delivery will hold below 72.12 this week. Be that as it may, thanks to a bullish article by Seymour "Abu Ghraib" Hersh in the latest issue of the New Yorker regarding the U.S.’s supposed intention to nuke Iran, this market is back on geopolitical tilt. Combine that with the intention and the deep-pockets of the funds, and you have a recipe for a spike.
Now in yesterday’s trading the bulls failed where we said we thought they would, i.e. at the top of the February 01st pivot area, 68.95. Thus, strength above that level |  |
Tanker rates for all classes continued to tread water last week. VLCC transport ex West Africa (WA) for USGC discharge is now trading at a post Katrina/Rita low of around worldscale (ws) 75. An oversupply of tonnage, spurred by the combination of lagging Nigerian production, plus heavier than normal Far East and U.S. turnarounds continues to the weigh the market down. According to one published report, in the Arab Gulf (AG) there is a week-on week surplus of 16 VLCCs. Thus, weakness here trickles to other freight markets. What’s more, another major contributor to the overall bearishness of the current market is the overhang in U.S. crude stocks. |  | | Reserved for Subscribers |  | | Reserved for Subscribers |  |
Despite continued strength over the entire NYMEX energy complex, fuel oil fails to respond. Consequently, by last Friday the LSFO/WTI crack was still trading at below minus $18.25 per barrel. On the week the crack averaged minus $18.09 per barrel, down 2.2% week on-week. Meanwhile, gas at the gate in New York softened towards the end of the week thanks to cooler temps and increased fuel switching from industrials.
Accordingly, gas went out last Friday at a discount to fuel oil (0.7%) for the fourth time in the last five weeks. In fact, on the week fuel oil in the Harbor traded at a discount to delivered 0.3LP, 0.3HP and 0.7LP. Like we say, gas can only go as low as its nearest substitute! |  coal |
According to the DOE’s Jan’06 Short-Term Energy Outlook (STEO), electric power sector demand for coal is projected to increase by 1.2 percent in 2006 and by another 1.4 percent in 2007. Power sector demand for coal continues to increase in response to higher natural gas prices as well as higher oil prices. U.S. coal production is projected to grow by 2.7 percent in 2006 and by 1.2 percent in 2007.
The price of coal to the power sector is projected to rise throughout the forecast period, although at a slower rate than in 2005. In the electric power sector, coal prices are projected to rise by an average 7.0 percent in 2006 and by an additional 2.8 percent in 2007, increasing from $1.54 per million Btu in 2005 to $1.70 per million Btu in 2007. |  |
NAT-GAS… Front-month gas closed below $7 for the first time in four weeks last Friday. Weakness this week below our critical point of reference at 6.660 sets the table for a push towards the March 08th low (continuous) at 6.450 and intra-week support at 6.359. Sellers below here will look to find a path towards the May 27th continuous low at 6.030 and the 6.000 psych-support. Otherwise, a rebound back above $7 should encounter resistance at least until the top of the three-week pivot area at 7.150. Buyers above intra-week resistance at 7.427 will then gun for last week’s 7.630 high print. Penetration of this resistance creates a platform for a move against the 8.000 psychbarrier.
CRUDE OIL… NYMEX WTI caught a bid for a fourth straight week with the front-month closing last Friday at a tenweek high. As we look ahead to the new week the skew obviously remains to the upside with considerable technical support beneath unchanged (67.39) in the K’06. Bears will have to overcome support beginning at the top of last Friday’s pivot range, 67.23 and lasting until the area in between, the 14 and 30-week pivot moving averages from 64.21 to 62.26. On the other side of unchanged, strength above 69.00, the February 01st high (continuous) sets the table for a run against the K’06 life-of-contract high at 70.33 and the all-time high at 70.85. Bottom line, given recent vol metrics, should the K’06 breakout into virgin territory, the odds still favor the contract holding below 72.12 this week. | |  |  For more information on the Shork Report click here | |
