Thursday, October 8, 2009

Four Handle

In my quest to find Wi-Fi (I'm still on the road), I came up with seven (and counting) ways to start this post, but none seemed to convey the shock/amazement/joy/fear, etc. that I felt in seeing the Henry Hub spot price for natural gas on my phone this afternoon. The price jumped another 15% to $4.25.

To put this in context, last Friday the price was $2.32. That's an 83% increase in six days. If you had somehow been able to buy gas on the spot market at Friday's close and sell it at today's close that would be a time weighted return of 984,330,241,730,150,000%. That would have been a good investment.

With the release of the storage numbers today, I think the market has figured out that we will not run out of storage space. The injections for the past month have been in the mid-60's (Bcfs) and there will probably be enough capacity before the withdrawals begin. The spread between the front month futures price and the spot price has narrowed to about 17%. By comparison, it stood at 130% last Friday.

In case you're wondering, the spot price hasn't been this high since May 12, 2009, and that was only for a single day. The price hasn't been sustainably above $4.25 since mid-February 2009. Just in case you think this is an indication we're "Goin' to 10!" I'd hold off on the celebration. The price likely won't exceed the front month futures price, which is currently trading around $4.96. The December contract is trading around $5.77 and the January 2010 contract is about $6.07.


Anonymous said...

Great posts overall. Thanks. However, in this post, how can you say traders are sure now there is plenty of storage after we have been having injections at the 5 year avg. rate?

If we continue at the 5 yr avg rate, storage is max'ed at 3900 bcf by 1st wk Nov:
9-Oct Oct. 16 Oct. 23 10/30 11/6
70 62 52 35 27
3,728 3,790 3,842 3,877 3,904

At the 2008 rate it's max'ed by Oct. 30th.

I am eager to hear how you (factually) explain your statement.


Robert Hutchinson said...

Actually, what I said was "I think the market has figured out that we will not run out of storage space" not that traders are sure there is plenty of storage.

I'm just trying to figure out what is going on. It seems premature to see a substantial move at this point given the unknowns. But certain players in the market love to be the first one to make the winning trade. Many more are lemmings who are worried they are missing something.

I agree with your numbers, which is why I'm scratching my head at what I think is an early move in the price. Looking back at the past five years, the storage number has peaked twice in the second week of Nov., twice in the first week of Nov. and once in the third week of Oct. History is not an accurate barometer of the future, buuuut that points a peak in the first week of Nov., give or take. If you add 63 Bcf (the average injection for the past two months) each week through the first week you end up with 3.973 Tcf in storage, which is effectively maxed out.