Natural gas has fallen and can't get up

Take no quarter, give no quarter. Or at the very least beware of the end of the U.S. third quarter. The quarter was a dream especially the month of September for stock market and precious metal bulls. Yet it seems as the quarter is coming to an end the markets with the most strength are running out of steam as funds and traders look to book profits as the markets failed to take out key resistance. For gold and all the talk about $1,300 per once, the market never officially made it there and at the end of the quarter it seems that close is good enough. So unless we get some bearish news on the dollar it seems that $1,300 an ounce won’t be hit at least until the next quarter. The stock market is rounding out a profit taking top as traders look to book profits from the best September since 1939. Yes this is a September to remember but also remember that this is a profit taking business and it appears that unless the data gets us real excited the correction should start.

The market in gold and stocks has been helped by the Fed. Ben Bernanke and his band of money printing merry men have engineered this latest gold and stock market rally. Now if only they can get it to trickle down to the oil market. Oil prices, while higher, are a bit less inclined to get excited about the recent stock market strength. With supply near record high and high stock prices not necessarily being reflected in real oil demand oil traders are less enthusiastic. The truth is oil and the products are in a bearish way so they desperately need the outside markets to support them. Maybe once we get out of shoulder season we can see some of that enthusiasm we saw in the beginning of the summer driving season as fleeting as that was.

Natural gas took a bit of a hit. Reuters Joe Silha reported that the average of the first 12 months of New York Mercantile Exchange natural gas futures contracts slid to its lowest level in nearly eight years with moderating autumn demand and comfortable supplies continuing to pressure gas prices. The 12-month futures strip slid 9.9¢ to settle at $4.227 per mmBtu on Monday, eclipsing the recent low of $4.273 set on Aug. 27 and the lowest strip settlement since Dec. 9, 2002, when the average stood at $4.171, according to Reuter’s data. After a first quarter sell-off, front-month gas rebounded to about $5.20 at mid-June and helped drag the strip to an early summer high of $5.483, but even with record heat and power demand this summer, prices mostly headed lower, sinking to an 11-month spot low of $3.62 in late August. Last week's U.S. Energy Information Administration storage report showed total gas inventories climbed to 3.340 trillion cubic feet, still about 6% above average and a level normally reached until after the first week of October. Joe Goes on to say, "High inventories supplies and no serious storm threats to Gulf of Mexico gas production have helped keep front-month gas prices on the defensive, while concerns about the economy and production have limited buying interest in forward contracts. Strong production this year has been a major roadblock to tightening a loose supply-demand balance though relatively low spot prices could finally slow drilling by squeezing producer profit margins."

Baker Hughes data Friday showed the gas drilling rig count dropped last week for the first time in four weeks, but horizontal rigs - the type most often used to extract gas from shale - were unchanged at the previous week's record high, casting doubts that gas output will slow anytime soon.

A recent EIA estimate still put U.S. gas output this year above 22 trillion cubic feet, its highest level since 1973. Most analysts agree it will be difficult to tighten the market until economic activity picks up enough to boost industrial demand, which accounts for nearly 30 percent of total gas consumption. The 12-month natural gas strip is a long way from its all-time high of $13.334 set in July 2008.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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