Natural Gas soared and my call for a major historic bottom in gas is looking right on. Yesterday the catalyst was the energy Information Storage report that showed a 31 billion cubic feet rise that set off a short covering rally. Yet it may be a shift in the spreads that are signaling a major shift in sentiment from this market being a cyclical bear to a cyclical bull.
Jerry Dicolo of Dow Jones wrote "Natural-gas funds often use spread trades, which are wagers on the price difference between two futures contracts. Certain bets on a widening or narrowing price gap between different gas futures contracts are often referred to as "widow makers." At some points in the year, particularly in the spring and fall, these wagers can move sharply against investors as unpredictably as changes in the weather.
“While it is unclear how specific natural-gas funds were positioned, a possible trade could involve contracts for April delivery this year and next. For such a trade to profit, gas for near-term April delivery would have to perform worse than gas slated for April 2014 delivery.
“But as a cold snap hit much of the U.S. in March, contract prices of gas for delivery in April soared 14% on the New York Mercantile Exchange. The price of April 2014 gas rose 4%.”
He goes on to say that "The trend has continued with the May contract. Contract prices for gas for May delivery rose Wednesday 1.3%, to settle at $4.214 a million British thermal units, up 19% since the beginning of March. May 2014 gas settled up 0.4% at $4.116, up 3.9% over the same period.
Long-term natural-gas prices aren't rising as much as near-term prices because producers are selling in order to lock in prices for next year above $4 a million British thermal units, traders say. That could be because they don't trust the recent climb will last, they add. One executive at a major energy trader, which arranges deals with gas producers, said that during the past month, the number of producers selling contracts for next year was the highest he had seen in two years.”
Yet what this says to me is that the market has changed. While the spread that they have been playing for the last two years works great in an oversupplied market where there is little hope of a change, the spread will not work if demand and demand expectations start outstripping projected demand increases. This spread reversal may be another sign of change in the longer term fundamentals.
We have been writing about this for most of the year. We called for a major bottom back in January as we saw signs that demand would start to rise. We called for natural gas to hit $7.00 by 2015 a call that now looks ever more likely. In today's Journal the benefits of our emerging Natural Gas economy is becoming clearer as the air we breathe. In a must read in today's Journal by Russ Gold it appear that "U.S. carbon-dioxide emissions have fallen dramatically in recent years, in large part because the country is making more electricity with natural gas instead of coal. Energy-related emissions of carbon dioxide, the greenhouse gas that is widely believed to contribute to global warming, have fallen 12% between 2005 and 2012 and are at their lowest level since 1994, according to a recent estimate by the Energy Information Administration, the statistical arm of the U.S. Energy Department. "
So with the EPA reading this and the crackdown on coal even the environmentalists will have to admit that the switch to natural gas is positive!