Gas Soars 19%
When watching a sports game, would you bet on who’s going to lose?
That’s essentially what “short-sellers” do: they bet that a stock, sector or broader benchmark will fall in price. (“Long investors” bet that prices will rise.)
Natural gas in the US is a curious creature. Unlike oil, it is not a
globally traded commodity. North American production is landlocked, with
practically no LNG export possibilities at this time, though big dreams
are in place to make that happen, and many billions of other people’s
dollars have been sunk into these dreams.
The US also exports natural gas to Canada. But it imports more from
Canada than it exports to Canada and Mexico combined. Hence overall, the
US remains a net importer of natural gas.
So the rest of the world has no impact on the price of natural gas in
the US. There were times when LNG sold for eight times more in Japan
than it traded for on the NYMEX. This cordoned-off market is a favorite
playground for the Big Money because it’s relatively easy to push it one
way or the other to one’s liking.
And natural gas is a near-term bet on the weather, except
when it’s not. So everyone is prodding their weather gurus to predict
the temperature over the next few days and weeks: if the next cold-wave
would be big enough to jack up demand for heating purposes, or if the
next heatwave would force power generators to burn through vast
quantities of gas so that folks can max out their air conditioners.
Head fakes, unexpected plunges when it should rise, inexplicable
rises when it should plunge, and whiplash-inducing but otherwise
mysterious turnarounds are normal. And once every few years, there is a
panic that can last for weeks or months, whipping up dizzying spikes.
But over the last seven weeks, the forces have combined, and shorts
have piled in as others have bailed out in desperation, and the price
plunged, though this is the time of the year when natural gas normally rises,
and often by a lot, due to heating demand. But a few warmer days early
in the winter and surging production were the signal to go short, and
short they went. Over the last seven weeks, they pushed down the price
But it must have been one of the most crowded trades around. And Thursday is coming up…
Every Thursday – except during holiday weeks when it may fall on a
different day – a potentially heart-attack inducing event happens: the
EIA releases the weekly inventory report. It can be a big market mover.
And especially after the recent plunge, it seems the shorts, all
stepping on each other in this immensely crowded trade, didn’t want to
go into this together, hand in hand, and jointly jump off the cliff. So
they jumped individually ahead of time, while they still could, and it
created an epic short squeeze.
On Monday afternoon, in electronic trading on the NYMEX, natural gas traded at $2.80 per million Btu. At the time, the Wall Street Journal observed, “Natural Gas Drops to Two-Year Low as Forecast Warms Up.”
But Tuesday morning at 10 AM, after some ups and downs overnight, it
bounced off $2.83/mmBtu, and the Big Squeeze started. It hit $2.95 by 2
PM and more or less maintained that level through much of the night. By
5:30 AM today, it breached the $3.00 level and then began its stupefying
ascent, plowing higher and eating shorts as it went, and they were
trying to get out from under their bets as fast as they could. Now as
I’m writing this after-hours, it just ticked up to $3.33/mmBtu.
This is the two-day journey from $2.80 to $3.33, a phenomenal jump of 18.9%:
And here is our miracle commodity over the past six months in daily
increments. Given the last two days, Natty has done great so far this
year, up nearly 18%. But even the monster move of the last two days only
brought the price back where it was on December 22, a time during which
it was in freefall. Note how fast and far it plunged since November 20:
And here is a 12-month chart in weekly increments. It depicts the
polar-vortex-induced ramp-up last winter, and the brutal plunge that
Whatever oil is going to do – and it too made shorts nervous today,
but it jumped “only” 5.9% – US natural gas is going down its own path
for its own reasons. Neither OPEC nor Russia nor slowing growth in China
matter. What matters are the nerves of the traders, or more importantly
the programming of the algos, along with weather, demand, production,
storage, and a million other things, all in the US. And for those who
trade it, it promises a lot of premature gray hairs.
Last time this happened in the oil patch, the stock market crashed.
“Going to be a painful period of time,” is how Texas Gov. Rick Perry
explained the situation. Read… This Is Just the Beginning of the Great American Oil Bust