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Natural Gas Momentum Marches on!


Crude (West Texas Intermediate) spot price has gone up about 51% from $96 to $145 since beginning the year and has grabbed all the attentions and headlines from media, politicians and Main Street alike. Natural gas, on the contrary, quietly has sneaked up over 68% over the same period and got much less fanfare than its “big brother” from general public. However, at the NYMEX, non-commercial market participants (“speculators”) have keen interests and got all their attentions. The speculator’s long positions for Henry Hub natural gas swap futures has skyrocketed from less 560,000 to over 1,400,000 contracts, while the short positions maintain at about 200,000 during the 1st half year. The attached chart (natural gas is represented by red line and the net long position is presented in shade column) shows clear close association between the incremental accumulations of net long positions for the speculators and spot prices for Henry Hub natural gas. It seems that upward moment for natural gas is much intact and no indications to abate at all.

In the last decade, on average crude oil was traded about 6-8 times over natural gas. If we do assume the regression to the mean does hold here. Current 11 times crude to natural gas ratio could mean that 1) natural gas keeps moving up if crude remain relatively stable level, 2) natural gas accelerates faster than crude oil if oil continues the current upward trajectory, 3) certainly natural gas may also decline from bearish statistical/economic data or simply capital rotation out of natural gas and lock-up the gain and heading for beaches at Hampton for the summer, and or 4) the commodity bubbles finally burst and both crude and natural gas along with metals and agricultural commodities all spiral downward. And certainly some unexpected extraneous events could happen and change everything.

One of caveat, though, even the seemingly unstoppable crude upward movement, the crude speculators have been continuing closing out their bullish bet (NYMEX speculators crude long positions declined from about 260k to 210k) in the last month, while their short positions remain at about 190k level. This may be not a good sign for the oil bulls out there.

What will happen next, that is always the most important question.
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