Thursday, June 14, 2012

Natural gas storage surprise prompted massive short covering

This morning's EIA natural gas in storage report took everyone by surprise. We started out with this projection.
Bloomberg: The U.S. Energy Department’s natural-gas inventory report, scheduled for release at 10:30 a.m. in Washington, will show that supplies rose 2.6 percent last week, according to a survey of Bloomberg users.

The government’s report will show that inventories gained 74 billion cubic feet in the week ended June 8 to 2.951 trillion cubic feet, according to the survey.
At 10:30AM the EIA had this to say: "Working gas in storage was 2,944 Bcf as of Friday, June 8, 2012, according to EIA estimates. This represents a net increase of 67 Bcf from the previous week." This was visibly below the Bloomberg survey.

Working gas in underground storage compared with 5-year range (source EIA)

So what's the big deal? Again, we have a technical issue in the market. The nat gas market has been left for dead with the speculative part of the market piling into the short positions. A surprise in the inventory number sent the shorts covering. And in this market a shot covering is not a couple of percent. Natural gas futures spiked over 12% in a short period of time.

Natural gas active futures contract intraday

It remains to be seen whether this rally will carry over to next week. But this is a good lesson for other markets with overextended short exposures such as oil, euros, etc.
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