Friday, July 13, 2007

Analysing a Natural Gas Report

Usually you can't trade fundamental news on an intraday basis. Fundamentals are the big waves. They move whole markets over longer periods of time. You see them on the weekly and monthly charts, you use the daily chart to finetune your entry. But there are reports which allow you to trade fundamentals on an intraday basis. The Natural Gas report is such a report as I learned yesterday. Reports are all about perception. What does the market expect, what is the whisper number and what is the reality. You get major shifts and eventually the start of a new fundamental trend if the market expectations and reality just don't match, if the market is leaning one way, while the reality says otherwise.

10:30am EST EIA Natural Gas Storage Report

The market is expecting a high number (95 Bcf) after two reports showing below average injections into the Natural Gas reserves and selling off prior to the report.

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(16:30 my time is 10:30am EST)

The report is published first here: Weekly Natural Gas Storage Report

And the report showed a Total net change of 106 Bcf compared to the market expectation of 95 Bcf

The market reaction to this 10% higher than expected injection into the National Gas storage was a fast and furious sell-off

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Followed by a quite usual short covering rally, something I have seen a few times already, when NG sold off 150 ticks or more. (Don't forget 1 tick is 0.01 and pays 10$, so the move you see above is worth about 1,500$ / contract in seconds)

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What now should follow is another wave of selling bringing Natural Gas below the previous low. Actually that number coupled with the information from the National Hurricane Center that the Atlantic shows no signs at all of developing nasty weather should get Natural Gas down to the 6.100 to 6.000$ level and eventually below that number.

As expected another wave of selling hits the market, but it is met with continuous buying bringing prices further up to the 6.500 level again.

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It's the first sign, that the report isn't all doom and gloom, and it actually got me looking for and reading the actual report, instead of relying on Barons and reading only the headline number.

The report table had a note attached:

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There was a reclassification from base gas to working gas of 10 Bcf. I was a bit puzzled at first but then I understood that note and the markets behaviour. The reported number wasn't 10% higher than the market expected. It was actually an inline report. The 10% increase was caused by a reclassification of already stored gas from untouchable (except in cases of a national emergency) reserve to regular gas reserve to be used as needed.

After that 6.500 post report high was made 3 waves of selling pushed Natural Gas to a new daily low.

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The low was made after the London traders left their stations at 5pm UK time.

6.300 marked the daily low and slow but steady buying was now seen in the market bringing the price again upto the 6.450 level. An impressive 150 tick retracement from the lows.

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At 20:00 my time or 2pm EST you see 2 high volume bars, while price is moving just 27 ticks holding above the 34ema, which was already tested twice and rejected to the upside.

2pm marked the release time of another report, which is regularily published by EIA. A report usually not mentioned in the regular news services and thus going unnoticed by the average trader. Of course the informed traders obviously wait for it and read it.

The Natural Gas Weekly Update Report. Released at 2pm the day the Natural Gas Storage report is released.

This report gives the details, which lead to the change in the National Gas Storage.

Look for the Storage heading to get the details:

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The price of 6.450 was about the level Natural Gas August futures were trading prior to the release of the first report. And an inline report mentioning cooler average temperatures in the US resulting in less Natural Gas consumption should put further pressure on prices. Still that's not what we see after the release of the report.

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The NG pit closes at 20:30 resulting in the volume drop you see on the chart

Prices continue to be supported reaching an overnight high at 6.566.

Looking further into the report you find an ominous sentence, which might shed light on the price behaviour on a fundamental basis.

While this sentence might be considered as the general warning notice

Although price decreases characterized much of the springtime, there are still factors that could lead to rising prices this summer. Being only 3 weeks into the official summer season, plenty of time remains for episodes of hot temperatures in the next few months. Competing petroleum products (as evidenced by an increase in the underlying crude oil price) continue to trade at near-record prices. Additionally, the hurricane season may yet become active and result in hurricanes that could disrupt production in the Gulf of Mexico region.

this one seems more important to me on a fundamental basis

The spot price for West Texas Intermediate (WTI) crude oil increased $0.77 per barrel on the week to $72.58 per barrel. On a Btu basis, the crude oil price is now nearly double the price of natural gas at $12.51 per MMBtu. The relative difference in pricing can have a large effect on demand (mostly in the industrial sector and power plants).

If it is correct, that power plants and industries can make a relative simple switch from one type of fuel to power their company to another, it might be going through the mind of a CEO to earn his company some money by selling these oil futures bought in December 2006 and January 2007 at an average price of 55$ to 60$ to secure an average 2007 oil price and buy Natural Gas futures instead to secure the current low Natural Gas price for the remainder of 2007.

Sure, if you need the commodity you use futures and other commodity derivatives to hedge yourself against price fluctuations. You are not in the futures market to make a profit from these futures positions. But if you can get the same amount of energy at half the price, it might be interesting even for a speculation averse CEO to get this extra profit and switch the company's energy consumption from oil to natural gas.

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