The gap between the crude and natural gas markets continues to expand. The world is concerned with having too little of the former and too much of the latter.

As I write, front-month natural gas futures are selling at a level we have not seen since August of 2002 (when the equities market was claiming a low of its own), just $2.93 per million BTUs.

The contract price has fallen by more than 6% during today’s session.

It is certainly not good news for domestic companies that worked overtime to expand their drilling range during the bullish run we saw over the past several years.

Pennsylvania, West Virginia, Ohio and New York all saw companies like Chesapeake Energy (NYSE:CHK) and Andarko (NYSE:APC) knocking on the door of property owners, willing to sign big checks to get their hands on mineral rights.

But now that the nation’s economy has ground to a halt and gas prices have fallen off a cliff, producers are wondering what in the world they were thinking. All they can do is shut down the drills and close the valves.

The further natural gas futures fall, the more output will be stricken from the market. It is a race to see which side of the equation can reach equilibrium first.

The tide is turning

If you have been following this site throughout the summer, you know I have remained bullish on natural gas. And if you are a TFN Strategic Trader subscriber, you know I have made several recommendations in kind.

Judging by today’s headlines, I am not alone.

According to the Financial Times, an unnamed hedge fund has spent millions to gobble up extremely bullish natural gas options with expirations later this winter. Specifically, the fund bought contracts with $10 strike prices that expire in January and February.

That means the fund is showing its confidence that natural gas prices will more than triple in the coming months. If it happens, or comes anywhere close to happening, the mysterious hedge fund stands to rake in tens of millions of dollars.

If it doesn’t happen, of course, and the situation gets even worse, the mysterious fund could lose everything.

So why would anybody make such a move?

Several reasons. First, even if natural gas prices do not hit the $10 strike price, the options could surge above last week’s trading price of $0.056 with even a slight short-term spike in prices or bullish speculation.

A four-percent turnaround in gas prices in the near future could lead to a triple-digit gain for the fund. That’s the beauty of options.

Beside an all-out speculative play, the firm could be hedging its book with the move. After already making a slew of cash playing the downside, this could be its plan to help ensure it keeps those gains even if prices make a quick turnaround.

The bullish argument for gas prices is an easy one to make. As natural gas prices and demand have plummeted over the last year, producers have cut their production. They have cancelled plans for new exploration and have slowed their development of new wells.

Eventually, the current market oversupply will turn into a shortage. When it happens, which very well could be this winter, prices will surge until equilibrium is met in the opposite direction.

Whenever the market’s pendulum swings this far, its momentum will carry it to the extremes of both sides.

Now is the time to enter natural gas plays, when nobody else wants to do it. The easiest way to make the move is to check out TFN Strategic Trader’s portfolio. There is more than enough in there to get you drooling.

Source: Taking a Big Bet on Natural Gas

“The debate between whether the market should focus on green shoots or current weak demand and over supply goes on,” said Phil Flynn, vice president at futures trading and research firm PFG BEST Research.

“The green shooters have had the upper hand this week, but the real test will be next week,” Flynn added.

“Although we cannot discount further gains, we are somewhat wary about jumping in on the long side at this late stage,” said Edward Meir, analyst at MF Global.

“The stock market advance, in particular, looks somewhat overextended,” Meir added.

Source: Crude Continues to Climb

“Home sales blew the market away,” said Phil Flynn, vice president at futures trading and research firm PFG BEST Research. “Oil wants to go lower but the surge in stocks pushed it up.”

“Demand is still weak and supplies still high yet the market keeps driving us higher,” he added.

Crude has risen in six of the recent seven sessions. The rally came even after petroleum data continued to show weak demand and rising inventories.

Total inventories of crude, gasoline and other petroleum products in the U.S. rose 1.9 million barrels in the week ended July 17, up for a sixth straight week to the highest level since September 1990, data released by the Energy Information Administration showed.

Source: Crude Continues to Rally

Analysts surveyed by energy-information provider Platts had expected a decline of 2 million barrels for crude stockpiles. They also had forecast increases of 800,000 barrels for gasoline and of 1.4 million barrels for distillates.

While refiners used less crude in their production, oil imports fell by 346,000 barrels a day last week, resulting in a drop in crude inventories. Refinery inputs averaged 14.8 million barrels a day, down 300,000 barrels from a week ago. Utilization rate stood at 85.8%.

Total petroleum products supplied, an implied gauge of consumption, rose to 18.917 million barrels a day last week, up 0.3% from a week ago. Consumption was still nearly 1 million barrels a day lower compared with a year ago.

Crude oil inventories at Cushing, Okla., the delivery point for Nymex oil futures, stayed unchanged at 30.8 million barrels.

“EIA numbers have been very similar, as the last few weeks saw a slight draw in crude and a build in products,” said Tariq Zahir, managing member at Tyche Capital Advisors.

“With inventories at multi-year highs and OPEC members not abiding to quotas, crude definitely could come off rather abruptly, barring any political events or weather related issues,” he added.

Source: Crude Falls First Day in Six

“People are buying in thinking that demand will pick up for oil and products soon,” said Zachary Oxman, managing director at futures trading firm TrendMax Futures.

Meanwhile, energy traders are awaiting the Energy Information Administration’s report on petroleum inventories scheduled for release later today.

Analysts surveyed by Platts expect a decline of 2 million barrels in crude stockpiles and an increase of 800,000 barrels for gasoline. They also project an increase of 1.4 million barrels in distillate supplies.

Total petroleum inventories, including crude oil, gasoline and diesel, are expected to rise for a sixth straight week, adding to what already is a 19-year high.

“The fundamental picture looks bleak and far too much uncertainty remains on the demand outlook, so a move lower is possible,” said Nimit Khamar, of Sucden Financial Research.

“However, given the [oil] market is mainly driven by financial markets and economic sentiment for now, and not [by] oil fundamentals, further gains cannot be ruled out, although a rally based on this comes with an increased risk of a sharp correction,” Khamar added.

Source: Crude Climbs Fifth Day Straight

Also pushing oil higher (according to MarketWatch), some traders who had been shorting, or selling without owning, the front-month contract have to buy it back to cover their positions before the contract expires Tuesday.

“Trading is like wind, and any economic headline that comes along can change the direction,” said Phil Flynn, vice president at futures trading and research firm PFGBest Research. “It seems traders want to cover shorts ahead of the weekend.”

The 6.1% gain oil posted this week came after a 10.3% fall last week. For the month, oil is still down 9.1%.

Meanwhile, China, the second-biggest energy consumer after the U.S., processed a record volume of crude oil in June as faster economic growth boosted fuel demand and refining profits encouraged production.

Oil processing rose for a fifth month to 31.9 million metric tons, or about 7.76 million barrels a day, China Mainland Marketing Research Co., which compiles data for the government, said in a statement yesterday.

“Developing countries are going to grow and consume more energy,” said Paul Crovo, a Philadelphia-based oil analyst with PNC Capital Advisors. “This may be enough to offset tepid growth in the developed countries, like the U.S., and provide for reasonable growth in demand.”

Source: Crude Still on the Rise

As evidence of how screwed up things are out there, crude apparently got a boost from the Labor Department’s report mentioned above. So more than half a million new people filing for unemployment in a week is good news?

“The jobs data and the dollar are helping oil today,” said Phil Flynn, vice president at futures trading and research firm PFG BEST Research. “But weak demand concerns are rising.”

Meanwhile, crude inventories at Cushing, Okla. – the delivery point for crude futures traded on the New York Mercantile Exchange – jumped to 30.2 million barrels last week, up 5.6% and adding pressure to futures prices.

Also on the energy front, U.S. natural gas inventories rose 75 billion cubic feet in the week ended July 3rd to reach 2,796 billion cubic feet, the Energy Information Administration reported yesterday. Analysts at IHS Global Insight had expected an increase of 71 billion cubic feet.

At the current level, inventories were 601 billion cubic feet higher than last year at this time and 452 billion cubic feet above the five-year average.

Source: Crude Oil Gains

There were no great surprises in the report. However, there was an uptick in crude inventories at Cushing, Okla. — the delivery point for crude futures traded on the New York Mercantile Exchange. They jumped to 30.2 million barrels last week, up 5.6%, which added a bit of pressure to futures prices.

Summing up, “The market is adjusting itself,” said Michael Fitzpatrick, of MF Global. “In the past few weeks, there was a lot of wishful thinking that the economy will recover. Now people realize there is no evidence of any sustainable economic growth.”

Source: Crude’s Slide Intensifies

The Commodity Futures Trading Commission (CFTC) may impose stricter limits on commodities speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years. The investigation has the support of politicians seeking greater price stability for the global economy and consumers, but traders argue that such restrictions will only reduce market liquidity and not necessarily prices.

CFTC Chairman Gary Gensler said his agency will hold a series of hearings from July through August to determine whether or not it should place new limits on energy futures contracts.

Right now, the CFTC sets limits on the amount of futures contracts in some agricultural products that can be held by market participants. But futures exchanges are free to determine what, if any, position limits should exist for energy futures.

The New York Mercantile Exchange (NYMEX) currently restricts oil traders to 10,000 net futures for any one trading month, and 20,000 net futures for all months. However, traders cannot exceed 3,000 contracts in the last three trading days of the spot month.
“This different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review,” Gensler said. “It is incumbent upon the CFTC to ensure a fair and transparent price discovery prices for all commodities.”

Speculators – specifically, large investment banks, such as Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE:MS), that build multibillion positions in futures and swaps in the commodities markets – are believed to be a big reason for the sharp fluctuation in oil and gas prices over the past two years.

As of last July, when oil hit a record-high $147 a barrel, financial investors had about $300 billion riding on indexes that track the value of futures contracts, according to the International Energy Agency (IEA). That’s about four times as much as in January 2006.

Similarly, a sharp shift in the futures market this year helped oil prices rally about 115% to $73 a barrel in June from below $34 a barrel in February. Positions held on the New York Mercantile Exchange by investors who expected the price of oil to rise shifted from a net 11,000 short to 40,000 net long from May to June, as traders shifted their positions to reflect an improved outlook for the global economy.

That shift alone helped accounted for at least 20% of oil’s price surge during that period according to the IEA.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. told Bloomberg News. “Something has to be done to reduce some of the speculation, no doubt about it.”

In an opinion piece submitted to The Wall Street Journal yesterday (Wednesday) French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said that the recent gyrations of the oil market defy the “accepted rules of economics,” and called on regulators to take coordinated global action against market interference by speculators.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Brown and Sarkozy called on representatives of the Organization of Petroleum Exporting Countries (OPEC), the IEA, and the Expert Group of the International Energy Forum (IEF) to work develop a shared analysis of future supply and demand trends and a price range that would be more consistent with fundamentals.

“The experts should also consider any measures that could be put in place to reduce volatility,” they said. “Discussions should look again into the question of whether trading activity is amplifying erratic price movements.”

Brown and Sarkozy said they would pursue the issue further at the meeting of the Group Eight nations in Italy this week.

Of course, not everyone is convinced that more regulation is the answer.

Investment banks, such as Goldman Sachs and JP Morgan Chase & Co. (NYSE: JPM) “are the market makers,” Michael Lewis, a partner at the Washington law office Paul, Hastings, Janofsky &Walker LLP toldBloomberg. “Those are the entities that have the huge positions. If the financial players, the banks, the hedge funds, et cetera, are limited to the number of trades they can take, it will lead to less trading. Less trading, I don’t think necessarily leads to lower prices.”

Source: Speculators Feel the Heat as Demand for Tighter Regulation of Oil Contracts Rises ]]> http://www.contrarianprofits.com/articles/speculators-feel-the-heat-as-demand-for-tighter-regulation-of-oil-contracts-rises/18920/feed 0 http://www.contrarianprofits.com/articles/investment-news-briefs-thursday-july-9-2009/18905 http://www.contrarianprofits.com/articles/investment-news-briefs-thursday-july-9-2009/18905#comments Thu, 09 Jul 2009 15:30:40 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=18905 Pickens’ Wind Farm Delayed; Apple Tarnished by SEC Scrutiny; UBS May Settle Tax Dispute; Higher Gas Prices Help Reduce Traffic; Discount Retailer Thrives in Recession; Pepsi Bottling Profits Rise