NYMEX continues to run on its own steam this week. It shrugged off a healthy 67 Bcf injection, which was bang on with projections for the first time in weeks, and is in the process of working its way to a close near $4.00 following a week where prices ping-ponged between $3.50 and $3.90.

This is turning out to be a very interesting experiment in the relationship between NYMEX the futures market and NYMEX the commodities market. The current run is pretty much pure speculation…there is still every indication that the whole thing will come crashing to the ground before the year is out…yet this is the most sustained rally since the price drop began last year. If it continues to hold, it’s a worrying sign about the volatility of natural gas prices post-2009.

You can sense that a lot of analysts are waiting for the other shoe to drop, and at least one shoe will hit the floor this week, when the UNG ETF gets back into the natural gas market on Monday. There is considerable speculation that one of the factors fueling the current run is investors wanting to get in before UNG starts issuing new shares just in time for a new front month. That should be the big story of the week to come.

An interesting fact to keep in mind is that the EIA, which is the Department of Energy’s information branch and (we assume) the most unbiased source in the market, continues to project mid-2010 prices in the $6.00 range. This despite the fact they also project the possibility of a pre-winter dip back into…or even below…the $2.50 range of a month ago. These figures are based on a substantial recovery of demand by American industry. Perhaps they know something we don’t know, and perhaps, as representatives of the U.S. government, they are keeping up an optimistic front.

Meanwhile, there is a new piece in the puzzle that will be the natural gas market of America’s future. As we’ve written before, the natural gas market post-recovery will be very different from the pre-meltdown market, perhaps radically so. Natural gas will most likely play a substantially larger role in America’s energy picture: it may power our cars, it may replace coal in our electric generation, it may take on any number of new roles. This transformation in demand will play out against a transformation that has already taken place in supply and production.

The new puzzle piece is big oil. Most of the major players, like Exxon Mobile, got out of gas years ago because of the tight margins and low returns, focusing instead on oil. Today’s natural gas producers are mostly (more than 80%, in fact) small companies operating just a few wells at a time. There’s still very much of a “wildcatter” mentality to the industry, which is one of the reasons that it is able to respond so quickly to price volatility. It is also why innovation has been adopted so rapidly.

This may soon change. The big boys are taking a new interest in the natural gas they used to flare off their oil wells. With exploration costs and exploration risks way down, a ready supply at record levels, and the potential for entirely new markets for the product, it’s natural that the major players would be thinking about a return. After a year of being buffeted by low prices, a lot of small gas producers will be more than willing to be bought out. As with so many other parts of the natural gas picture, the production side may be looking at some big changes in the years to come.

We’ll keep you posted.

Check the NYMEX

As we’ve said before, we live in interesting times. Last week’s NYMEX rally found legs this week, with several days seeing 10%+ price increases and natural gas briefly flirting with a return to $4.00 prices. Today’s storage report was a speculator’s dream: for the first time in ages, the actual injection came in substantially below projections (although current storage levels nonetheless gained against last year and the five-year average). One would expect this news to bolster the rally.

One would be wrong. NYMEX is responding to the news it wanted by going into a bit of a fade. Currently, we’re pointing to a drop below $3.60.

An awful lot of people are calling the current situation a “technical rally,” although those less inclined towards jargon are using the term “bubble.” And a survey of the analysts can make for some amusing reading, because you won’t find a common explanation between any two of them (the Wall Street Journal, for example, proposes that the current rally is fueled by natural gas hitting the tipping point with coal prices…which natural gas reached months ago and which we discussed months ago). Massive short covering? A sudden respect for the traditional seasonal price rise? A response to the economic indicators…for the first time in months? Fear of impending regulations? Take your pick, there are plenty to choose from.

Whatever you call it, there is a growing suspicion that the price of natural gas right now has nothing to do with fundamentals, nothing to do with supply and demand, nothing to do with storage, and nothing to do with natural gas at all. It’s investors trying to outguess other investors, pure and simple.

From a market standpoint, this is fine; markets are designed for people to act this way. Unfortunately, you pay the price (or enjoy the largess) of the energy contracts that result from all this. When the price you pay for a commodity you need is not tied in any predictable way to the actual, physical market for the actual, physical commodity (and spot prices split from NYMEX prices by a substantial margin this week), you need to seriously concerned about your financial security. Natural gas has always been volatile: right now, it’s price is irrational.

As we’ve discussed before, the vast majority of the current holdings (up to 80%) on NYMEX are held by investors, such as the ETFs, with a one-to-two month horizon. You can see how this has skewed the overall picture of gas prices by looking at the 36-month chart. Traditionally, you’d expect three similar hills, with highs in winter and lows in summer.

The current NYMEX 36-month chart

The current chart looks like someone grabbed the front end of the string and yanked it down. The yank has successfully unspooled the first six months, with the effects gradually diminishing the farther you get from the source. So prices a year or more beyond the current month are almost unaffected by the current price trends, because very few investors are looking that far into the future.

In the world of actual natural gas, most of the major storage sites are at or above 90% of capacity (the joke in Canada is that storage is so full they may have to outlaw smoking in some provinces for risk that they’ll blow up). The estimated capacity for America’s storage network is slightly under 3,900 Bcf, at which point there is nowhere to put it and spot gas is sold for whatever producers can get. There is a very real possibility this point will be reached before the year is out, in which case a drop below $2.00 is conceivable.

Signs point to a fairly mild winter. While the economy is out of recession…Ben Bernanke said so this week…recovery is going to be slow, and how big a role manufacturing will play is in question. New discoveries and new technologies suggest it may not be that hard for producers to ramp up to meet increased demand, whenever it actually happens.

In other words, everything points to a price crash coming soon. This, however, is where we hit the “…but…” in the equation. We still don’t have a clear picture of how big a role speculation played in the price rise of 2008. We don’t know how long, or how far, the market can sustain itself on the whims of investors alone. But as this current rally continues on into its third week, it’s going to give us another chance to find out.

By the way, in another week UNG will begin issuing new shares again. All of that talk about regulating the funds and curbing speculation is, for the moment, just talk. If this makes you think that you’d like to put some stability into your personal energy picture, give Cost Containment Intl. a call.

Check the NYMEX.

There have been a wealth of studies published lately advising that the best way to forestall the decline of old age is to constantly challenge yourself mentally, as strenuously as possible, while you are still relatively young and your mind is still relatively fresh. The way NYMEX has been behaving this year, we fully expect to be mentally sharp well past the age of 150.

Another week of…you guessed it…a slightly under-expectation injection, and NYMEX shoots up above $3.00 again. Not that it was that much of a rally; the market has been rising steadily since last week’s low point. It had cruised at around $2.80 in the days leading up to today’s storage report, and after a momentary drop right at 10:31 am today, changed its mind and decided that last week’s bad news was this week’s good news.

If there’s any basis to this prolonged bout of confidence, we must have missed that memo.

While today’s injection was marginally below projetions…as has been the case almost every week for the past four months…it comes on the heels of a week where more than one national pipeline issued an imbalance warning. An imbalance warning is a way of saying that you can’t cram any more natural gas into storage there. Remember, natural gas is stored underground in salt caves, abandoned wells and the like…no one actually knows how much room we’ve got…and the only way to tell that you’ve filled every cubic inch is when things like imbalance warning happen.

Enough of these and there’s simply nowhere left to put the natural gas that’s being pumped into the system. Which means that producers have to start selling at whatever price they can get. Which raises the specter of sub-$2.00 gas.

This may still happen before the national natural gas storage picture moves from injections to withdrawals.

Meahwhile, the economic news was downbeat for the first time in weeks, as attention focused on jobs. It’s pretty clear that while the credit part of the meltdown may be starting to unfreeze, and while the “nobody buying anything” part of the meltdown is starting to thaw, the job situation is going to continue to get worse, and take up to four years to recover. Which points to the fact that America continues to decline as a manufacturing economy. Which points to a slower recovery of industrial demand for natural gas.

The EIA continues to predict that natural gas prices will rally in 2010. But this week, they also predicted that October prices would fall below $2.50.

So let’s rally!

Here are two possible scenarios for what is happening right now. The first is that this is another flash in the pan: NYMEX jumping the gun on hitting bottom. We’ve seen it a couple of times before in the past few months. If this is the case, look to next week’s storage report as make-or-break for it’s continuance.

The second is that investors have decided, for one week, to go back to conventional wisdom. September has traditionally been the time to buy gas. Natural gas prices have traditionally started rising during the changeover from September to October, so this is a good week to get in. There are some fairly well-established “market plays” involving energy commodities that take place around this time most years, and investors may be going this rout.

We’ll see what happens. Whatever shape the next week takes, it’s certainly helping to keep us sharp. The current market conditions have produced some very content Cost Containment Intl. customers and some very interesting opportunities for customers willing to follow the guidance of an experienced hand in the energy markets.

Another week, another storage report that falls within expected levels, another new low for NYMEX. We started the day at a 7-year low for natural gas; we may head into the long weekend taking a trip back to the 90s for NYMEX.

People who once predicted that gas couldn’t go below $4.00 are now wondering if even $2.00 is safe. Since the vast majority of analysts are pro-market, rather than pro-consumer, we’re beginning to see some doomsday scenarios in the mix: a storage system filled to capacity, production with nowhere to go, gas being flared, producers going belly-up en masse.

They write for their target audience; we write for you. We don’t recommend you start digging out the shelter just yet. Enjoy the buyers market. If you want to lock, this is a great time to lock; if you prefer to ride, you can do it without risking a lot of sleepless nights. If you’re interested in exploring ways to make some long-term energy plays in a market that seems to have lost the ability to think beyond a two-month timeframe, Cost Containment Intl. would love to hear from you.

The next few weeks will probably tax our ability to keep the posts interesting, but a significant date is looming large on the near horizon. In roughly five weeks, we hit the end of the traditional injection season, and move to the winter withdrawal phase of the annual natural gas storage cycle. A lot of people are looking to these for a sign of what the winter will bring. Continuing injections…or very low withdrawals…could very well set the stage for a winter of very satisfying fuel bills. We’re watching. And negotiating some very agreeable contracts.

Meanwhile, in the financial sector, the SEC (Security & Exchange Commission) and the CFTF (Commodity Futures Trading Commission) are doing something unprecedented: trying to get their respective acts together. It’s a sign of the prevailing attitude in America towards financial markets…and a sign of how deeply the lingering economic downturn is beginning to affect that attitude…that the two major watchdogs have operated, and set regulations, pretty much independently of each other up until now. Whether anything will come of it is unclear; most of the priciples are talking as if this is more show than substance. But we’re breaking new ground in many ways these days.

The CFTF continues to take a hard look at the energy ETFs, and there is a growing sense that some kind of restriction on outright speculation will be put in place. There was actually a quote from a CTFT member this week questioning whether an asset as vital to America’s security as energy SHOULD be an object for speculation. We doubt that this idea will get much traction, but could you imagine someone even saying this a year or two ago? The coming year is going to be interesting.