Mark Twain once wrote that “everybody talks about the weather, but nobody does anything about it.” Substitute “NYMEX” for “weather” and the words still ring true. An increasing number of analysts think NYMEX is on a bubble…yet week in and week out, prices and investors have stayed the course they started on back in September.

If Mother Nature decides to lend a hand and send us a cold winter, they might just pull it off. And…depending on whose data you choose to believe…we’re on track for a substantially colder OR a substantially milder winter this year.

Meanwhile, storage saw a second week of slightly-below-projection injections. The numbers have dwindled substantially…18 Bcf last week, while we were on hiatus, and 25 Bcf this week…but let’s be careful about reading too much into that. Storage is tight enough now that a lot of restrictions are kicking in. Both weeks were within a few Bcf of projected numbers.

With a new Front Month in play, NYMEX appears to be in wait-and-see mode. Check the NYMEX page: there’s been very little movement today. But look beyond December, and you’ll note an interesting trend.

Things are getting mighty flat in the world of near-term futures. Read out as far as May, and you’re seeing $5.40 as far as you go. That trend is pulling even closer in today’s market as we speak. December-January are less than $.50 apart, which is almost half  the spread when November-December closed. We haven’t seen a six-month set of prices this close in recent memory.

Meanwhile, spot prices have finally succumbed to the upward pressure and pulled up so that they closed November within traditional range of NYMEX…a substantial rise, considering that a few weeks back the futures-spot price was two-to-one. Everywhere we look, things are coming to a point of convergence. Not a harmonic convergence for bottom-seekers, but a convergence nonetheless.

You get the feeling NYMEX has found its comfort zone, and now it’s content to sit and wait to see how the next few weeks play out. We’re at the cusp of the withdrawal season, which means that the storage report should again become the center of attention. Withdrawals will mean that the Big If has paid off for investors. Injections will mean it hasn’t. At which point things should start to diverge again.

Cost Containment Intl. will be watching.

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A week of cold weather had the expected effect on the weekly storage report…it “only” came in about 5 Bcf above predictions. As storage creeps within 200 Bcf of estimated capacity, it’s a good guess that anyone with the available funds and the gambling instinct to pay storage fees…even a few month’s worth…is buying natural gas now and socking it away for a brighter future.

NYMEX, as has been its pattern for the last few weeks, isn’t interested. Actually, it’s rallying a bit.

It has problems of its own to deal with. Prices momentarily fell off a cliff on Tuesday: 10% in less than an hour. We’ve seen these kinds of moves before, generally tied to the storage report, but in this case the trigger was an announcement by the UNG ETF that they were getting out of the natural gas futures market.

Is this really going to happen? Depends on whether or not you believe public announcements by trading entities, and it was sort of a “we are getting out but we aren’t really” kind of announcement (the gist is that they’re moving from simple futures contracts to more complex investment entities which are likely to remain unregulated) . But the reaction was pretty clear. A lot of investors have been riding the coattails of UNG; its the big trader on NYMEX and its trading strategy is widely known and understood. It’s a good guess that a lot of traders who have been using the coattail investment strategy decided it was time to get while the getting was good.

Since then, NYMEX has puttered along at a fairly even pace, around $4.50, even in the face of today’s storage report.

It will be interesting to see how this all plays out next week. UNG, with its huge share of the front-month contracts, rolls them over in the third week of the month (in this case, selling November and buying December). This has tended to push the old down and the new up. It will be interesting to see how their announcement affects things…and whether that was their intention.

We will probably see a lot of this in the coming months: quick jumps up and down. NYMEX is running on guts right now, with a lot of traders in bad positions, looking for quick opportunities to get out. Don’t think, however, that this is necessarily going to drive prices down. We’re coming off a prolonged period where most investors were betting short…holding futures that only pay off if prices drop…and the strength of the current rally has a lot of them running scared and looking for windows of opportunity…drops in the rally…to “cover” their shorts. We’ve spoken before about the hair-trigger response of NYMEX, and we can expect plenty more of it in the weeks ahead.

No one’s even guessing what will happen when/if storage hits capacity. It’s never happened before. If the current cold weather holds, we may not find out.

Meanwhile, a trend is developing that bears close watching. Producers are starting to lock in prices for 2010 and beyong. That’s right…producers. They’re starting to put together long term supply contracts within fixed minimum and maximum levels. One of the largest independent producers, Chesapeake Energy, has been talking about 10- to 20-year fixed contracts with some large energy generators. These guys are just as sick of the volatility as everyone else, and are willing to forgo the possibility of a return to $14 prices in exchange for preventing the possibility of a return to $3 prices.

Most of these contracts are in the $5-$10 range. They REALLY don’t want a return to $3 prices.

At Cost Containment Intl., we’ve always stressed the importance of security in planning your energy future. Looks like this idea is getting some traction in unexpected places.

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Let’s take a moment to mark yet another record for storage. Yesterday’s injection report, a well-above-expected 69 Bcf, brings the nation’s storage within 240 Bcf of its theoretic limit.

NYMEX, as shouldn’t surprise you by now, didn’t blink. Current trading is holding steady just below $5.00.

Natural gas the commodity and natural gas the futures contract are living in two different worlds right now. The current spot price for natural gas, reacting as it does to the fundamentals of supply and demand, remains under $3.00. That’s more than $2.00 below the front month NYMEX. Natural gas is leading a double life.

How much of a double life? You remember last week we introduced the concept of “contango.” Pick any future month (or, at the moment, any month at all), and the NYMEX price is higher than the current spot price. For the commodity market, this will tend to pull the price up; it’s a good time to buy, so demand goes up. For the futures market, contango tends to pull the front month price down. Eventually, spot price and front month futures price need to converge (if we spent more time playing the futures market and less time dealing with actual energy management, we could probably explain this in a single post. Take our word for it). Right now, that’s not happening.

What this means, very clearly, is that NYMEX continues to believe what it wants to believe and run on its own steam. How long it will run before it runs out of steam is the big question. Investors are choosing to believe that spot prices will catch up by then and continue to head up going into 2010.

Spend some time in the financial section these days and you understand more clearly how the American economy was brought down by the belief..incredible as it seems in hindsight…that American home prices would never, ever stop gaining value. As this rally has continued, the skeptics and the head-scratchers have gradually been falling into line, treating the current situation as if it’s business as usual. The current line is that we’re in the midst of the standard fourth-quarter rally. Never mind that previous fourth-quarter rallies were based on the fundamentals of the natural gas market, and this one is based on…investors believing what they want to believe. No one wants to spoil the party now that the party’s going strong.

Meanwhile, we’re watching for a few big IFs over the next couple of weeks:

IF this week’s cold spell, and the presumed uptick in natural gas use, shows up in next week’s storage report.

IF the cold winter that so many are predicting actually starts to happen.

IF we see more action in Congress favoring use of natural gas in the pending energy legislation.

Leading up to the biggest IF of the lot: what happens IF we run out of space to store natural gas? And what IF NYMEX doesn’t care?

Meanwhile, IF you believe that a sensible energy strategy is the way to go moving forward, give Cost Containment Intl. a call.

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Let’s take a moment to mark today’s storage level: at 3,589 Bcf, it’s the largest level ever recorded.

So why is NYMEX up a dollar from last week? If you’ve been paying attention to more than the first line of the NYMEX numbers, you know the answer. We’re into a new front month. When October rolled into November, it took NYMEX up with it.

Which brings us to this week’s word: contango. No, this has nothing to do with Dancing With The Stars. But it may have a lot to do with what’s going on with NYMEX at the moment. Let’s have a look:

NYMEX 36 month projection: nowhere to go but up

This is a graphic of NYMEX prices for the next 36 month. As we said a few weeks back, natural gas prices have traditionally followed a seasonal, year-long trend like the one you can see in 2010-2011. But the current prices have been dragged down…way down…while the longer-term prices relatively unaffected.

This gives us the steep slope from the current month looking forward. Basically, there’s nowhere to go but up…way up. More so if you’re comparing futures prices to the actual current spot price for natural gas. Spot prices can’t ignore the fundamentals, which is why they are well below even NYMEX right now.

If you could buy natural gas right now and stick it into storage, rather than burning it, then wait until the higher prices come around, your could make a lot of money. That’s contango. And contango, rather than a supply imbalance, may be the reason natural gas keeps pumping into storage at record levels. People are buying low, with an eye towards selling high next year, and they plan to hold that gas in storage for as long as they can.

No one knows if this is happening. But a lot of people think it is.

We’ve been talking a lot about fundamentals in the past few weeks…mostly in terms of how NYMEX has been ignoring them…but there are another set of fundamentals in play here. These are the fundamentals of a futures market, which is what NYMEX is. And they work very differently from the fundamentals of the physical natural gas market.

Futures markets aren’t about what something is worth right now; they’re about what something might be worth at some time in the future. The fundamentals of the physical natural gas market are grounded in physical reality: now much gas is coming out of the ground, how much gas is being burned, how the environment is making it easier or harder to produce, how the economy is affecting demand. The fundamentals of a futures market are far more complex: the nature of risk, the psychology of buyers and sellers, the way that large masses of people will react to both actual events and…just as important…their perception of these events.

Right now, these two sets of fundamentals are on pretty much a collision course. Today’s storage report showed an injection of 64 Bcf. There’s room for four…maybe five…more of these, then there’s no more room.

Yet there’s every indication that NYMEX doesn’t care. Investors seem to be ready to gut out the glut. They’re banking on a cold winter to start burners burning, and anything from a quick economic recovery to a new model for natural gas consumption in America to take it from there.

They are getting plenty of moral support. Analysts can only argue against a bull market for so long before they jump on the bandwagon. Natural gas producers are all for the current trend. Consumers aren’t going to complain too much about prices that are still well below last winter’s. Those who worry that they’ve missed the bottom…well, you know how Cost Containment Intl. feels about bottom chasing.

NYMEX is doing a pretty good job of weathering today’s storage report, with a close around $4.50 likely by day’s end. This rally is proving to have some very steady legs. Remember, these are the same people who pushed natural gas up to $14.00…with winter projections running north of $20…back in 2008.

It may still go pfffft. Unless it doesn’t. We won’t know for a few weeks yet.

When forces collide, it’s best not to be caught in the middle. If you’re looking for a secure path for your energy future, give Cost Containment Intl. a call.

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