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Point & Go Figure


Nothing wrong with a bit of "natural" gas in a well-ventilated area.


Yesterday, in response to comments that "the Hurricane Katrina story is not about the supply of crude (which would perhaps cause a logical person to ask the government why it is releasing SPR oil that must still be refined) but the supply of refined energy products," Minyan John C writes the following:

Hi Kevin,

It probably made sense for the government to release oil from the SPR, as evidenced by the fact that Valero (VLO) and other big refiners have requested SPR oil.

Most of the big refineries are at or near full operations now, but there would have been a gap in the supply of crude to the refiners if it hadn't been for the release of SPR.

However, there are two HUGE refineries in Pascagoula and Belle Chasse that may be out for months. I think these two by themselves account for 5% of the nation's output. The refining situation was tight before Katrina, and the loss of these two refineries will probably push the situation into crisis mode.

The big story though is natural gas. There is no strategic reserve of natural gas. September and October are key months for natural gas because the summer air conditioning season is over and winter is still on the horizon. This is when the supplies are supposed to build up to the level needed to fuel winter heating. A lot of natural gas production in the GOM has been lost, and there is no damage assessment yet of the natural gas processing plants onshore which are crucial for the transfer of the natural gas received from the wells into the pipeline system. How about a chart for natural gas?

Cheers, John C.

Below is the long-term continuous chart for Natural Gas.

Natural Gas Continuous (NG/)
Chart courtesy Dorsey, Wright & Associates

The price objective based on a conventional point & figure vertical count from the April breakout at 8 is 12.20, which has been met and exceeded. The question Minyan John C asks is if the market must now consider the possibility that that price "forecast" based on the chart has changed due to shifting supply/demand expectations.

Interestingly, the near-month most active contract counts on a point & figure basis to 12.50, while the Dec. contract counts to 12.90. Going out to Jan. and Feb., the counts are at 13, while beyond Feb. the counts are below 10.

These price "targets" are not written in stone, of course. They can change based on how the charts develop from present levels. But they do provide a framework for evaluating risk/reward in this market going forward.

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