Down again, naturally. Natural Gas retreats after what should have been a bullish supply injection report in a move that seemed to define the mood in the rest of the of the petroleum and metals complex. As we all know natural gas put in an explosive bottom after hitting seven and a half year lows in what seemed to be an effort to catch up with the rest of commodity world yet when you find that bullish injection is not quite bullish enough it possible that we have hit a short term top. Is the reversal in gas a sign that perhaps all the commodities are running out of gas?

Well to find the answer to that question you should really look hard at the reasons natural gas bottomed and why natural gas gave up its gains after a very bullish report. How bullish was it? Well based on expectations it was very bullish. According to most surveys the natural gas injection was supposed to come in somewhere in the area of 77 billion cubic feet. Yet the injection was much smaller than that. The EIA showed that supplies increased by 66 billion cubic feet up 1.9% from the week before. Yet after a brief pop the market reversed.

Maybe the market priced in all the news or maybe it decided to focus not on the weekly gain but step back and focus on the big picture and the incredible supply. Supplies of working natural gas stands at an incredible 3.470 trillion cubic feet which is 16.4% above the five year average as we head towards what should be record storage going into winter. These numbers stagger the imagination and you might think that anyone who was bullish should be questioning their sanity. Despite strong industrial production and manufacturing numbers industrial demand has been weak.

 Still remember that when it comes natural gas it is not just about supply. It is about production. And the bulls will tell you that natural gas was just too cheap. In the winter gas in storage is used when current production is not enough to meet peak demand. As the winter goes on those supplies go down. If Prices get too low and production falls too far we will use supplies in storage more quickly. If you get a cold winter supplies could get tight despite having record storage.

Natural gas bulls seemed to jump on a return to falling natural gas rig counts and signs from other producers that $2.50 gas in September was not high enough to inspire enough production to get us through the winter. Big natural gas exporter in Canada expects that production might be down for some time. Reuter's news reported that Canadian natural gas supplies are likely to fall 17 percent in the next two years as oil companies cut back on drilling activity due to low prices. The National Energy Board said drilling in Canada and the United States has slowed to about half the level of previous years, which will mean sharp declines in conventional production. The US outlook is also lower. The US Department of Energy predicted that naturall gas production would fall by 0.9 percent this year and 3.5% next year. Huge drop in production that bulls worry could accelerate if prices fall too fast.

Yet at the same time on shore production is soaring Shale gas and new drilling technologies has made production much cheaper and somewhat less sensitive to price as it was a few years ago. And if you are going to worry about natural gas supplies going into winter September is the month to do it. Natural gas prices generally bottom in September. 

That buying intensified when it was announced that United States Natural Gas Fund would be issuing new shares. Many people believe that funds like UNG increase the price of the underlying commodity. So that belief caused some people to buy the underlying futures contract perhaps in anticipation of the hedging of these new shares. UNG fund management warned Reuters that it cannot predict what impact, if any, the resumption of creation activity will have on the price of the units of the fund but warned it was possible it could reduce or remove any premium over net asset value.

 Yet some think it had a big impact. Bloomberg News said that speculators trying to profit from the U.S. Natural Gas Fund's roll of futures contracts got slaughtered and helped boost volatility as gas prices surged this week. They also said that volatility in gas jumped to the highest level since Amaranth Advisors LLC collapsed in September 2006.

The Moves in gas seem to suggest that the markets are working fine. The Moves in gas show the market will move to assure ample supply so we can all stay warm this winter.