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Inside, confidential and off the record

Going higher

ENERGY PRICES ARE HIGH AND ARE RISING, and we’ve any number of bullish
fundamentals pushing prices higher at the moment, not the least of which is the continued war being waged in Libya and the new electoral problems in Nigeria (more on that below in our comments on the political situation).
Both of these countries produce and sell some of the highest quality crudes in the world. These are high API low sulfur crudes which the world is most short of and which of course are most sought after. Note then that the term structures continue to tighten; that is the once enormous contangos in WTI have narrowed appreciably to the point where the year spread from June onward are now backwardated, and where the already steeply backwardated Brent is even more steeply backwardated. Just for comparison’s purposes, note then that the average June’11/”red” June’12 for both Brent and WTI has moved to a backwardation of $1.92. One week ago this was $1.41 and two weeks ago it was $1.46.

Perhaps even clearer, we note that the front month year spread for WTI, which is this morning at a 10 cent contango was, one month ago, at $1.10 and two months ago was just above $10.00! It was only two months ago that the market was gravely concerned about whether there was enough storage available to store all of the crude flowing down from Canada’s Athabasca tar sands, forcing the term structures into a stunning contango. Now, those fears are assuaged, and suddenly we are facing backwardation across Brent’s entire term structure and swiftly moving that way even for the
supposedly over-supplied WTI:

MayWTI up 124 108.46-51

Jun WTI up 127 109.00-05

Jul WTI up 122 109.42-46

AugWTI up 117 109.63-68

SepWTI up 112 109.76-81

Oct WTI up 107 109.82-87
OPEC Basket $110.q8 03/30

Henry Hub Nat-gas $4.27

The rally in nat-gas futures and nat-gas related equities is now reaching levels of extreme "over-bought-ness," if there is such a word. The sums of nat-gas being found almost daily and being brought on stream almost as swiftly in the Eagle Ford, in the Marcellus, from the Bartlett Shale are really quite amazing, and will make it very difficult, if not wholly impossible for prices to be sustained above $4.50/MBtu. We may have been bullish of nat-gas previously, but we need to be demonstrably less so henceforth.



-Dennis Gartman/ The Gartman Letter / 04/04/ 2011

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