October natural gas is expected to open 4 cents higher Tuesday morning at $2.69 as traders factor in some near-term warmth and mull the case for a longer-term advance. Overnight oil markets eased.
Weather forecasters see near -term relative warmth. "The biggest changes in the current short workweek include a much hotter California with 100s peaks in Burbank and Sacramento and a cooler Texas to TVA [Tennessee Valley Authority], thanks to a fast, stronger cooler front impact," said Matt Rogers, president of Commodity Weather Group, in a Tuesday morning report to clients. "Similar themes are seen for the Midwest and East, but dry soils are triggering hotter high temperatures in the Northeast ahead of the cold front this week.
"The six-10 day trends warmer for the Midwest compared to yesterday's outlook (partly due to progression), while the 11-15 day also shows a good deal of variability. In both periods, demand is low compared to summer levels as we move into the shoulder season."
Analysts see the bulls on thin ice from a seasonal standpoint. "To be sure, with the Labor Day weekend marking the traditional end of summer, short-term weather demand will no longer provide support to the market," said Teri Viswanath, director of natural gas strategy for BNP Paribas, in closing comments Friday.
"Indeed, a relatively important reset in prices took place following Labor Day last year, when the front October futures contract tumbled $0.175 in the Tuesday trading session following the holiday. Indeed, three out of the last five years have recorded a Labor Day sell-off, with the front of the curve declining by an average $0.05 when the market returns from the three-day weekend."
Longer term, risk managers see the natural gas market improving. "Over the short term, it is difficult to make a case for the gas market to have a substantial move in either direction," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. "But in our opinion, the gas market could be setting up for a substantial rally. Demand and production for natural gas has been steady, but we feel that we are going to see declines in production.
"It has been our thought that higher oil prices over the past three to four years have been subsidizing natural gas drilling activity. With current oil and natural gas prices, we could see a substantial decline in natural gas production over the next six to 12 months. It will not take a very significant decline in production to drive natural gas prices higher. There is a large short speculative position (that has been in place for the past couple years) that could be forced to cover if gas prices start to rally."
DeVooght is currently standing aside the market but awaiting an opportunity to enter on the long side.
Forecasts by the National Weather Service (NWS) call for well above normal cooling requirements at major population centers for the remainder of the week. For the week ended Sept. 12, NWS predicts New England will see 59 cooling degree days (CDD), or 51 above normal. New York, Pennsylvania and New Jersey are expected to endure 63 CDD, or 44 more than normal. The greater Midwest from Ohio to Wisconsin is forecast to see 53 CDD, or 34 more than the seasonal norm.
Over the weekend, Tropical Storm Grace formed in the eastern Atlantic and at 5:00 a.m. EDT Tuesday the National Hurricane Center reported a weakening Grace was 1,360 miles east of the Lesser Antilles and was moving to the west at 20 mph. Grace was holding 40 mph winds and was projected to head toward the general vicinity of Puerto Rico.
In overnight Globex trading October crude oil fell 34 cents to $45.71/bbl and October RBOB gasoline eased fractionally to $1.4175/gal.