October natural gas is expected to open 2 cents higher Monday morning at $2.71 as traders zero-in on eventual production decreases and storage as keeping prices steady if not higher. Overnight oil markets fell.
Risk managers are sensing a rally in natural gas prices based on the assumption of declining production. "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, in a weekend note to clients.
"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 awaiting an opportune time for an entry on the long side.
In the near term, others see less of a price advance than price stabilization. "To be sure, even if the industry replicates last year's refill pace, working gas in storage at the end of October would fall short of the 4 Tcf mark -- the level likely required to reset prices lower," said Teri Viswanath, director of natural gas strategy at BNP Paribas. "As late as last month, the market consensus held that the industry would most likely top 4 Tcf -- a presumption supported by injections running 20% higher than the five-year average during the first four months of the season. Consequently, ample storage capacity still available to store excess supplies should prevent an exaggerated sell-off as the industry winds down the injection season," she said in a Friday note to clients.
Energy weather trader Bespoke Weather Services saw little change in weather patterns over the weekend. "Weather guidance remained relatively neutral over the weekend, with some bearish trends in the medium term and some bullish trends in the longer term, leading us to believe there will not be any significant weather-driven changes in prices through the week," the firm said in a weekend note to clients.
"GFS [Global Forecast System] American guidance has a relatively zonal pattern in the medium and long term, indicating that weather will be relatively warm but not a significant demand driver into the end of the month. GFS operational guidance has begun to show a cold snap by day 13 that would significantly spike early season heating demand, but we see little evidence that this is anything more than a fantasy."
In overnight Globex trading October crude oil dropped 21 cents to $44.42/bbl and October RBOB gasoline fell a penny to $1.3578/gal.