With both natural gas and crude inventory reports coming in somewhat bullish, Hurricane Dennis continuing to strengthen in the Caribbean and the apparent terrorist attacks in London causing chaos, traders didn't know which way to look on Thursday. Despite all of the seemingly bullish news on the day, the natural gas futures market seemed predisposed to drop lower.
Buried in a fast and furious news day, the Energy Information Administration (EIA) reported Thursday morning that 63 Bcf was injected into underground natural gas storage for the week ended July 1, a number that came in below most industry estimates and well below its historical comparisons.
Immediately following the bullish report, August natural gas futures had a knee-jerk reaction, jumping up 10 cents from pre-report levels to trade at $7.69 as of 10:33 a.m. EDT. However, after the initial shock, August plunged quickly, reaching a $7.25 low in the afternoon before settling at $7.398, down 29 cents from Wednesday.
Following the U.S. Department of Energy's crude stocks report, which showed a larger than estimated drop of 3.6 million barrels for the week ended July 1, August crude futures also declined, recording a $59.05/bbl low before closing at $60.73, down an inexplicable 55 cents from Wednesday's settle.
"It is just insane around here. Talk about a day with too much news," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "We've got trade selling out here [in natural gas] and the local traders are also selling. Dennis is going to be a problem because it is already strengthening faster than they expected. It is supposed to get into the Gulf of Mexico on Saturday as a Category 3 hurricane."
Kennedy added that the natural gas futures market is likely to remain unsettled for a while. "What you see is what you are going to continue to see, which is extraordinary futures volatility," he said. "If you say buy or sell, you're risking 10-15 cents as soon as you open your mouth."
The 63 Bcf injection report was no match for the EIA's five-year average injection of 93 Bcf or last year's 107 Bcf build for the week. Coming fairly close, the ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 68 Bcf injection.
Kennedy argued that the storage situation shouldn't be considered bullish at all. "How is the storage situation bullish," asked Kennedy. "We are still way ahead of any historical average."
Working gas in storage now stands at 2,186 Bcf, according to EIA estimates. However, stocks are still 155 Bcf higher than last year at this time and 242 Bcf above the five-year average of 1,944 Bcf. The East region led the injections with 45 Bcf, while the West and Producing regions chipped in 12 Bcf and 6 Bcf, respectively.
"If you don't want to call the storage report bullish, you don't have to, but it certainly wasn't bearish in any way, shape or form," said Steve Blair of Rafferty Technical Research in New York. "I really thought that when this report came out...August natural gas was going to take off to the upside, but it didn't."
One theory for the decline in natural gas and crude futures on Thursday was that the contracts became top heavy following Tuesday's and Wednesday's run-up (see Daily GPI, July 7). "Maybe all of the markets fell over Thursday under their own weight," Blair said.
Another possible reason for the sizeable shifts over the past three regular sessions is the fact that the week following July 4 is one of the largest, if not the largest, summer vacation period. "From what I'm hearing from talking to people on the floor, half of the local traders aren't there," Blair said. "In addition, the noise level [in the natural gas pit] wasn't anything like I would of expected for a market that is moving in such big increments. I think lack of volume is definitely a contributor to the large moves the past couple of days."
Blair added that a change in Hurricane Dennis' path could also be affecting natural gas futures. "On Thursday afternoon, the National Hurricane Center moved Dennis' expected track further east along the western tip of the Panhandle. If it keeps that track, it will miss a lot of the large production areas," he said.
He noted that trading on Friday should be interesting because Dennis isn't expected to hit until the weekend. "When everyone walks in [Friday] and sees what the latest forecasted tracks for Dennis are, there will be a significant impact on this market," Blair said. "If the NHC says Dennis is tracking more and more eastward, then this market might be able to continue downward. However, if there is any change back to the west, then the natural gas futures market will definitely take off again."
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