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Petroleum Sympathy, Continued Heat Push Natural Gas Futures Higher

Bolstered by forecasts for renewed heat along with a serious display of strength from petroleum futures, September natural gas futures on Friday continued to explore the upside in search of resistance, coming close to venturing above the psychological $8 level.

Ultimately, the prompt month ended up settling near its $7.900 high on the day by closing at $7.885, up 19.1 cents from Thursday and 46.4 cents higher than the contract's close last week.

September crude and unleaded gasoline posted gains on Friday, part of which were attributed to a refinery fire in Texas. Crude ended up settling 63 cents higher at $60.57/bbl and gasoline finished up 1.52 cents at $1.7261/gallon.

"The petroleum sector surely isn't helping to hold back natural gas futures," said Steve Blair of Rafferty Technical Research in New York. "Part of the petroleum run-up has to do with that fire down at BP's Texas City, TX, refinery. Later on Friday, BP said the accident is affecting approximately 35,000 b/d of gasoline."

Blair said the natural gas market is very weather-related, adding that there is still a lot of heat down in the South and West. It also looks like the East could see a renewed heat wave starting up this week.

"I think the market is probably going to see some hesitation around the $8 level," he said. "However, if this heat wave ramps back up in the Northeast this week, I can't see futures having much trouble getting up over $8."

Checking in on the storm front, Blair said concerns about the rest of the storm season are not affecting natural gas futures. "I don't think this market is going to make any big moves to the upside on the possibility that there might be more storms between now and the end of the hurricane season," he said. "Now tell me there is a storm in the Caribbean that might move into the Gulf, and traders will likely react for good reason."

Blair also took issue with reports that traders were shocked at the Energy Information Administration's 42 Bcf injection report for the week ended July 22. "That was an expected number," he said. "Everyone knew we had shut-ins in the Gulf of Mexico. Besides, we are still well above year-ago and five-year average comparisons."

Another theory on the natural gas price run-up late in the week is tied to the EIA's announcement Thursday that it is revising its storage reporting methodology (see Daily GPI, July 29). Advest Inc.'s Jay Levine said, "While it doesn't sound like anything earth-shattering, and a few clients [are] asking me what I thought, my only statement was that the market just might view [the methodology revision] -- at least until [ the July 29 storage] numbers are released and the few thereafter -- with some skepticism, apprehension, and/or concern."

Those who take a fundamental approach suggest that the case for higher prices is not so clear. "The long bullish argument has been that electricity generation digging deep into the generation stack would suck all available natural gas into power generation," said Kyle Cooper of Citigroup. He added there was 6 Bcf/d of additional supply in relation to demand. If it stays this hot, yes, injection levels will remain low, he added.

"The one thing I do feel relatively secure in stating is that weather will neither remain bullish nor bearish forever," he added. "It has been very bullish. It may remain bullish for quite a bit while longer, but it will not remain bullish forever."

According to Cooper, weather and markets are likely to change. "Once it turns bearish, it will not remain bearish forever either. The last two weeks have been the epitome of the bullish argument," he said. "If this were truly a bullish supply/demand balance, I would have expected a build in the low 30s to even 20s. This week again failed to establish a new record low injection despite record generation. That simply does not suggest extreme tightness in relation to history."

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