With colder temps already descending on the Midwest and East and forecasts calling for real seasonal cold to impact the East late next week, natural gas futures traders on Wednesday continued to venture higher towards the psychological $7 level. The February natural gas contract put in a high of $6.800 before settling at $6.755, up 12.4 cents on the day and 57.1 cents higher already for the week.
Top weather forecasters see brutal cold arriving next week (see related story). Tom Skilling, chief meteorologist at WGN-TV in Chicago, said high temperatures in the city will hover in the 30s and 40s through Sunday but plunge to a high of only 18 on Monday and a frosty eight degrees on Tuesday. The Weather Channel reports the average high in Chicago at this time of year is 32.
The big question is what impact the cold will have on supplies. Working gas inventories stand at a record 3,074 Bcf at this point in the traditional withdrawal season and in order to reduce supplies to a plump 1,500 Bcf by the March 31 end of the heating season, weekly withdrawals would have to average more than 121 Bcf, a tall order for a heating season that has seen just one triple-digit withdrawal, 168 Bcf for the week ended Dec. 8.
"Right now, we don't know how long and how strong this coming cold front is going to be," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "You have to remember that most moves in natural gas are exaggerated, so we will have to see what more seasonal weather can produce on the price side."
Saal said the $7 level remains key resistance followed by $7.25. He warned that a round of short-covering is likely due. "Commercial traders are still fairly short natural gas contracts, so we could see some short-covering coming in here," he added.
Ed Kennedy, also of Commercial Brokerage, said natural gas futures will get their cue from the length of the cold. "All the independent forecasters are saying it will be cold, and that it will stay around until mid-February. That's the kicker," Kennedy said. He added that the shorts are currently "fat, dumb and happy" but agreed that more short-covering was likely forthcoming.
Short-term traders see additional short-covering as well. "I think the market has been down for so long that you are seeing nervous shorts cover their positions. I think it will be that way for the rest of the week," said a New York floor trader. He added that he thought traders had placed stop loss buy orders at higher prices, which if triggered could send the market, albeit briefly, sharply higher. "I wouldn't be surprised to see the market seek out more shorts, trade up to $7, and then head back down to $5.50," he said.
Others are also counting on a jump to $7. Phil Flynn of Alaron in Chicago said to sell February natural gas at $7.02 with a stop loss order at $7.35.
Some were surprised that natural gas futures were not dropping off even a little bit in sympathy with February crude futures, which have been plummeting as of late and recorded an 18-month low on Wednesday. The contract put in a low of $53.80/bbl on Wednesday before closing at $54.02/bbl, down $1.62. The most recent drop was due to a Department of Energy report showing that overall U.S. fuel inventories climbed for a fourth week.
Some insiders said hedge funds "getting out of Dodge" had a lot to do with crude's recent price collapse. "The rumor is a lot of funds are getting out of crude oil," one broker said. "I think we are seeing some long liquidation by funds in natural gas, but we are not seeing the terrific downward price movement that crude oil is enjoying."
Turning attention to Thursday morning's storage report for the week ended Jan. 5, most estimates are for a withdrawal in the 40-55 Bcf area. A Reuters survey of 22 estimates expects a median drawdown of 45 Bcf, while the ICAP storage options auction on Wednesday produced a 52 Bcf withdrawal expectation.
Golden, CO-based Bentek Energy's Flow Model and Daily Supply/Demand Balance Model both came up with 53 Bcf withdrawal expectations, which is 1.8% above the five-year high.
Using its Flow Model, Bentek expects a 38 Bcf withdrawal in the East region, a 10 Bcf withdrawal in the West region and a 5 Bcf pull from the Producing region.
"From this week last year until the first of April, stocks declined by a total of 926 Bcf, or about 77 Bcf per week," Bentek said. "If this year tracks that same rate of decline, stocks for the withdrawal season would end at 2,095 Bcf, or almost 24% over last year's historically high inventory level."
The number revealed Thursday will be compared to last year's date adjusted 17 Bcf withdrawal and the five-year average pull of 102 Bcf.
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