Traders and market-watchers alike on Wednesday were trying to get a handle on exactly what was happening in energy futures as natural gas and crude soared higher once again. April natural gas gained 38.8 cents on the day to close at $9.741, while April crude got back to its recent record-setting ways by adding $5 to close at an all-time high of $104.52/bbl.
"The natural gas market is out of control beyond belief and the petroleum sector is completely out of control," said Steve Blair, a broker with Rafferty Technical Research in New York. "This market seems to be a battle between the long and short factions within the funds. The long faction seems to be winning, but as the market goes up the short faction just seems to keep selling into it. I can't believe that the supply and demand equation in natural gas is driving this market higher.
"It is not like we are approaching the point where we are going to go below 1 Tcf in storage. Even if we get the 142 Bcf withdrawal in Thursday's storage report that some expect, we will still be more than 60 Bcf above the five-year average level," he said. "I really think people are comparing current storage levels to last year's levels, which is unfair because last year's stout storage levels were an anomaly that we might never see again. Traders and market-watchers alike are scratching their heads in disbelief, because no one knows what is going on here."
Blair noted that while some organizations and industry gurus are claiming that the run-up in commodity prices is tied solely to supply and demand issues and not fund activity, he sees things a little differently. "If, in fact the reason for higher prices in energy is a supply and demand issue, then why is this not the only market segment this is happening in?" Blair noted. "The sugar market, which has more sugar than it knows what to do with, is up big. So are the soybean, wheat and precious metals markets. Why are a lot of these markets up at levels never seen before unless it is fund spec money that is driving it? It is money coming out of the equity sector and into commodities as everyone jumps on the bandwagon. Unfortunately, it is creating something that at some point the U.S. economy will not be able to turn back from. It really has the potential to wreak havoc with the economy...much more than it already has."
Looking ahead for natural gas futures, Blair said his company's two major resistance levels are at $9.820 and $10. "Above $10 there is a pretty wide berth for the market to go higher because at that point the market is back in post-Hurricane Katrina territory," he said. "There might be some minor numbers up there, but I don't think any major resistance comes in until $10.800. The interesting x-factor is the funds. While they have shown that they have deep pockets, at what point do the short funds go long? When the short funds get out, we will likely have a blow-off top to the upside, followed by a significant correction. The question is, where is that price point where the short funds finally give in?"
Taking a look at the storage situation, the industry appears to be looking for a withdrawal in the 130 Bcf to 142 Bcf neighborhood, which if fulfilled would be much larger than the 99 Bcf date-adjusted withdrawal last year and the five-year average pull of 111 Bcf. A Reuters survey of 20 industry players expects the Energy Information Administration to report that 141 Bcf was withdrawn for the week ended Feb. 29, while Golden, CO-based Bentek Energy said its flow model is indicating a 137 Bcf draw, which would bring stocks 22.7% below the five-year high and 4.2% above the five-year average.
Almost any way you look at the numbers, it appears that gas in storage will likely emerge from the withdrawal season's end on March 31 above the five-year average level. According to Bentek's calculations, assuming five-year average withdrawals through the end of withdrawal season, storage fill would decrease by 179 Bcf to a working stock of 1,303 Bcf, which is still 4.9% above the five-year average. However, the Bentek weather model is pointing toward slightly larger-than-normal withdrawals totaling 225 Bcf through the end of the withdrawal season, which would put stocks only 1% above the five-year average.
Presently, working gas inventories are at satisfactory levels. Supplies stand at 1,619 Bcf, and all indications are that these should be enough to satisfy present and near-term requirements. However, some within the industry are not sure that really matters.
"Although stocks remain adequate at this late stage of the heating season, the prospect that unusually strong injections will be required during the second and third quarters will remain as a bullish consideration well beyond this winter period," said Jim Ritterbusch of Ritterbusch and Associates. According to Ritterbusch's estimates, season-ending storage will be approximately 20% below average levels of the past two years by the end of this quarter. "As a result, high prices during the spring/fall period may be required to attract imports to the market in order to facilitate a supply anywhere close to recent prior-year levels come next fall," he said in a note to clients.
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