July natural gas futures posted a hefty gain Thursday after a government inventory report showed additions to storage that were smaller than trader expectations. Longer-term observers, however, see the current supply argument as overdone. July futures rose 13.8 cents Thursday to close at $12.798, while August settled 14.6 cents higher at $12.895. July crude oil rose 36 cents to $136.74/bbl.
The 10:30 a.m. EDT release of Energy Information Administration (EIA) inventory figures showed gains in supplies for the week ended June 6 of 80 Bcf, well short of the 90 Bcf predicted by a Bloomberg survey and 92 Bcf expected in a Reuters poll. The deficit also increased relative to last year and the five-year average. A year ago 97 Bcf was injected, and the five-year average is 98 Bcf. The deficit to last year now stands at 343 Bcf and the deficit to the five-year average expanded to 19 Bcf.
Regardless of the deficits, some aren't buying the elevated level of prices. "I don't think the fact that we are 300 some odd Bcf below last year warrants $12.800 Nymex. I think that is a red herring in my opinion," said a Southern California trader. He added that the industry was headed toward satisfactory storage. "You always have the chance that the market will get whacked by a large hurricane or something, but I think the much greater probability is that the demand response [decline] starts to play out during the back half of the injection season. That's what I learned in economics. You double the price and you get a demand response. I don't think things have changed all that much."
He said that he didn't have any "hard numbers" at hand, but "I think in recent years when we have had dramatic price increases, that we've seen in ballpark numbers of about a 5% demand decline in the residential and commercial sector. I suspect we'll see as much and maybe more this year. The high cost of motor gasoline is kind of a red flag to everyone when it comes to energy. I think everyone realizes that all forms of energy go up and down together."
"With motor gasoline out here north of $4.50/gallon it sends a signal to everyone regarding their summer power consumption and everything else."
The marketer added that he thought what was causing such high natural gas prices was an energy "anomaly," or premium throughout all energy markets. He wasn't ready to call it speculation, but "it is what it is, and the anomaly has taken us to a whole new level. All this chatter about LNG [liquefied natural gas] and storage being down relative to last year are off base. They are caught in the minutiae and can't see the forest for the trees."
The natural gas futures market received a bullish jolt Thursday morning after the EIA reported that an anemic 80 Bcf was injected into underground stores for the week ended June. 6. After trading at a low of $12.543 in morning trade, the July contract climbed to $12.705 in anticipation of a smallish injection. Following the 10:30 a.m. EDT report, the prompt-month contract climbed immediately to a high of $12.888.
"The 80 Bcf net injection was bullish relative to consensus expectations and also compared with the 98 Bcf five-year average," said Tim Evans, an analyst with Citi Futures Perspective in New York. "This bumps the year-on-five-year average deficit out to 19 Bcf. Overall, this still leaves the neutral pattern of the past two months intact. However, this also implies a lower 60 Bcf injection for next week, which would further widen the deficit relative to a 90 Bcf five-year benchmark." Evans had been expecting a 110 Bcf injection.
As of June 6, working gas in storage stood at 1,886 Bcf, according to EIA estimates. For the week, the East region injected 54 Bcf while the West and Producing regions chipped in 16 Bcf and 10 Bcf, respectively.
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