July natural gas futures rose sharply on a combination of technical buying ahead of the long weekend and algorithmic traders utilizing buy stop orders to limit losses. At the close July had advanced 15.8 cents to $4.518 and August had risen 15.2 cents to $4.557.
"With June going off the board Thursday, the funds showed their hand by rolling shorts into July, and once the market got above an old resistance area in June at $4.40, black box stops were hit, some traders jumped in on the long side and that took us to old resistance at $4.55 to $4.60," said Eric Bentley, CEO of VKNG Energy LLC in New York. "Once July got above $4.40, it really solidified the buying."
Analysts are putting the pencil to Thursday's unexpectedly large inventory build. "On a temperature-adjusted basis Thursday's injection was very, very large," said Kyle Cooper of IAF Advisors in Houston. "It was well above expectations, and it definitely says there is plenty of production. It's surprising that the market is rallying now other than what we're seeing this week is that the injection for next week is likely to be much lower, in the 80 Bcf range."
Cooper pointed out that market supply is fairly constant. "You've got forecast heat for early June. Supply has not been sporadic; it's the demand that has been fluctuating back and forth."
He lamented that the market price is "more and more dependent on the weather. If you have a hot summer, then prices are cheap, but I don't think there will be anything as hot as last summer, but you never know. If we end up with something much cooler than last year, which I think is highly probable, closer to the 30-year normal, prices could get really weak. If it's cooler than the 30-year normal, I think the market has a lot of downside to it. Right now prices are so weather-dependent that it's really hard to call.
"Throw me a hot summer and I'm in the bullish camp, but a cooler summer and the market is way overvalued."
Other analysts also see near-term market direction as weather-driven. "Warm temps are expected over the eastern two-thirds of the nation with Texas in particular likely to see a significant upswing in CDDs [cooling degree days]," said Jim Ritterbusch of Ritterbusch and Associates. "The market has been forced to price in some downsized storage injections within the weekly Energy Information Administration releases that will extend out to mid-June. So while yesterday's three-digit supply increase [105 Bcf] narrowed the deficit against last year and the averages, such a pattern could prove difficult to sustain. As a consequence, we are maintaining an upside target to the $4.60 area per the July contract that makes its debut as nearby futures in today's trade."
Market technicians were closely watching the July contract as it broke out of its recent trading range. "If we can clear $4.37, I think there is a good shot at testing the $4.60 area," said Brian LaRose, an analyst at United-ICAP, following Thursday's trading.
Students of the economy were pleased with the 8:30 a.m. EDT report by the Commerce Department on April personal income and consumer expenditures. Both came in right on target, and both were expected to have increased 0.4%. Although personal income and expenditures are not direct determinants of natural gas prices, a steady if not firm economic recovery is considered an underpinning of increased industrial demand for natural gas.
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