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July Cartwheels Lower Following Bearish EIA Report

July natural gas plunged Thursday after the release of a government inventory report showing slightly higher additions to storage than what traders were expecting.

The Energy Information Administration reported a build of 80 Bcf, which was modestly higher than expectations in the high 70s Bcf area. At the close July had tumbled 17.3 cents to $4.674 and August had shed 17.0 cents to $4.704. July crude oil surged $1.19 to $101.93/bbl.

Traders were looking for an injection number below earlier estimates. "I thought we would see a [injection] number somewhat lower, in the low 70 Bcf range, but we got 80 Bcf. It looks like a little bit of a flush today, and maybe we will hold and rally back tomorrow," said a New York floor trader.

When queried about the wild trading that took place Wednesday evening about 7:45 p.m. EDT on Globex when July futures plunged to $4.510, the trader said he thought "someone punched in the wrong amount and sold a bunch. Someone was saying there a sale of 480 contracts and it got punched in as 4,800, but it did bounce back from $4.51."

The price plunge was severe enough to trigger a 20-second automatic trading pause for the August Henry Hub natural gas futures contract, said Laurie Bischel, a spokeswoman for Chicago-based CME Group Inc., which owns the Nymex.

Expectations going into the report were for slightly lower injections. A Reuters survey of 21 traders resulted in an average 78 Bcf build and industry consultant Bentek Energy predicted a 78 Bcf increase as well. Apparently a small deviation was enough to trigger a major price slide.

"The 80 Bcf net injection was bearish relative to expectations and extends a pattern of week-to-week surprises that has been bearish-bullish-bearish the past three weeks," said Tim Evans, analyst with Citi Futures Perspective, New York. "A larger-than-expected drop in demand over the Memorial Day weekend or rising nuclear plant operating rates may have played a role in the latest data."

Apparently lost on traders was the longer-term impact subpar injections may have. The 80 Bcf figure, while moderately above expectations, is far below the five-year average of 96 Bcf and last year's 98 Bcf build. The broader issue is whether current low injections are likely to imperil reaching a satisfactory season-ending inventory level. "The weather has to moderate," said Kyle Cooper of IAF Advisors in Houston. "It was 105 in Houston on Sunday, so we are already experiencing peak summer demand, and Mother Nature is bullish."

"The weather is starting out so hot that reaching 3.8 Tcf is a little on the high side. We are 250 Bcf behind, and that is a lot to make up. The [injection] window is closing and temperatures do need to back off. I'm looking for an injection next week in the mid 60s Bcf range."

Prior to the release of the inventory figure July futures traded as high as $4.983 and the near-term weather outlook continues to be the primary price driver. Commodity Weather Group of Bethesda, MD, in its one- to five-day forecast predicts above- to much-above-normal temperatures south and east of an arc extending from central New York to eastern New Mexico. After a period of cooling, however, the heat is expected to return (see related story).

"No major changes today, although the western heat event next week is expected to be short, with cooling returning quickly by late in the six- to 10[-day forecast]. Highs should push into the mid to maybe upper 90s in Sacramento, and upper 80s or low 90s still seem reasonable for the Los Angeles area," said Matt Rogers, president. "Otherwise, next week is a definite reprieve from recent strong heat levels in the Midwest and East, with cooler, rainier conditions. The South should still stay quite hot and humid. In the 11-15 day, cool western troughing helps push heat back to the Midwest and then to the East toward days 14-15."

Rogers also noted a low-confidence event in the tropics, with "the American operational model [showing] a weak, fast-moving Gulf system in the 11-15 day that goes to Florida."

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