August natural gas futures tumbled Thursday following the release of inventory data showing greater-than-expected increases. For the week ended July 1, the Energy Information Administration reported a build of 95 Bcf, about 10 to 15 Bcf greater than what traders were expecting. Prices quickly obliged following the 10:30 a.m. EDT report and by the close August futures had declined 8.4 cents to $4.133 and September had jettisoned 8.4 cents as well to $4.138. August crude oil soared $2.02 to $98.67/bbl.
Forecasters were looking for somewhat above-normal storage builds. Houston-based IAF Advisors expected the inventorty report to show an 85 Bcf increase, and Ritterbusch and Associates was looking for an 81 Bcf build. Bentek Energy, utilizing its North American flow model, predicted an 87 Bcf increase.
Analysts were undecided on whether the 95 Bcf represented greater-than-expected production or less demand. "The 95 Bcf was well above the median expectation and, in fact, was above the full range in most of the newswire surveys, so this is a clear bearish surprise," said analyst Tim Evans of Citi Futures Perspective. He attributed the surprise to "either a greater sensitivity to the drop in cooling demand for last week or some unexpected jump in supply."
Kyle Cooper of IAF Advisors in Houston had predicted an 85 Bcf increase and after the release of the report admitted, "That's a lot of gas." Cooper saw his 10 Bcf "miss" as a result of less demand rather than higher production. "The production has been there for quite a while, and I think it's demand that is not increasing as much as you would think. Measured supply has not shown a significant increase, and in my opinion it's a combination of both.
"It [the report] says supply is there and supply is vastly exceeding demand, and that results in a 95 Bcf injection. I don't see the 1-year storage differential [224 Bcf] closing, but this definitely puts it on track to get a lot closer."
From the standpoint of cooling demand, temperature data showed near-normal conditions and suggests that other factors may have been at work. If production is as less of an unknown as Cooper suggests, then nonweather demand factors may be in play. For the week ended July 2, cooling requirements in dominant eastern and Midwest markets had been about average. The National Weather Service reported normal accumulations of cooling degree days (CDD) in major markets. New England received 29 CDD, or just one above normal, and the Mid-Atlantic enjoyed 39 CDD, or four below normal. The Midwest from Ohio to Wisconsin saw 46 CDD, which is about typical.
Traders saw a windfall for the bears. "This is beautiful for them," said a New York floor trader. In his view Thursday's decline represents a continuation of the trend that began when natural gas futures fell below $4.50, and "now we are playing a different range. $4.06 [Thursday's low] is a good area for prices to hold, but if it breaks below $4 again, $3.85 is the next target. The market should trade between the $4.06-4.08 area and $4.35."
However, if the market should break below the psychological $4 level "we could see $3.85 and $3.60 after that. There's no real weather. We're starting to trade a little bit with crude oil. Now that crude has slipped below $100/bbl, it's putting a little pressure on natural gas," he said.
The trader noted that Friday's important report on employment could have a bearing on natural gas prices. "Current expectations have been factored into the market, but a bearish surprise would push prices lower," he said. The current consensus is for nonfarm payrolls to have increased to 110,000 for June, well above May's tepid 54,000 employment gains. The unemployment rate is expected to remain constant at 9.1%.
Market bulls, who had savored a bullish flavor to Tuesday's modest 5.2-cent gain, had to head back to the drawing board after Wednesday's and now Thursday's decline. "Natural gas prices were hammered [Wednesday], dropping nearly 15 cents/MMBtu in a move that seems to have caught a number of traders leaning the wrong way. We were in that group after seeing two key reversals higher within three trading days. It looked to us that prices were headed higher. Now it looks significantly less positive," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.
"As is typically the case at this time of year, the major factor was the weather. In this case, forecasts were moderated to show less intense heat in areas that had previously been earmarked for hot temperatures. Now they are forecast to be hot, but not to the same degree as had previously been suggested."
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