Gas Futures Have Phenomenal Week, Hold Above $4
The natural gas futures market had one of its more volatile
weeks last week as daily price fluctuations averaged more than 20
cents and price ranges averaged a substantial 28 cents. As of
Friday afternoon, the July contract stood at a lofty perch of
$4.160/MMBtu, 11.7 cents higher than the previous Friday and 94.3
cents above where the near-month contract stood one month earlier.
The 12-month strip now rests at $3.938, a record level, and the
July contract twice in the past week and a half has come shockingly
close to the all-time high for any gas futures contract of $4.60
set in the winter of 1996-97. And it is the beginning of summer.
As close as July has come to reaching a new peak, however, it
has come equally close to plummeting back into the mid or low
$3.00s, according to some sources, who expect the extreme
volatility to continue until near-month futures can either take out
support at $3.80 (the low on June 1) or bust through resistance at
$4.55, "a nice friendly little trading range."
"One of the main characteristics of this market for the last
week has been that you get these wide swings and clear out all the
resting orders. We've cleared them all out above and below, and
there's nothing but a vacuum in here. If this market wants to move
in a direction, there's nothing that's going to stop it, so expect
to see it move 15-20 cents a day," said Ed Kennedy of Pioneer
Because July took out $4.185 on Friday, Kennedy believes it will
continue into the "upper reaches" of the recent trading range.
"...I'll guarantee you there will not be any selling up there to
stop this thing. That would tell me to expect a move back up to the
$4.30s and $4.40s."
But if you ask what brought the market to these price levels and
why the 12-month strip is at record highs, Kennedy has no answer.
"It doesn't make any sense," he said. "Oh, by the way, there's more
demand in the wintertime than there is in the summertime. We got
through the winter with low prices in a high demand period, and now
we're in a low demand period and you're telling me that the strip
is worth $3.93. I think it's a bunch of hype."
Kennedy blames the high prices and increasing volatility in part
on the "noticeable absence of the natural short sellers, the large
producers" and the on the absence of many end-users in the market.
"The structure of the market is really interesting here. It lends
itself to being controlled by the large marketers." The end-users
didn't have a good opportunity to enter the market during the
shoulder months this year, he added. They didn't get their seasonal
slide in gas prices during the shoulder months so they're currently
under hedged. The producers, he said, historically have been
reactive rather than proactive and only recently have stepped in to
lock in the attractive strips.
Despite the hype that may be affecting prices, there are quite a
few bullish factors that can be identified. Number one is the low
inventory situation in storage, although its impact was far from
bullish last week. The American Gas Association reported a
higher-than-expected injection of 78 Bcf into the nation's gas
storage facilities last Wednesday and the July contract plummeted
34.9 cents to $3.945. Despite being the smallest injection for the
week ending June 2 in the last six years, many observers had been
expecting even less than 55 Bcf, given the significant lack of
incentive to store gas at these prices. The current backwardation
in the futures market, with high prices in the near months and
lower prices in the outer months, provides little or no incentive
to buy gas and pay to put it in storage for next winter.
The 78 Bcf storage injection report apparently "spooked some
people" because if next week's report shows another 78 Bcf
injection, it would show a smaller deficit compared to last year
for only the second time this season, noted Kyle Cooper, futures
research energy analyst for Salomon Smith Barney.
"Quite honestly, that injection came in 20 Bcf above what I had
estimated. I was thinking it was going to be 58 Bcf so it shocked
me as well. I think it's the first time that you've seen injections
above 10 Bcf/d [this season]."
At 1,352 Bcf (41% full), working storage levels are 442 Bcf less
than levels at the same time last year and 183 Bcf less than the
six-year average. Even if the injection pace for the rest of this
season matches that of last year, a lower-than-average year,
working storage levels still would end the season at historic lows
of 2,500 Bcf. If injections are able to reach the average pace of
the past six years, working storage levels would end the season at
2,750 Bcf, which still would be much lower than average.
The market also got its first weather scare of the hurricane
season, a tropical depression that was about 425 miles southeast of
Brownsville, TX, Thursday morning in the Gulf of Mexico, but the
system degenerated by late afternoon into a broad area of low
pressure with a few 30 mph squalls.
Meanwhile, renowned hurricane forecaster Dr. William Gray and
his team of soothsayers at Colorado State University announced last
week that they are raising their projections on hurricane activity
this year. The number of named storms now expected this season is
up to 65 from 55. They also upped the ante on hurricanes to eight
from seven, predicted 35 hurricane days instead of the earlier
April forecast of 25 and now believe there will be four rather than
three intense hurricanes in the Atlantic Basin this season (see
related story this issue).
With low storage levels, increasing demand from new gas-fired
generation plants, flat production and few cyclones added to the
mix, the gas market appears is poised for further growth despite
already being near record levels, according to some observers.
"The thing is going to go a lot higher, but before it does it
has to build a base," said Ira Hochman of New York City-based Trot
Trading Corp. "They tried testing the highs the other day
(Tuesday), and as soon as they lost day structure it just
collapsed. There's a double top at $4.55 and $4.50. If we break
through $3.80 that will confirm those tops and we'll probably pull
down to the $3.60 or $3.70 level. We could still pull back to $3.25
and still be good [for another rally]. I mean there's a lot of wind
in this thing." Hochman, a local floor trader, said he's in this
market for the long-haul and expects gas prices to potentially move
above $7 over the next couple years.
Peter Hattersley of Rafferty Technical Research said he sees
more optimism in this market than ever before at these high prices.
"I don't know that it's going above this because there always has
to be somebody to buy it, and optimism and buying are two different
things. But you've got just a tremendous amount of optimism. People
are buying $6, $7 and $8 calls. I've never seen that before over