September natural gas is set to open 6 cents lower Wednesday morning at $3.91 as traders discount forecasts of warmer temperatures and focus on a government report suggesting sub-$4 prices. Overnight oil markets fell.
Tim Evans of Citi Futures Perspective said Tuesday's market romance with the $4 level is "supported by warmer than normal temperatures forecast for the next two weeks and possibly some anticipation of a seasonal rally ahead of the winter."
He notes that the market is continually being better supplied. "Thursday's DOE storage report for the week ended Aug. 8 may give the market its fundamental push, with market expectations apparently running relatively close to our own model's 84 Bcf forecast from the handful of early estimates we've seen so far," Evans said. "An 84 Bcf refill would outpace both the 69 Bcf build from a year ago and the 44 Bcf five year average net injection, confirming that the market became better supplied on a seasonally adjusted basis for a 17th consecutive week."
His data shows that temperatures are expected to "turn slightly warmer again on Tuesday and will help to limit storage injections over the next two weeks to something nearer the five-year average rate."
If his projections are correct, the year-on-five-year average storage deficit would contract to 515 Bcf by Aug. 29. "The slower pace of injections over the next two weeks may relieve some of the immediate downward pressure on prices, but we'd bear in mind that tighter balance is only a function of the weather pattern and that the background growth in natural gas production remains in place," he said.
He pointed out that Tuesday's DOE Short Term Energy Outlook pegs U.S. dry gas production at a new record of 70.21 Bcf/d, up by 3.25 Bcf/d, 4.9%, from a year ago.
Bottom line, Evans recommends standing aside until a low-risk entry can be identified.
That record production, no doubt, was on the mind of the Energy Information Administration' forecast that spot natural gas prices would weaken through October. NGI noted in a report Tuesday that "natural gas spot prices, which fell to $3.78/MMBtu at the end of July after starting the month at $4.47/MMBtu, are expected to remain below $4.00/MMBtu through October before ramping up with winter heating demand, according to EIA's latest Short-Term Energy Outlook (STEO) [see Daily GPI, Aug. 12].
"The agency expects Henry Hub prices to average $4.46/MMBtu this year and $4.00/MMBtu next year. Both estimates are significantly lower than in the previous STEO, when EIA projected that Henry Hub natural gas prices would average $4.77/MMBtu this year and $4.50/MMBtu in 2015."
WSI Corp. in its morning six- to 10-day forecast said, Wednesday's outlook is "generally warmer than the past forecast across the East into the Mid West, mainly due to the period shift. A good portion of the West and Northern Plains is cooler. Confidence in the forecast is about average based on reasonable ensemble model agreement, but there remain technical differences. Confidence is also hampered a bit during periods of pattern transition."
Risks to the forecast include upside in "the lower Midwest into the Northeast during the back half of the forecast period. The Northwest and Northern Rockies could run cooler."
In overnight Globex trading September crude oil fell 37 cents to $97.36/bbl and September RBOB gasoline lost a half cent to $2.7237/gal.