With storage remaining more than ample and no real weather-related demand on the horizon, June natural gas futures on Friday continued to probe lower prices for a fifth consecutive day.

In late afternoon trade, the prompt month plunged downward to record a $6.55 low before settling at $6.585, down 16.3 cents on the day and 68.4 cents lower for the week. The May natural gas contract expired Wednesday at $6.748, a whopping 37.2 cents below Tuesday’s settle.

After trading lower in Thursday overnight Access trading, the June prompt month failed to mount any real push higher Friday after being repelled from the $6.72 level twice and the $6.725 level once. The $6.55 trade marked the lowest a prompt month has been since March 1, 2005, when the April futures contract recorded a low on the day of the same $6.55. The $6.585 close was the lowest prompt month settle since the March contract expired at $6.304 on Feb. 24, 2005.

Commenting on the 7-cent trading range in the last two minutes of Friday’s regular session, Rafferty Technical Research’s Steve Blair, said, “I think that was probably liquidation ahead of the weekend as well as the fact that there were not a lot of local traders on the floor to take the other side, making it easy for the market to make such a move. There were a number of local traders not on the floor Friday. I think that probably has a lot to do with the nice weather coming in.”

Once again, the natural gas market appeared to loosely follow the direction of crude futures on Friday. “I think the natural gas market really took its cue from crude because the June crude contract got hammered on Friday,” Blair said. “The interesting part is that we had a major crude support number of 49.75/bbl, which the market bounced off of twice in the last week or so. On Friday, June crude broke below, but ended up settling at $49.72, $2.05 off of Thursday’s settle.”

Commenting on the ongoing argument of whether crude and natural gas futures prices are correlated, Blair said, there “absolutely is a relationship” between natural gas and crude through heating oil, noting that heating oil is a byproduct of crude. “There is definitely something there.”

Blair pointed out that with Rafferty’s major June natural gas support target of $6.53-6.55, both natural gas and crude have come down to finish the week at or near their major support levels.

“I think we should hold this level in natural gas and crude in the near term,” Blair said. “I think what we saw Friday in both natural gas and crude was liquidation ahead of the weekend. In addition, the lack of weather demand also played into natural gas’ slide. If the $6.53-6.55 range holds up as major support, we could see a bounce Monday.”

The 73 Bcf injection reported by the Energy Information Administration on Thursday for the week ended April 22 further increased the supply surplus relative to the five-year average to 319 Bcf, but the impact on further storage is unclear. Tom Saal of Commercial Brokerage Corp. in Miami pointed out that huge returns are available for storage operators by buying October futures and selling January contracts. Saal noted that the differential Wednesday was a whopping $1.085, with the October futures at $7.39 and the January contract at $8.475. At Thursday’s settlement, that differential stood at an even more robust $1.160. Trading on Friday saw the differential widen to $1.207. Estimates vary, but the cost of storage generally falls in the vicinity of approximately 15 cents per MMBtu per month. Thus at a $1.207 difference, less 45 cents in storage costs, a storage operator could profit handsomely, traders agreed.

Apparently not handsomely enough. According to a Midwest analyst, cooler weather will reduce the storage surplus in coming weeks, but at this time of year storage operators and electrical generation requirements will normally be in competition for natural gas supplies. But that may not necessarily be the case this year. “The usual strong competition between the storage operators and industrial or EG [electrical generation] related users will be significantly reduced this year. As a consequence, storage demand will remain selective,” the analyst said.

He added that normally the carrying charges in the spread term structure (such as those above) would prove conducive towards buy and store programs. This factor is currently being mitigated by expectations for even lower prices. “However, short of a further major collapse in oil prices, we view further downside possibilities in the natural gas market as limited and would anticipate good support in the June contract at around the $6.60 area,” he posited.

Others are taking a close look at the economics of competing fuels. “Natural gas prices often trade between No. 2 heating oil and No. 6 residual fuel oil. Since 1998, natural gas has traded between heating oil and residual fuel oil more than 50% of the time in both the New York Harbor and the Gulf Coast,” said Tom Driscoll of Lehman Brothers in New York.

He pointed out that over the past four weeks, natural gas prices delivered to the New York Harbor have averaged only 12% higher than low-sulfur residual fuel oil. Last week, however New York (physical) gas prices traded around $7.64, yet “natural gas prices would need to drop to about $6.00/MMBtu for residual fuel users to have long-term incentives to switch back to natural gas,” he said.

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