After skyrocketing in morning trade on petroleum futures sympathy to reach a high of $7.43, July natural gas futures were not able to hold onto the gains as the afternoon continued Wednesday.
The wild ride in all of the energies sparked by conflicting crude inventory reports and reports of moderating temperatures, helped July natural gas trade within an enormous 46-cent range during Wednesday’s regular session. After bottoming out at $6.97 at 2:21 p.m. EDT, the natural gas prompt month ended up settling at $7.00, a drop of 12.7 cents on the day.
“Reports are now that it is not going to be so hot by the end of the week,” said Tim Evans, an analyst with IFR Energy Services. “We also have got some excitement off the low-pressure system in the Caribbean, but maybe it’s not going to be a killer storm that hits producing areas.”
Weather 2000 said Wednesday afternoon that Tropical Storm Arlene “could kick off the 2005 season this week.” The firm’s forecasters said some of the conditions they are seeing could help Arlene materialize, including the fact that water temperatures in the Western Caribbean, Gulf of Honduras and South of Cuba are “particularly warm” for this time of year.
At 5 p.m. on Wednesday the National Hurricane Center (NHC) upgraded the storm, which is currently still Southwest of Cuba, to Tropical Depression OnE. The NHC added that the storm’s current path could put it just south of Mississippi in the central Gulf of Mexico by Saturday afternoon.
Wide trading ranges could be found in all of the energies on Wednesday. Following the 10:30 a.m. crude inventory reports, July crude ran up to a high of $55/bbl in morning trade, but ended up settling at $52.54/bbl, down $1.22. Likewise, July heating oil and July unleaded gasoline pegged highs of $1.625/gallon and $1.55/gallon before settling near their lows at $1.5528/gallon and $1.4975/gallon, respectively. Heating oil was down 4.8 cents on the day, while unleaded gasoline was down 1.82 cents.
“There was also the parallel debacle in the petroleum sector today,” Evans said. “July crude went from being down overnight to up big, then back down. It was just a mess Wednesday. The initial spike in crude futures prices was partly based on the American Petroleum Institute estimate of crude oil stocks for last week. The Department of Energy reported a 3 million barrel decline, while the API reported a 13.8 million barrel drop. This is not reality-based programming,” Evans quipped.
“That got us all jazzed up in the morning, but we were unable to hold those gains and down it came like a house of cards,” he said. “I think some of the selling in natural gas was collateral damage.”
As to where natural gas futures go next, Evans said he thinks the weather is the key. Noting that the recent temperature forecasts from the National Weather Service have had a below average confidence rating, the analyst said it is clear that not all of the models agree.
“When all of the models don’t agree, things tend to be a bit unstable,” he said. “I think it is up to the weather to revive the uptrend and without that firm upward pressure from the weather forecast, we are going to see at least a substantial correction to the recent rally. If we pretend that Fibonacci retracements have anything to do with reality, they are targeting $6.93, $6.78 and $6.62.
“Regardless, it is definitely time to fasten the seatbelts because of the volatility here,” Evans said. “We had a 46-cent range Wednesday. If nothing else, you might want to review whether you really want to hold a 1,000-lot position in a market that is swinging 46 cents in a day.”
Turning attention to Thursday morning’s natural gas storage report for the week ended June 3, industry projections seem to range from an injection of 100 Bcf to 111 Bcf. The number released Thursday by the Energy Information Administration will be compared to last year’s 100 Bcf build and the five-year average injection for the week of 99 Bcf.
“I’m looking for something in the 100 Bcf to 110 Bcf range, which also looks to be about the consensus,” said Evans. While the estimate falls on the high side of historical figures, Evans said he doesn’t think the market is going to care much whether there is a minor addition or subtraction to the year-over-five-year average surplus. “A 5 Bcf swing either way in the surplus is really not going to change a lot of hearts and minds.”
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