The National Hurricane Center said it was possible for Tropical Storm Alberto to become the season’s first hurricane before making landfall on the upper Gulf Coast side of the Florida Peninsula early Tuesday morning, but the storm had minimal impact on Gulf producers and the gas futures market Monday. The July contract inched up 5.2 cents to settle at $6.224.
At 4 p.m the tropical storm had 70 mph maximum sustained winds and was located about 145 miles southwest of Cedar Key, FL, moving northeast about 10 mph. The general motion was expected to continue over the following 24 hours. Coastal storm surge flooding of 8-10 feet was expected and 4-8 inches of rainfall was expected across central and northern Florida and southern Georgia.
“Everybody had the storm on their radar screen, but it doesn’t look like anyone overreacted to it,” said Tim Evans, futures analyst with Citigroup. “There has been very little in the way of evacuations or changes in activity based on the storm.
“It’s kind of shocking to think that this was just a big yawn for the gas market because we are quite used to volatility,” he said. “One of the remarkable things is that we are still inside the trading range from June 7. That’s not a terribly long time, and that was a wide trading session, but we’ve been between $5.94 and $6.40 ever since.”
At some point the market will start looking for vulnerability on the upside or the downside, said Evans, and a further drop in the petroleum complex or a shift in gas storage injections could trigger that. Evans said he’s expecting an injection in the 85-95 Bcf range for the Energy Information Administration’s natural gas storage report this week. That would be a larger number than last week’s 77 Bcf injection and would be larger than the 73 Bcf injection during the same week last year, but it would be below the 96 Bcf five-year average.
“You have a potential bullish spin there in that it would be below the five-year average, but a potential bearish spin in because it would be higher than last week and last year,” Evans said.
Crude futures closed down $1.27/bbl Monday to $70.36. It’s also been range bound between $68.17 and $76.40/bbl since April 16. In comparison July natural gas futures hit a low of $5.94 last Wednesday and the recent high was $6.82 on June 5.
“We’ve basically had about a month now of sideways chopping with a little bearish bias to it,” said Evans. “I think the greater risk is still to the downside. There’s a lot of open interest in the market. We’ve basically confirmed the longer-term downtrend. There’s a lot of gas in storage. There’s a little bit of heat in the forecast, but it doesn’t look like enough to lead to bullish comparisons with last year, which was warmer than normal.”
Evans said a major factor weighing against the bulls this summer is that last summer was so much hotter than normal and produced a hurricane season that led to more than 800 Bcf of gas production being deferred. It will be tough to top that this year.
“About this same time last year we have Tropical Storm Arlene. We actually shut in 3.4 Bcf on that by June 14, 2005. It’s supportive to have hurricane activity this early in the season but it still doesn’t give us a clear bullish comparison with 2005,” he said.
Nevertheless, Tom Saal of Commercial Brokerage warned to expect a dollar spike in futures once a hurricane threatens the Gulf production area this season. “I think when we get the first real hurricane that’s heading toward the producing area we should get a pretty good rally out of that,” said Saal, “We’re talking maybe a dollar. In the 90s they were only worth about a quarter, but today I’d say a dollar. A dollar is nothing anymore.” Any adverse impact from Alberto, however, is expected to be mainly ashore.
Saal also said that a further break to the downside is still very possible. “I wouldn’t rule anything out in this market. The price may have to go lower, maybe to $5.50. I think we could see some lower numbers later this summer if we don’t get a hot summer and an active hurricane season.
“But I think what is interesting so far is the injections over the last couple weeks have been going down,” he said. “That must mean production is still limited and demand is coming back at these prices.”
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