Coming off of a fairly strong natural gas futures session on Monday and faced with widespread heat across the United States, the cash market posted healthy gains Tuesday that ranged from about a dime to over 50 cents. However, cash market gains might be a short-term phenomenon.
Despite the uniform price strength displayed on the day, the baking heat across the country and gas flow issues due to Southern Natural Gas’ continued force majeure offshore Louisiana (see related story), some traders are convinced that the lack of tropical storm activity combined with ample levels of gas in storage could spell lower prices in the near future.
“The cash market was up on the day, but I think it came off a little bit at the end,” said a Midcontinent gas trader. “We do still appear to be following the previous day’s futures market activity. Futures were up Monday, so cash was up Tuesday. Whenever we have this kind of heat across the country, people withdraw from storage, which frees up some inventory space to play with. A couple of weeks ago the fundamentals did not allow for any wiggle room. As long as you have space in storage, then you have a little bit of freedom to work deals.”
The trader noted that a few points in his region were standouts on the day. “While CenterPoint was high comparably, Southern Star was exceptionally strong,” he said. “Southern Star was the only pipeline that we felt had a price that was relatively higher than other pipes. This could have been the case because of the heat in the Kansas City market, which Southern star serves.” Southern Star gained north of 20 cents Tuesday to average just over $5.93/MMBtu.
Looking at the country’s overall weather outlook, widespread heat could help to keep cash prices firm in the near term. According to the National Oceanic and Atmospheric Administration’s (NOAA) six- to 10-day forecast covering Aug. 13-17, a vast majority of the United States is expected to experience above-normal temperatures with the exceptions of Maine, Vermont, New Hampshire and the Northwest coast, which are expected to see below-normal conditions, while New York and a small sliver of the West are expected to see normal temperatures.
Looking at the overall market, the trader said he feels the current cash market is top heavy. “The price goes up and then comes off. I think people are trying to take advantage of the high prices. When you are 70-80 cents above index, there is money to be made. They sell the high prices, and when the price goes down, they will just buy it back,” he said. “Despite the recent heat, there is also some pretty lackluster demand. Sure, there is some demand, but it is not outrageously high. Overall, I think people are pretty fat and happy.”
The difference in price to last year is telling. Last year during this week, gas traded at the Henry Hub was averaging around $7.44/MMBtu. This year, the hub is averaging around $6.100/MMBtu, down $1.34. Part of the reason for the discount is hurricanes… or the lack thereof, the Midcontinent trader said. He added that while 2006 was also a relatively quiet Atlantic hurricane season, the market was still jittery from the devastation of 2005. Another year removed, traders now have their nerves a little better in check.
He noted that earlier in the 2007 hurricane season, traders warned against any major price dips because the heart of the season had not occurred yet. However, as the calendar moves into August, that excuse loses some of its validity. “Maybe it is a case of too little, too late,” he said. “If you don’t get some activity in August or September, then you just don’t get it. We have a month-and-a-half window to have the cash market price go up any more.”
While current natural gas storage levels are comfortable, traders are still monitoring the weekly inventory reports. With more than healthy storage levels already, some industry experts are predicting drastically lower gas prices in the coming months. Thursday’s storage update for the week ended Aug. 3 could prove interesting. According to the Energy Information Administration, on a date-adjusted basis, last year’s report for the week revealed a 7 Bcf withdrawal, while the five-year average is a build of 45 Bcf.
Ron Denhardt, vice president of Natural Gas Services for Winchester, MA-based Strategic Energy & Economic Research Inc., said he expects a 56 Bcf injection will be revealed for last week. “Unless there is a major hurricane, working gas storage injections would bring storage levels at the end of October to 3,600 Bcf. However, working gas capacity may limit injections. We estimate usable capacity at about 3,500 Bcf.”
Denhardt noted that at the end of last October, working gas storage ended at 3,452 Bcf, while the five-year average is 3,270 Bcf. “Last year, because of high working gas storage, Henry Hub prices averaged $5.30/MMBtu in September and October,” he said. “There is a substantial chance prices will average less than $5.00/MMBtu for these two months.”
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