If the projections of a leading industry analyst are correct, the robust prices of gas for fall delivery may be trading as much as 70 cents lower upon expiration, mainly because of the gas storage situation.

“One factor of the natural gas market that is puzzling is that the market has been responding negatively to the amount of gas injected into storage for the last two to three weeks. From our perspective the injections are exactly what you would expect to see, all other things being equal. Injections always run high in the summer,” says Frank Bracken, analyst with Jeffries and Co.

“There are two issues facing the natural gas market. The fast money is so short sided that it is taking some signals that really are very long term positive and turning them into negatives. There has been a considerable liquidation of long positions by non-commercial traders, and that’s gone.

“In addition if one looks at the supply demand fundamentals as they exist today, and transposes them to next year’s gas market (assuming that there is not 1,000 Bcf too much gas in the ground January 2003), the market is extremely tight,” he said. “There is some confusion. One of the realities of the market is that there is still several hundred Bcf of gas in the ground that wouldn’t have been there had there not been a horrible industrial economy and the warmest winter on record. Without those two factors, it’s a very tight market.

“We are telling our clients that 3 Tcf will be reached by the end of September, not October. We expect soft gas prices in September and October. Our official forecast for September is $2.75 and $2.50 for October. Demand for power hasn’t had much impact on natural gas futures.

“Under current conditions natural gas generation is necessary to generate peak power. But in the aggregate two sources of supply, nuclear and hydro, ran at approximately the same level as they did last year, so for natural gas it becomes a question of weather. Collectively while hydro is up in the Northwest, it’s down due to the horrible drought conditions in California and the rest of the Rockies.

“To some extent some of the market softness is a result of what’s happening in Texas. There’s a large segment of the population that doesn’t have a fraction of the AC load that they normally do. There’s a large corridor where rainfall is keeping temperatures down,” said Bracken.

Although there may not have been much impact on the futures, savvy traders nevertheless stepped aside. “I saw the heat coming and I figured that with the verticality of supply [steepness of the supply curve] and if other supply issues are truly out there, a fall-off in injections will be forthcoming,” said Bill O’Grady, senior analyst with AG Edwards.

“Injections should drop into the 40’s and 50’s Bcf per week if the supply issues are for real. This is time to fish or cut bait. Earlier we sold September at $3.45 and covered at $3.20. It’s always tough to leave money on the table, but we were pleased with the trade. We left a good dime on the table or maybe more, but I think eventually that injections will slow,” he said.

“If September gas trades below $3.10, it’s probably a buy, assuming those kinds of drops in injections. If prices rally back to $3.45, would I sell? It depends on the weather. If injections drop to 40 Bcf for the rest of the season there will still be 3 Tcf. There’s a lot of gas.

“This is the time of year that weather developments make the market volatile,” he admitted. “I’m surprised for I thought it would be a cool summer. The one thing that you find is that no matter how hard you study the weather analogs, weather will often not follow the rules.” (Republished with permission from Bill Burson, https://gastrader.net )

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.