The natural gas physical and futures markets moved in divergent directions Monday as the physical market responded to some unseasonable eastern weather patterns.
Futures traders did the math and found no combination of weather and supply variables capable of sustaining the market above Friday's lofty settlement. The overall physical market gained 12 cents to $2.70, and only a handful of points slipped into the loss column.
The East paved the way with a stout 31-cent move. The Gulf, Midwest, Midcontinent, Rockies and California all posted single-digit gains. Futures gave up about half of Friday's advance. June dropped 7.8 cents to $2.802, and July skidded 7.9 cents to $2.849. June crude oil fell 14 cents to $59.25/bbl.
Observers of both the crude oil and natural gas markets suspect that any significant advance in natural gas prices will be met with heavy hedge selling, thus keeping a lid on prices. "Just as in the crude oil, as the price rises there are plenty of eager producers who want the cash flow and who will complete their drilled but uncompleted wells of which there are scores," said David Thompson, principal with Powerhouse LLC, a Washington, DC-based trading and risk management firm.
"These guys have all this high-yield debt they took out to fund their expansion, which means they have a pretty large note they have to pay off, so when they can, they will produce."
Thompson drew a parallel with crude oil. "While the front price has been rallying, the back months have been doing nothing, and the curve has been flattening since they can get north of $65 in some of these year-out prices. The open interest of the commercial shorts, namely the producers, is at an all-time high in Brent. WTI is not far off. In the end, the commercials tend to be right because they are the market.
"The question with natural gas is when the higher-priced puts have rolled off, can I still be profitable with lower-priced puts. Any creep up will be met with producer hedging activity," Thompson said.
Short-term traders see the market as sluggish. "Maybe the market has one more push to the upside, and maybe it will test the $3 area, but to me the market feels a little heavy. I'm wondering if it will fail against $3," said a New York floor trader.
Risk managers would be more than happy for a little "creep up,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
"It's that time of year when the natural gas is searching for direction as we enter the summer cooling season. As of now, the jury is still out on whether or not the market can rally this summer. A further short-covering rally is very possible from these levels, considering how short the funds are at this time. On a trade basis, we will stand aside and await further developments.
"If we do get a significant short-covering rally, spot month trading above $3.00-3.20, the deferred [months] above $3.50, we will look to establish producer collars (buy puts/sell calls)."
In the physical market, Eastern locations made the top seeds with price gains of up to $1. Gas for delivery Tuesday at the Algonquin Citygate added 80 cents to $2.62, and deliveries to Iroquois Waddington rose 8 cents to $3.15. Gas on Tennessee Zone 6 200 L was quoted 85 cents higher at $2.80.
Mid-Atlantic and Marcellus points also rose. Gas on its way to New York City on Transco Zone 6 gained 20 cents to $3.03, and parcels on Tetco M-3 surged 40 cents to $2.01.
Gas on Millennium changed hands 21 cents higher at $1.64, and Tuesday gas on Transco Leidy gained 31 cents to $1.75. Packages on Tennessee Zone 4 Marcellus rose 22 cents to $1.59, and on Dominion South next-day gas was seen at $1.88, up 36 cents.
Forecaster Wunderground.com predicted that the high Monday of 64 in Boston would soar to 85 Tuesday before retreating to 62 Wednesday. The seasonal high in Boston is 64. New York City's 81 high on Monday was seen rising still further to 88 Tuesday before backing off to 66 on Wednesday, 4 degrees below normal.
Major market hubs also came in with solid gains. At the Chicago Citygate, Tuesday packages were seen at $2.87, up 10 cents, and gas at the Henry Hub was quoted at $2.85, up 8 cents. Deliveries to the Opal Plant tailgate gained 4 cents to $2.65, and gas at the SoCal Citygate rose a nickel to $2.94.
Forecasters in the intermediate term see active weather patterns, but little in the way of extreme temperature conditions likely to materially impact the supply-demand balance. Commodity Weather Group in its Monday morning outlook said, "The big story over the next two weeks continues to be the warm pattern over the Midwest and East with its attempts to get strong enough to generate more significant early season cooling demand. We continue to track these spikes in the stronger direction, including a very humid 80s condition in the Mid-Atlantic [Monday] and a dry-heat surge into the first 90s for tomorrow. A transient cool push still races through the eastern half of the country mid to late this week, and it moves out slightly slower this weekend to linger a few extra late-season HDDs in the East before warming rebounds.
"Some additional demand gains from Friday are noted from warmer changes in the South at times later this week into next week, but Texas still avoids any major heat as wetness issues persist. Very cool anomalies plague the Southwest and California, offering some national demand offsets to this forecast," said Matt Rogers, president of the firm.
Natgasweather.com sees the current weather environment setting the stage "for massive 100-plus Bcf builds in supplies starting this week and lasting through the rest of the month. We are still expecting a record weekly build for Thursdays EIA report, with our calculations show it coming in over 127-plus Bcf, with a slight decrease for next week's due to cooler northern U.S. temperatures. Overall, we still view weather sentiment as bearish, even with gradually hotter temperatures gaining ground during the latter half of May."