Physical natural gas for Wednesday delivery and the front-month futures contract once again moved in opposite directions as weather-driven weakness in the East was able to dominate a market where most points moved from a few pennies to a nickel higher.
As temperatures that have been in the high 80s to low 90s during the first two days of the trading week were expected to give way to readings in the low 70s beginning Wednesday, eastern cash points fell on average 18 cents, and that was enough to offset gains of a couple of pennies across the rest of the country.
Futures advanced in spite of no supportive weather and looming storage issues. At the close June was up a stout 9.5 cents to $2.897 and July had advanced 9.6 cents to $2.945. June crude oil jumped $1.50 to $60.75/bbl.
Futures traders were perplexed on the day's advance. "It's hard to figure these [energy] markets out. They certainly are not fundamental," remarked a New York floor trader.
"All the energy markets are up and it doesn't seem to be for any real good reason. It seems they have turned and crossed some technical thresholds or something. Maybe they will just go higher for a while.
"The dollar is down huge today, and there has been a lot of that trade going on for the last several months [buying the dollar and selling crude oil]. I can see that, but the natural gas rally I can't figure out,” he added. “We've had some real summer-like temperatures in New York, but tomorrow we go back to normal.
"I think natural gas could see that $3.05 to $3.12 area on a technical rally. I don't see any reason for it to follow through higher.
The EIA in its May Short Term Energy Outlook released Tuesday did note that "low natural gas prices in recent months have significantly increased the use of natural gas rather than coal for electricity generation. EIA expects natural gas generation in April and May will almost reach the level of coal generation, resulting in the closest convergence in generation shares between the two fuels since April 2012" (see Daily GPI, May 12).
The day's advance hasn't changed the outlooks of others. "All in all, we are maintaining a near term bearish stance in anticipation of a price decline back to around the $2.50 area with Thursday's storage data possibly offering a trigger in this regard," said Jim Ritterbusch of Ritterbusch and Associates in closing comments. "Any existing short July positions would be advised to maintain stops above the 3.01 level."
Also casting a bearish shadow were changes in the storage outlook. Top analysts have tweaked their storage models and see the dark clouds of burdensome supplies and an inventory dynamic stretched to its limit by the end of the injection season. "We have updated our supply-demand balances, with end October working gas in storage now estimated at 4.04 Tcf, or within range of EIA's demonstrated maximum working gas volume of 4.3 Tcf," said Teri Viswanath, director of natural gas trading strategy at BNP Paribas.
Well above-normal warmth in eastern population centers has some thinking there will be adequate demand to balance what are expected to be aggressive industry injections, but Viswanath is not convinced. "Yet even with the increase in cooling demand, the recent pipeline deliveries reflect an accelerated pace of restocking that is hardly reassuring. Indeed, based on the month-to-date storage receipts, we now see the aggregate build in storage for May outpacing last year's record.
"Based on our updated analysis, the year-on-year storage surplus will expand in May. The problem is that the industry will be hard pressed to accommodate such an overhang in storage for the balance of the season. Without significantly higher demand, the market will struggle to rebalance, suggesting the recent price rally may only be temporary. As restocking accelerates, new lows for natural gas prices will likely emerge."
Market technicians are scratching their heads as a market that the "bears had lost control of" has suddenly failed to meet near-term technical objectives. "Monday's failure in front of $2.939 (0.236 of 4.544 to 2.443) has left us with a dark cloud cover on the daily candlestick chart," said Brian LaRose, a market technician at United ICAP, after assessing Monday's near 8-cent pummeling. "While this looks worrisome, the pullback was not enough to swing the technicals to a bearish bias or take out the $2.819 (0.236). For the moment, bulls are still alive. That being said, we would prepare for a deeper retreat. At this time will be counting any pullback as corrective."
Tom Saal, vice president at FC Stone Latin America LLC in Miami, in his work with Market Profile anticipates the market will test Monday's value area at $2.885 to $2.843 followed by a test of $2.782 to $2.712. In Market Profile parlance, Saal has identified an area of "minus development below $2.712" and said in a morning note to clients the market "looks a little heavy at the moment...Minus development (lack of liquidity) an additional downside target."
Eastern points tumbled as weather forecasts and slumping power prices made incremental purchases of natural gas less attractive. Forecaster Wunderground.com predicted the Tuesday high in Boston of 83 would plummet to 62 Wednesday, and climb to 70 Thursday. The normal mid-May high in Boston is 65. Philadelphia's Tuesday peak of 88 was seen dropping to 70 Wednesday and climbing back to 75 Thursday. The normal high in Philadelphia is 69.
Intercontinental Exchange reported that peak power Wednesday at the ISO New England's Massachusetts Hub fell $17.96 to $27.13/MWh and at the PJM West terminal next-day peak power skidded $34.11 to $34.15/MWh.
Gas at the Algonquin Citygates fell 45 cents to $2.17 and gas on Iroquois Waddington dropped 8 centsto $3.07. Gas delivered to Tennessee Zone 6 200 L fell 44 cents to $2.36.
Gas on its way to New York City of Transco Zone 6 fell 12 cents to $2.91, and packages on Tetco M-3 shed 29 cents to $1.72.
Gulf prices were steady to higher. ANR SE came in a penny higher at $2.81, and gas at the Henry Hub changed hands a penny higher as well at $2.86. Packages on Tennessee 500 L were flat at $2.86, and gas at Katy was quoted unchanged at $2.82.
Western locales were firm. Gas at the Cheyenne Hub rose 2 cents to $2.68 and deliveries to Opal were seen a couple of pennies higher at $2.67. Gas at Malin came in 3 cents higher at $2.72, and deliveries to PG&E Citygate added a penny to $3.25.