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Weather-Driven Spec Selling In Play; September Called 5 Cents Lower

September natural gas is expected to open 5 cents lower Tuesday morning at $2.70 as perceived moderation in temperatures and increased storage builds is prompting large non-commercial selling. Overnight oil markets were mixed.

Near-term market strength is predicated largely on temperature forecasts. WSI Corp. in its Tuesday morning 11- to 15-day outlook shows a slight moderation in cooling requirements. "Above average period anomalies are forecast across a good portion of the West, as well as portions of the East and Northeast. The central and southern states will end up near to slightly cooler than average. [Tuesday's] forecast is a little cooler across the southern half of the nation and a touch warmer over the northern tier. CONUS PWCDDs are down 1.4 for days 11-14 to 56.8 for the period.

"The forecast could deviate in many directions, but downside risks are placed over the central and southern U.S. at this time. The West, mainly the Northwest could run warmer."

Traders see large spec accounts willing to play the short side of the market based on less weather-driven demand going forward. "Nearby futures have declined by about 14 cents or roughly 5% since Thursday's close as large non-commercial entries are aggressively re-entering the short side with the help of expected temperature moderation," said Jim Ritterbusch of Ritterbusch and Associates in a Tuesday morning note to clients.

"Although no below normal trends are in evidence other than small pockets in the southern region, traders appear to be focusing on only minor deviations toward the warm side that could prove capable of boosting storage injections appreciably through the balance of this month's EIA releases. We look for Thursday's EIA report to show an upsized supply build of about 28 Bcf relative to last week's surprising 6 Bcf draw. And apparently the market is pricing in further increases as this month proceeds. In the background, production is coming in stronger on a year-over-year basis than previously expected as the summer upswing in oil rig counts is beginning to translate to some gains in associated gas production.

"At the same time, electric generation demand appears to be showing continued impact off of utility switching toward the lower priced coal. At the end of the day, the updated temperature forecasts appear to be shifting some perceptions back toward an end of season supply of around 4 Tcf that would represent a record stock. And while some divergence appears to be developing between this week's price selloff and a continued stout spread curve, we see limited possibility of sustainable inversion in the front switch short of a major storm event into the GOM."

In overnight Globex trading September crude oil rose 5 cents to $43.07/bbl and September RBOB gasoline fell fractionally to $1.3577/gal.

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