Crude Oil Sell-Off Dampens Bullish Euphoria in Gas Pit
In a topsy-turvy session that made traders glad the weekend was near, natural gas futures spiked and retraced three times Friday amid a bevy of fundamental and technical news. After encountering substantial selling in the low $6.80s early in the day, the January contract checked sideways for much of the session, finishing up 8.4 cents at $6.673. Comparatively the rest of the 12-month strip, led by March, which erupted 20.7 cents to close at $6.043, experienced double-digit gains.
Since notching a $6.02 low amid an expiration-day sell-off Tuesday, the January contract had posted an impressive two-day, 57-cent rally through the close of business Thursday. Many traders and market watchers polled by NGI on Thursday believed the $7.00 level would easily be tested on Friday. However, they did not anticipate what was about to happen in the nearby crude oil pit on Friday.
Despite the halting of nearly 3% of the world's oil production by Iraq late Thursday, crude oil futures slipped lower Friday, shedding more than 5% of its value to close at $32.02, a new three-week low. However, the move lower did not come as too big of a surprise for energy analyst Tim Evans of New York-based IFR Pegasus. "The market has shown in the past, rather emphatically, that it is not bothered by the Iraqis halting exports as long as the U.S. is willing to dip into its Strategic Petroleum Reserve.. On the one side of the price equation you have a shortage of 2.4 million barrels [of Iraqi imports] a day. On the other side, your have U.S. government stockpiles totaling 541 million barrels." In addition to the U.S stores of oil, the International Energy Agency was being tapped on Friday for the possible release of additional reserves.
Several gas traders were quick to point the erosion in the nearby crude oil pit as a key factor in the inability of natural gas to test resistance at the psychologically important $7.00 level late last week. "Natural [gas] wasn't the only game in town Friday," said a risk manager. "All of a sudden you have crude prices dropping out of the sky. That definitely took away from the rally in gas."
However, looking ahead, Evans is doubtful the events in the crude oil pit will have a lasting effect on natural gas prices. "This will be a little bit of a sideshow, but I don't think it will weigh on gas prices too much. After all, there is no government stockpile for natural gas."
The American Gas Association will likely take center stage again this week when it announces its latest storage report. Last year at this time the market withdrew 69 Bcf from underground storage facilities and the five-year average is a net draw down of 50 Bcf. Although he will revise his estimate early this week, Evans looks for the AGA to announce a withdrawal of 80-100 Bcf. Last week AGA said that 146 Bcf was pulled from the ground, the largest takeaway ever in the month of November. Two weeks ago, the market withdrew 94 Bcf when temperatures were similar to those seen across the nation last week.
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