Taking more of a wait-and-see approach ahead of Thursday morning's storage report, August natural gas futures traded within a slim 12.5-cent range on Wednesday before settling at $7.087, up a mere 1.4 cents on the day.
Outside noise included continued weakness in petroleum futures and the arrival of Tropical Storm Bret, which never posed much of a threat to the Gulf of Mexico's oil and gas production. Downgraded to a tropical depression Wednesday afternoon, Bret was continuing to weaken as it traveled farther inland over Mexico.
August crude continued its descent again Wednesday, closing 94 cents lower at $57.26/bbl. Over the past two days, crude has dropped $3.69 from its $60.95 high on Monday. July heating oil also declined again Wednesday, recording a 1.88-cent drop to close at $1.6016/gallon.
With the petroleum futures sector setting record price levels last week, some market watchers are having trouble believing that prompt month natural gas futures didn't get any higher than $7.80.
"You can the make the case, as I have already suggested...but I have my doubts, that if natgas fails to benefit from all-time record crude and rising product prices, that it's a market in trouble," said Jay Levine of Advest Inc. "It's another way of saying crude and the products are the only things holding natgas up. Any downward correction in the petroleum sector -- and somewhere along the line one must be considered -- spells disaster for natgas."
However, Levine said that might not necessarily be the case. "I for one wouldn't be banking on...putting all my eggs in one basket -- whether those eggs are bear eggs or bull eggs, although I firmly remain in the latter camp," he said. Natgas, in my opinion, is simply backing and filling and going through what I'd call 'growing pains.'"
Levine noted that while natural gas may be historically overvalued in the traditional sense based on fundamentals, "these are untraditional times, what with great economic expansion (so they say) and unprecedented concerns (fears) over supply and/or demand."
Prior to the Energy Information Administration's natural gas storage report Thursday morning, Levine sees August natural gas "buys" at $6.975, $6.865 and $6.755. He sees "sells" at $7.275, $7.575 and $8.025.
Without support from storms in the Gulf, seasoned observers see natural gas futures falling. "Unless assisted by fresh tropical storm news, a weak pricing environment looks likely with nearby futures eventually drifting down to the $6.85 area," said Jim Ritterbusch of Ritterbusch and Associates.
Analysts agree that at present natural gas inventories are plentiful, but summer weather coupled with an aging fleet of gas-fired electrical generation could put a healthy dent in supplies. "Depending on the actual injection on Thursday, there would appear to be a very definite inflection point where natural gas demand rises at a very rapid rate," noted Kyle Cooper of Citigroup in Houston.
He noted that summer natural gas demand has always been nonlinear, as additional less efficient units must be utilized to meet higher electricity demand, and "based on the last few weeks and our projection for Thursday, the increased demand may occur a little more quickly than originally estimated." Cooper projects this week injection at between 85 and 95 Bcf.
Levine said with most estimates in the 70-90 Bcf range, he is looking for an 81 Bcf injection. After coming in well below all of the other storage estimates -- and the actual injection -- for the previous week's report (see Daily GPI, June 24), the ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 90.5 Bcf injection for this week's report, which covers injection for the week ended June 24.
Thursday morning's data will be compared to last year's 92 Bcf build for the week and the five-year average injection of 91 Bcf.
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