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Natural Gas Futures Soar on Heat, Petroleum Sympathy

Receiving support from current events in the petroleum futures sector, September natural gas futures on Monday erupted higher, reaching levels not seen since the January 2005 contract reached an $8.23 high on Nov. 29, 2004.

As of early afternoon, September natural gas futures had broken through the psychological $8 level and reached a high of $8.22. The prompt month ended up backpedaling a little to settle at $8.154, up 26.9 cents on the day.

With news of the passing of Saudi Arabia's King Fahd creating supply uncertainty in some minds, combined with continuing U.S. refinery outages, petroleum futures were on the move higher again on Monday. September crude by early afternoon had traded as high as $62.30/bbl, before settling at $61.57, up a dollar on the day. Likewise, September unleaded gasoline and heating oil also rocketed higher. Gasoline reached a high of $1.7920/gallon before closing at $1.7471, up 2.1 cents on the day. Heating oil traded as high as $1.7325/gallon, but ended up settling at $1.7169, up 4.07 cents.

"We made new contract highs for September on Monday," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "Some of the local traders are looking for this thing to get into the low $8.30s. If we get a bonus round of short covering, that is easily achieved. However, I wouldn't be doing any fixed-price deals for hedges here. I'd use the options because they are still cheap. It really is the golden opportunity here. Everybody is complaining about price, but nobody is looking at the cheap options. You do not have to lock your price in this situation."

Commenting on Fahd's passing and the news that King Abdullah is his successor, Kennedy said he doesn't see where any of the fear or concern is coming from. He noted that Abdullah has run most of the kingdom's affairs since Fahd -- his half brother -- suffered a stroke in 1995.

"I hate to point this out to folks, but Abdullah took over 10 years ago," Kennedy said. "So is there going to be a change in the Saudi energy policy? Well, if there wasn't 10 years ago when he effectively took over, then why would he change it now?

"What we have on the natural gas side is a lot of funds who were short" and are now looking for cover, Kennedy said. "The cash was also unbelievably strong Monday, and I am not sure why. Yes, we are having a return to above normal hot weather, but it is nowhere near as hot as it was two weeks ago.

"As for the storm front, there are a couple of tropical waves out there, but forecasters aren't calling for development any time soon," he added. "So why are prices here? Obviously crude is acting as background noise, which it has been doing for the past few months, but I still don't see too much out there to give [reason for] this rally."

IFR Energy Services' Tim Evans agreed that natural gas futures on Monday were influenced by the Saudi king's death, fund short covering and the return to heat. He agreed that the king's death really shouldn't be as big of a deal as it is being made out to be.

"Natural gas has some heat in the outlook to consider but is mostly just riding along with the stronger tone on the petroleum side, with perhaps an added boost from fund short covering," Evans said. "The death of King Fahd may have been expected, given his hospitalization in late May in 'grave condition' and his prior health history, but that doesn't seem to have dampened the price response today. If anything, the prior dry runs at buying up contracts seem to have resulted in a more practiced response at accumulation on the initial news.

"It may take the market some time to calm down, but we think it will eventually realize that production is still flowing and that, to a very large extent, nothing has really changed. On one level, they have simply substituted an 81-year-old for an 84-year-old and the change is really that small."

Evans noted that the refinery problems at BP in Texas City, TX, and Exxon Mobil in Joliet, IL, "are not major," but are "sufficient" to incite added interest on the product side.

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