After gapping lower in the overnight Nymex Access trading session, July natural gas opened Wednesday's regular session at $6.150 and explored lower depths from there as traders absorbed the fact that summer heat is making false starts in a number of regions across the country. The prompt month broke below the psychological $6 level in early trading and bounced on either side of the number before recording a low of $5.940 and settling at $5.974, down 41.1 cents on the day. That brings the week's losses so far to 64.9 cents.
"We had a pretty significant drop Wednesday," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "We saw quite a bit of fund selling that got the market back down below $6. I don't know whether they were reacting to weakness in crude oil or the more moderate temperatures across the country. Futures clearly followed the cash market down pretty well." July crude closed $1.68 lower on Wednesday at $70.82/bbl.
Saal said the current natural gas trading area is not new by any account. "What we basically have done is retraced back to where June expired, so now we have to see if that level acts as support or not." On May 26, June futures put in a prompt-month low for the move of $5.750 before expiring at $5.925. "Beyond that, the $5.71 level, which marks last year's low, is the significant support zone. If we got through that, it would definitely be a very bearish sign. That would likely accelerate more selling."
As for the current price level, the broker said the market is at a pretty key level. "If you look at a chart over the last three or four years, if you were a buyer below $6, you did OK over a longer term because you were hedged when we had problems," Saal said. "I think people are now taking a look at that."
Putting the day's action into the rear view mirror, Saal said the market now has to prepare for fresh storage news Thursday morning. With natural gas storage sitting at near record levels, the broker said a bearish build could test that important $5.710 level.
The near-term weather picture continues to remain unsupportive. MDA EarthSat Energy Weather said Wednesday that the 2006 summer -- from a cooling degree day standpoint -- will be near normal compared to the very high demand seen during the 2005 summer.
"After a hot Memorial Day weekend, the June pattern has evolved quite differently in the eastern U.S. compared to last year," said Matt Rogers, MDA EarthSat's deputy director. "Right now, the main concern areas for summer heat continue to be in the South Central U.S. and in the western states. We believe that this will be a consistent theme for most, if not all, of the upcoming summer." The company's forecast for both July and August has above normal temperatures in the West and below normal temperatures targeted for the Midwest into parts of the Northeast.
Looking at storm projections for the Atlantic hurricane season, MDA EarthSat said it is still anticipating 19 named storms. It also continues to forecast that the central to western Gulf of Mexico has a 90% chance of observing a hurricane this season and a 65% chance of that hurricane becoming a strong system (Category 3 or greater on the Saffir-Simpson scale).
However, hurricane bulls may want to reassess their outlook if the analysis of a prominent weather forecaster proves correct. Meteorologist Joe Bastardi of AccuWeather said Wednesday the Carolinas and points north and east are the primary areas "for above normal impact from hurricane activity along with the Gulf Coast from central Louisiana westward with an eye toward the southwest Florida Gulf Coast especially later in the season." He suggests that the central and eastern Gulf may get "a break."
Prior to Wednesday's trading action, some traders were looking for continued erosion in natural gas prices. "Lower prices are justified given the prospects of limited shrinkage in the current storage overhang that should continue to exceed 45% above average levels with this Thursday's report," said Jim Ritterbusch of Ritterbusch and Associates. He added such a large supply may force storage space to be allocated this summer in the form of prices low enough to increase electrical generation and industrial demand. In this scenario the increase in demand would absorb excess production and temper the demand for gas storage.
Looking closer at projections surrounding the Energy Information Administration's (EIA) storage report for the week ended June 2, many in the industry are looking for an injection in the high 70s Bcf to low 80s Bcf range, which would fall far short of historical injection levels. The EIA said 102 Bcf was injected last year for the week, while the five-year average injection for the week is 105 Bcf.
A Reuters survey of 19 industry players is centered on an 84 Bcf injection, while the ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus build expectation of 78 Bcf. Golden, CO-based Bentek Energy said its data also points towards a 78 Bcf injection, with 46 Bcf deposited in the East region, 17 Bcf in the Producing region and 15 Bcf in the West region. The EIA report will be released at 10:30 a.m. EDT Thursday morning.
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