Thursday morning's natural gas storage report had traders experiencing a case of deja vu as the Energy Information Administration (EIA) reported that 77 Bcf was added to underground working gas for the week ended June 9, the identical amount of gas that was added the previous week. While the injections were the same, the market's reaction was remarkably different as the industry had been expecting a meatier number this week. July natural gas reached a high of $7.250 on the day before settling at $7.207, up 61.7 cents on the day and $1.035 higher for the week to date.
After going into the 10:30 a.m. EDT report trading at $6.660, July natural gas futures shot higher once word of the bullish injection hit the streets. As of 10:46 a.m., the prompt month had broken through the $7 threshold and was trading at $7.080. Late in the session, July natural gas notched its high for the day just before closing.
"The [storage] number was much smaller than most people were looking for," said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. "Most people were looking for an injection in the mid-80s Bcf. We are also seeing short-covering by funds, who obviously had a large open interest on the short side."
As for whether there was any new buying, Kennedy said it was hard to tell. "While we can identify some of the funds -- and we are assuming that they are short -- we will have to wait and see what the open interest does Friday to see whether there is new buying coming in here." Kennedy added that a close above $6.82 would complete the bottom on all of the charts." Front month natural gas hit a low for the move of $5.75 back on May 26.
The broker added that weather is also supporting natural gas prices. "The National Weather Service is saying that large portions of the country will see 'above normal temperatures' starting this weekend, while most of the independent forecasters are saying 'much above normal.' So it is either going to be hot or very hot, but the important thing is the heat is expected to stick around a while."
Weather bulls will argue that what is really important is the upcoming weather picture. AccuWeather reports that summer will come soon for the Northeast as an upper-ridge of high pressure sends a warm, southwesterly flow of air into the region. They noted that temperatures failed to get above-normal values, which are in the 70s and lower 80s, during the first half of June, and high temperatures will climb into the 80s and lower 90s each day this weekend. "In addition, as moisture from the south flows into the region, humidity levels will also rise by Sunday," AccuWeather predicted.
That heat will be reflected in increased natural gas demand used to generate electric power. Forecaster Weather Derivatives says that air-conditioning load will surpass normal by 62% through June 21. Cooling requirements in the Northeast will be 39% above average, and use of air conditioning will also top normal in the Southeast, southern Plains and desert Southwest.
Tom Saal, also of Commercial Brokerage Corp., said the natural gas futures trading pattern on Thursday was not new. "What we saw Thursday was a repeat performance of Wednesday, which is strong fund-buying. Based off of the Market Profile pattern, it looked to me like it was all short-covering. However, we did take out the $7.130 prior high from May 5th's Access session." In his brokerage business, Saal often uses Market Profile analysis, a technical tool which attempts to gauge market value by charting where the market traded on an intra-day basis. Market Profile can show you trading levels where the market spent considerable time or levels where the market barely traded at all.
"Three things have happened so far this week to bring us to this point," Saal added. "The bears have come to the realization that we are probably going to have some hurricanes this year -- we had our first storm. Second, it is probably going to get hot sometime this summer -- this weekend. And third, we are not seeing the gargantuan injections that were advertised. Those three disappointments have probably made some of these short speculators a little nervous. One or a combination of those factors caused these guys to cover their shorts."
Saal said he expected the market to trade higher Friday to finish the week. Looking at Market Profile, Saal said resistance resides at $7.300, which marks the high-end of a value area. Beyond that lies $7.515. However, the broker noted that the downside is far more interesting. "If we go down to $6.92, this thing could fall apart down to $6.660, which was Wednesday's high and the springboard to the current price level. The $6.930 number was the bottom of the value area on Thursday. This current market is not for orphans or widows. This movement right now is what we like to call 'volatility.'"
The 77 Bcf build Thursday fell just shy of last year's 78 Bcf injection but well below the five-year average build of 97 Bcf. Prior to the report, the industry appeared to be looking for a build within the 80s Bcf with some calls for a 90+ Bcf injection. A Bloomberg survey of 14 analysts was looking for a 90 Bcf build, while a Reuters survey of 24 industry players was calling for stocks to increase by 88 Bcf. The ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus build expectation of 83.4 Bcf. Golden, CO-based Bentek Energy was a little closer with a projected storage injection of 81 Bcf.
Despite the bullish injection, working gas in storage as of June 9 stood at a very healthy 2,397 Bcf, according to EIA estimates. The storage level remains in striking distance to exceed the all-time June ending inventory of 2,553 Bcf reached in June 1991.
Stocks are currently 451 Bcf higher than last year at this time and 659 Bcf above the five-year average of 1,738 Bcf. The East region deposited 55 Bcf into underground stores, while the West and Producing regions injected 13 Bcf and 9 Bcf, respectively.
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