Despite the potential for an Atlantic Hurricane development friendly La Nina event, natural gas futures traders sided with warming temperatures Wednesday as the April contract continued to work lower for a third consecutive session. The prompt month recorded a low of $7.250 before settling at $7.300, down 23.3 cents from Tuesday's close.
With the string of 200 Bcf-plus storage withdrawal reports seemingly over and a warming trend sweeping the central and eastern portions of the United States, the April contract over the last three regular trading sessions has dropped 50.6 cents. The last time April natural gas traded lower than $7.250 was back on Feb. 15 with a $7.130 low. Some market experts expect a test of the psychological $7 area, but not much beyond that.
"What the market is telling us is that it is a range between roughly $8 and maybe $7. It's basically saying throw me some weather and I'll gyrate up, take it away and I will work lower. I think it is really looking for where it should be valued at right now," said Tom Saal with Commercial Brokerage in Miami. "With temperatures warming up, we could definitely go down and test $7 here. April looks like it still wants to head lower. Once we get a little lower we will have to see what kind of buying shows up. If I was a buyer here, I would still be a little patient...waiting to see if Mother Nature can work for you. The system did take a heck of a shock with all that cold weather, which beat down storage supplies pretty well. As a result, I think $6.500 or below are points that are a little too far away to set our sights on right now."
Looking towards this summer's weather, the National Oceanic and Atmospheric Administration (NOAA) said Wednesday a La Nina event could be establishing itself, which could increase hurricane activity in the Atlantic Ocean and reduce hydropower capacity in the Northwest due to drought (see related story).
Touching on the potential for a La Nina event, Saal said the market likely isn't looking that far ahead yet. "That is still pretty far out in the future, so a lot of things could change," he said. "Traders are trying to guess how much gas we will have in storage as of April 1, so that is also an unknown. The market appears to be trying to get rid of winter before it can put its focus on summer."
As for a recommendation in the current futures market, Saal said he still advises clients to use an options strategy. "We recommend that hedgers buy calls or puts right now because of the low volatility in the market, which allows people to purchase options at bargain basement premium values."
Some traders see the market's destiny as one of lower prices. "Anytime the market gets above $7.70 and up to $7.80, you sell it," said a New York floor trader. He added that the weather was warming and by Monday of next week he expected prices to test down to $7.020. "I thought Tuesday we would test down to $7.400, but crude rallied and it looks like natural gas followed crude for a portion of the day," he said.
A more analytical approach supports the idea that the grind lower may not have too much longer to run. Jim Ritterbusch of Ritterbusch and Associates noted that during winter months, underlying demand for natural gas from the industrial and power generation sectors gets largely ignored at the expense of weather-related factors. "These numbers are always backed out of the weekly storage indications and tend to become somewhat murky during the winter when the weather represents a major portion of consumption," he said.
Ritterbusch argued that once weather becomes a nonissue during the upcoming shoulder months, underlying trends in industrial requirements will point to a stronger level of demand than a one-day 416-point plunge in the stock market might suggest. "We remain reluctant to abandon a bullish near-term view, but at the same time, this week's price action is now suggesting an upside price cap at about the $8.00 area," he said.
MDA EarthSat in its Wednesday morning forecast for both the six- to 10-day and 11- to 15-day periods shows increasing warmth expanding from the central U.S. eastward to the East Coast. "Progression continues [Wednesday] with warming expanding into more of the middle third of the country as cooling diminishes along the Eastern Seaboard. Some models are even faster in removing the East Coast cooling with several members showing just near normal there [Wednesday]," the forecaster said.
Looking at Thursday's storage report for the week ended Feb. 23, Saal said he is looking for a 137 Bcf withdrawal, while a Reuters survey of 22 estimates is looking for a 143 Bcf pull. The Wednesday afternoon ICAP storage options auction produced a consensus withdrawal estimate of 141 Bcf. The number revealed by the Energy Information Administration will be compared to last year's 165 Bcf pull and the five-year average withdrawal of 129 Bcf.
Golden, CO-based Bentek Energy's Flow Model indicates a withdrawal of 138 Bcf, bringing stocks -14.3% below the five-year high (last year) and 11.1% above the five-year average. A stock level of 1,727 BCF is only 31 Bcf above the 1,696 Bcf level reached at the end of the 2006 withdrawal season on March 31, 2006. The company said it expects the East region to reveal a 102 Bcf withdrawal, while the Producing region and West region pull 26 Bcf and 10 Bcf, respectively. Bentek's Daily Storage Range report for this storage week indicated a range of withdrawals from 136 Bcf to 152 Bcf with a midpoint of 144 Bcf, while the company's Supply/Demand Balance report published on Friday indicated a 147 Bcf withdrawal estimate.
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