After natural gas futures played dead on Monday with minimal activity in either direction, traders were awaiting a spark to steer the market's next direction. They got that spark Tuesday as AccuWeather.com Hurricane Center Chief Forecaster Joe Bastardi warned that the U.S. Gulf Coast, which avoided the wrath of major storms and hurricanes in 2006, is at much higher risk of destructive tropical weather this year (see related story). April natural gas, which expires Wednesday, soared to a high of $7.530 Tuesday before settling at $7.503, up 24.9 cents on the day. The May contract, which takes over front-month status in after-hours trading Wednesday, added 23.2 cents Tuesday to finish at $7.615. However, prices pushed even higher late Tuesday afternoon in Globex trading due to an unsubstantiated rumor out of the Middle East.
Bastardi's inclusion of "Gulf Coast" and "major storms" in the same sentence was all that was necessary to bring back memories of the destructive 2005 Atlantic hurricane season, which saw widespread devastation to Gulf of Mexico oil and gas infrastructure. As of the Minerals Management Service's final report June 19, 2006, a total of 935.7 MMcf/d of Gulf of Mexico natural gas production was still off-line because of damage caused by Hurricanes Katrina, Rita and Wilma in 2005. From Aug. 26, 2005 to June 19, 2006, a total of 803.6 Bcf of natural gas production had been deferred due to the storms, which equates to just over 22% of the annual gas production from the Gulf (3.65 Tcf).
Bastardi said if his forecast holds up, the season could have significant implications for the areas recovering from the devastation wrought by the hurricanes of 2004 and 2005 -- which included Katrina -- as well as for energy prices, because of the significant energy production that occurs in the Gulf of Mexico.
While Bastardi's forecast was decidedly bullish, one broker said the tea leaves were already turning in favor of the bulls. "Our technical models switched to bullish on Monday, so we were advising our clients on higher prices," said a Washington, DC-based broker. "While Bastardi's hurricane forecast certainly added fuel to the bullish case, sentiment was that this move higher has been in the works. A lot of the marketers and people we have been talking to have seen $6.750 to $6.900 being about as low as it can go in the near term. All of the sudden we started moving higher and the herd started moving a little bit. We did a modest amount of commercial buying Tuesday, and while that is a lagging indicator to some degree, they do represent the herd. They are slow to move, but once they start moving they really get going."
He added that bidweek also could have factored into the price jump. "A lot of people were hoping for one final push lower, but it wasn't coming, so they had to get their buying done," the broker said. "The move started back on March 21 when futures prices made a strong vault higher. In the sessions that followed, we weren't really able to carve back into those gains. If the bears really wanted to sell this thing off again, they had March 22, 23 and 26 to do it. After a while, people say, 'OK, I guess it is going the other way.' There is an awful lot of short interest out there in the large speculator category and that is kindling for a spark. Unlike retail investors, they don't just get out of their positions, they go in the other direction. If they are short 100, instead of buying 100, they buy 200."
A rumor following the regular session close sparked even higher prices. Reports that Iran had attacked a U.S. warship Tuesday afternoon were quickly denied by the U.S. Navy and the White House, according to Reuters. However, the damage was already done. April natural gas spiked to $7.720 while May crude jumped more than $5 to a high of $68.09/bbl in Globex trading late Tuesday afternoon. Both markets had come off significantly by Tuesday evening.
"A very wise client once told me never to spread a rumor I didn't create myself," said Jay Levine, a broker with enerjay LLC. "And since I didn't create this latest rumor -- which has caused the energy complex to ignite in spectacular fashion (crude up, at one point, an eye-opening $5 in the Globex session and April natural gas extending its gains with a $7.72 high) -- I'd simply suggest taking a deep breath and remember that no one can predict if and when the geopolitical landscape takes a major turn for the worse and volatility explodes, along with prices. Better to be a cautious bull, under these circumstances, than a reluctant bear."
Prior to Tuesday's trade, market experts saw natural gas futures as largely range-bound as well as disconnected from the petroleum complex. "Basically, at least when it comes to [natural gas], it's still all very range-bound with the top of the range sitting closer to $7.60 and the bottom of the range sitting closer to $6.90ish," said Levine prior to Tuesday's regular session. "Taking out either suggests a possible breakout, or down, and until then I'd merely play the swings and stick with previously posted support/resistance/pivots."
In Monday's trading the bullish enthusiasm from last week was nowhere to be found. Last week April natural gas futures rose 34.5 cents to $7.269, and May crude oil advanced $2.70 to settle at $62.28/bbl. Crude oil longs Monday were rewarded with a 63-cent gain to $62.9, but natural gas bulls had to settle for a 1.5-cent loss to $7.254.
"The price action in the natural gas market thus far this week is tending to reinforce our expectations for range-bound trade during the coming sessions, mainly within last week's price boundaries," said Jim Ritterbusch of Ritterbusch and Associates.
Natural gas bulls can take some comfort in the inability of prices to work lower Monday. "When the market first got down to $7.22 there were buyers there," said a New York floor trader Tuesday morning. He noted that the market tested technical support at $7.20 three times but failed to break lower. Following the failure, prices worked higher.
It may be more difficult to use the petroleum market as a guide to trade natural gas. "Crude oil opened better [Monday], but that didn't affect natural gas; it was trading all over the place, and was not a directional market," the trader said.
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