With doomsday hurricane scenarios scaring natural gas traders into higher prices and concerns over Middle East unrest still seeping over from the crude trading pit, May natural gas futures finished the week on a strong note by closing at $7.730, up 12.1 cents on the day and 46.1 cents higher than the previous week's close.
Even with Thursday's smaller than normal 22 Bcf withdrawal from storage for the week ended March 23 and mild spring weather occupying a number of high gas-demand regions around the United States, traders were having trouble on Friday getting past the geopolitical tension or the assertion that the 2007 Atlantic hurricane season could be much like the destructive one seen in 2005. Despite some claims that the market is being misdirected, others cited a new cold snap for backing up the market's recent strength.
"I don't know how misguided the recent strength in the natural gas ring has been. While storage is certainly healthy as we finish up the heating season, it certainly is not as comfortable as it was last year," said Steve Blair, a broker with Rafferty Technical Research in New York. "Attention is now turning to summer and we will have to see what kind of weather awaits us."
Despite the big gains during the week of trading, which saw the April contract expire Wednesday at $7.558, Blair said he still believes there is room to the upside. "When we got down below $7, it seemed like we got into an unbearably tiny range of congestion until we finally broke out to the upside," he said. "I thought maybe we were seeing that again on the upside when we got into the $7.300s, but since we broke above that the ranges have not been as tight. That said, I'd be hard-pressed to think that we could get too much higher here without any fundamental factors getting in the way. We might have another 10-15 cents on the upside. We have major resistance around $7.860 and then $7.950. I think we might test those areas, but I don't think we will break through unless we have drastic weather changes or further disruptions in the Middle East."
The unrest surrounding Iran intensified during the week, pushing crude significantly higher. May crude futures finished the week at $65.87/bbl, down 16 cents on the day but $3.59 higher than the previous Friday's close.
The hurricane talk from AccuWeather's Joe Bastardi or Weather 2000 did not hurt the cause of the bulls during the week, nor did the overwhelming strength in crude and the rest of the petroleum complex. "Should the whole Iran situation blow up, crude will soar and the natural gas ring won't be able to ignore the commotion," said Blair. "It obviously won't go to the extremes that a global market would go to such as crude, but natural gas futures will certainly be impacted in my opinion. I doubt these markets are going to head much lower until the Iran situation abates."
While temperatures were mild during the week, that could change soon as AccuWeather forecasters see Old Man Winter making an unwelcome return. "Winter will be making a rude return by the middle to end of [this] week. Cold air will be dumped straight out of Canada into the Midwest and Northeast, making temperatures feel more like late February," said AccuWeather meteorologist Bob Tarr. He added that there have been "hints of a little snow around Easter, but that's a long way down the road."
Cold winter air may be trying to make a comeback, but going forward analysts see an opportunity to gauge underlying industrial demand and electrical generation requirements, which may hold the key to summer storage injection patterns and supplies going into next year's heating season.
"Our assumption is that such demand is proceeding at a relatively strong pace with the assistance of a stubbornly strong U.S. economy and a significant gas price advantage compared to heating oil and residual prices during recent months," said Jim Ritterbusch of Ritterbusch and Associates.
Ritterbusch contended that a supply of 1.5 Tcf is "virtually certain" to start off the injection season. The fact that this stock level is about 200 Bcf lower than a year ago suggests a need for higher prices through the spring/summer period in order to drive a stronger injection pace than was the case through last year's second/third quarters.
A stronger pricing structure might help as well. Thursday the July contract settled at $7.900 and the December at $9.451, leaving a $1.55 spread. A marketer using third-party storage may be forced to pay as much as 20 cents MMBtu/month to store gas for the five-month period, leaving 55 cents to cover overhead and profit margin. That would offer little incentive to justify the risks of assuming a market position, traders said.
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