Trying to capitalize on the momentum of Tuesday's significant gains, bulls made a run at $8 in natural gas futures Wednesday only to rebuffed. May natural gas recorded a high of $8.010 before settling the day at $7.855, down 1.4 cents from Tuesday's trading.
"It's too early to tell whether the market really did not like the $8 level," said a Washington, DC-based broker. "It was the first time up testing it, and while we did drop a few cents, we really didn't carve back into Tuesday's significant up day. Wednesday was a snoozer of a day. If we fail to punch through $8 again, then I think it would be a more significant indicator. As things are now, I am still bullish on things."
Natural gas futures prices seemed to find a spring in their step following the 10:30 a.m. EDT release of petroleum inventory reports, which revealed bullish supply news for gasoline. As a result, May gasoline futures climbed 3.57 cents to settle at $2.1587/gallon.
The broker noted that the relationship between natural gas and petroleum futures prices remains intriguing. "Some people are saying that natural gas and the liquids have separated themselves and are moving on their own accord, but the gasoline rally sparked by some bullish inventory numbers Wednesday morning clearly gave a little bit of a kick to natural," he said. "Following that boost, prices seemed to weaken a bit at the end of the day across all of the energies."
Commenting on Tuesday's mercurial 32.3-cent run-up, the broker said fund short-covering along with cold weather teamed to push things higher. "The cold weather sparked some utilities, who normally plan on buying gas and storing it at this point rather than buying current supply for use. Their models are saying that prices should be collapsing after a winter and all of the sudden this heating degree day demand sparks up across much of the country, so they had to come in and do some buying to cover their operational needs," he said. "If that triggered some buy stops from the very large short position held by the large speculators, then you get a combination of events, which creates a trading day like we saw on Tuesday."
Addressing the current natural gas storage situation and its impact on futures, the broker said last week's Energy Information Administration (EIA) storage report for the week ended March 30 explains about everything you need to know. "Last week's report was indicative of the underlying bullish psychology. It was for the last week of withdrawal season and we saw a 58 Bcf injection, but the market still moved higher. In addition, most market watchers had been expecting storage to leave the withdrawal season at 1.4 Bcf, but we left with 1.5 Bcf," the broker said. "All of these things seem to me like a really good reason to come out into the market and really sell it, but we basically had a rally from that point forward. I see Thursday as being an important test. We failed to punch through $8 Wednesday, so the question is are we pausing on our way up, or is it over. If we get a bearish storage number and see another bullish reaction to it, then watch out because $8 is going to be pushed through very quickly."
Market technicians interpret Tuesday's advance as consistent with a longer-term advance. They argue that the price decline, which started in early February after March futures posted an $8.035 overnight high, was not a major downtrend but a correction to the longer-term advance. "We take Tuesday's powerful rally and strong close as further evidence that the decline from $8.035 was a bull market correction and that this correction ended at the $6.812 low," said Walter Zimmerman of United Energy. If spot futures can achieve a "decisive" close above $7.985, their upside price objectives become "a cluster of wave count objectives at $8.230, $8.345 and $8.357," he said.
Technicians also cite Tuesday's advance as breaching a long-term downtrend line on the daily bar charts extending from the Aug. 2 high in the spot futures and extending lower to $7.740 on Monday. Tuesday's surge and settlement well above that line is an indication that a change of trend (higher) may be forthcoming. A Chicago analyst said the market was trying to make a technical breakout, and "we'll see if it holds."
Data from the National Weather Service (NWS) is also helpful to the bulls' case. For the week ending April 14, the NWS predicts above-normal accumulations of heating degree days (HDD) for the large energy markets of the East and Midwest. According to NWS figures, New York, New Jersey and Pennsylvania will "enjoy" 166 HDD, or a whopping 40 more than normal. Ohio, Indiana, Michigan, Illinois and Wisconsin will endure 165 HDD, or 35 more than normal.
Turning attention to Thursday morning's EIA natural gas storage report for the week ended April 6, estimates appear to range anywhere from a 17 Bcf withdrawal to an injection just north of 30 Bcf. A Reuters survey of 20 estimates expects storage levels to rise by approximately 14 Bcf, while the ICAP storage options auction held Wednesday afternoon produced a consensus injection of 25 Bcf.
Golden, CO-based Bentek Energy projects an injection of 29 Bcf for the week, bringing current stocks to 1,598 Bcf, which would be 6.7% below the five-year high (last year) and 28.9% above the five-year average. The analytical firm warned that while Thursday's report will likely be the third injection this season, this week's cold across much of the country could produce another withdrawal in the report next week. Focusing on the week that ended April 6, Bentek said it believes 12 Bcf was injected in the East region, while 10 Bcf was added in the Producing region and 7 Bcf was injected in the West region.
Whatever number is revealed Thursday morning will be compared to last year's 15 Bcf injection and the five-year average build of 8 Bcf.
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