Proving that the fourth time really is the charm, prompt month natural gas futures settled above $8 on Thursday for the first time since Dec. 1, 2006. June natural gas bounced on either side of the long-term resistance level for most of the day following the Energy Information Administration's (EIA) report that 95 Bcf was injected into underground storage for the week ended May 11.
After failing three separate times over the past few weeks to penetrate and settle above the $8 mark, June natural gas recorded a high of $8.090 Thursday before closing at $8.075, up 18.5 cents on the day. With the storage injection coming in within most industry estimates and above historical comparisons, many thought there should have been no real impact on the market.
However, in the world of natural gas futures trading, "should have" events often times do not end up playing out. After working higher leading up to the 10:30 a.m. EDT report, the prompt month pushed above $8 in the minutes that immediately followed.
On the other hand, traders could have been looking right past the storage number and trading off of fresh weather news combined with sympathy for the streaking petroleum complex. AccuWeather.com Chief Long-Range Forecaster Joe Bastardi and his team said Thursday morning that they expect this summer to be hotter than normal across a large part of the nation, including the most heavily populated areas of the Northeast (see related story).
Meanwhile, crude and gasoline futures were off to the races Thursday. June crude closed $2.31 higher at $64.86/bbl, while June gasoline jumped an alarming 9.96 cents to $2.4366/gallon. "If petroleum futures prices continue to move up, we cannot expect the natural gas market to fall, much less stand pat," said a Washington, DC-based broker. "While natural gas finally closed above $8 on Thursday, if you really want to be a little bit more cautious you might want to hold out for the $8.112 high from Monday or the $8.130 high from May 13. If you break those, then of course you have a whole different story. Remember, when we got to $8.112, traders beat the market up and gradually brought it all of the way down to $7.760. While that is not all that much, you have to recognize that this is a market that has been trading in increasingly tight ranges. As a result of that, any move of more than 13 cents is a big deal."
The broker said he is both technically and fundamentally bullish on the market following the recent activity. "Even though we did not break that $8.130 high, I think we can be fairly bullish about the market. After we beat it down so hard after the $8.112 high Monday, it confirmed that we are getting higher lows and the highs have not been lower highs, especially with Thursday's action. Once we break $8.130, we could see the market recover very nicely."
Looking at the big picture, the broker said from the $15.780 top of the market back in December 2005 to the low of $4.050 during September 2006, the 38.2% retracement is $8.540, so there is some "room to run" if it gets above that $8.130.
The broker added that in addition to the bullish technical indicators, there is also fundamental support. "Heading into the month of June we are out of the shoulder season and air conditioning demand is inevitably going to grow," he said. "Making that even more important is the fact that Bastardi on Thursday said he is looking for a warmer than normal second half of the summer. Put all that together with the calls for an overly active hurricane season and you would seem to have the ingredients necessary for a higher priced market. Even though inventories appear more than healthy, you still have all of the people ready to point out that we are still below last year's storage levels."
After trading lower in the overnight Globex session Thursday morning, June natural gas pushed higher leading up to the storage report, putting in a $7.890 tick just prior to the report's release, the same price level the contract settled at on Wednesday. Immediately after the report was released, the prompt month ventured above $8. After seesawing on either side of $8 into the afternoon, the contract ended up settling above.
"I think the storage number was within expectations, but traders pushed this thing higher anyway," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "I don't know whether we are going to make $8 stick this time."
Most industry estimates had been calling for an injection that fell closely on either side of 100 Bcf. The ICAP derivatives auction resulted in a consensus 97 Bcf injection. Golden, CO-based Bentek Energy said its Flow model indicated an injection of 96 Bcf. The actual 95 Bcf injection came in above last year's 90 Bcf build and the five-year average injection of 77 Bcf.
Jay Levine, a broker with enerjay LLC, said the 95 Bcf injection really came as no great shock. "It falls in line with market expectations with the initial response being a flurry of buying activity -- I guess some people took me at my word and 'bought the under'... Here we go again, testing the waters around this $8 area, and I'd just as soon keep an open mind and maintain previously posted support/resistance points."
Levine sees support at $7.725, followed by $7.575, $7.255, $7.010 and $6.750. The broker said to look for resistance at $8.135, $8.505 and then $8.875.
According to the EIA, working gas in storage stood at 1,842 Bcf as of May 11. Stocks are 225 Bcf less than last year at this time and 315 Bcf above the five-year average of 1,527 Bcf. The East region injected 61 Bcf while the Producing and West regions chipped in 22 Bcf and 12 Bcf, respectively.
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