With little to no air conditioning demand across the country for the week ended May 25, the Energy Information Administration (EIA) reported Thursday morning that a hefty 107 Bcf of natural gas was injected into underground storage. While the number was mostly in line with expectations, the July natural gas futures contract traded between $7.812 and $7.970 before settling at $7.935, down less than a penny from Wednesday's close.
After trading at $7.845 in the minutes just before the 10:30 a.m. EDT report, the prompt month slid immediately to $7.812 in the minutes that followed. The slide proved to be mostly a knee-jerk reaction as the contract then rebounded higher to $7.970 near 11 a.m.
Jay Levine, a broker with enerjay LLC noted that even with an expected injection amount, the natural gas futures market doesn't always need a rational reason for directional shifts or moves. "A 107 Bcf injection is perfectly in-line with market expectations -- although it's highly unlikely that anything the market does price-wise from this point...and how it arrives [there] will be; perfect that is."
"We always get big builds this time of year. The air conditioning demand is not there yet, and people are trying to squirrel away supplies ahead of the hurricane season," said Ed Kennedy, of Commercial Brokerage in Miami. "Especially with the forecast of an active hurricane season, you certainly would want to get as much gas in storage as you can early. Oh, and by the way, by the end of the injection season, storage is going to be full. It always is.
"It's really about the weather now more than anything else. Next week is expected to exhibit above-normal temperatures in key regions of the country, so July futures will probably test the price resistance that was there for the June contract. My guess right now is that the resistance will still hold because I believe we are still range trading."
Kennedy noted that Wednesday's near-test of $8 didn't see a whole lot of volume up there. "I think the real resistance will likely be up at $8.130 to $8.230," he said. "Wednesday's $7.995 high was not met with a concrete ledge of selling, so I think we will try a little higher than that."
Citigroup analyst Tim Evans, who expected a 115 Bcf injection, said, "The net injection of 107 Bcf was in line with expectations, a bit supportive compared with our model and we therefore view this as a constructive number -- it could have been worse."
While the storage report could be seen as bearish when compared to historical data, weather data, however, has added a definite bullish tone to the market. The National Weather Service (NWS) reported that for the week ended May 26, the populous states of New York, New Jersey and Pennsylvania aggregated 15 cooling degree days (CDD), or five more than normal. Yet for the week ended June 2, NWS expects 23 CDD for the Mid-Atlantic states, or 10 more than normal.
In addition, Colorado State University hurricane forecasters Thursday maintained an earlier forecast that called for a very active 2007 season with a 74% chance of a major hurricane making landfall on the U.S. coastline (see related story). Of even more concern is the fact that the forecasters see a 49% chance that a major hurricane will make landfall on the Gulf Coast from the Florida Panhandle west to Brownsville. The long-term average is 30%.
Tom Saal of Commercial Brokerage, in his work with Market Profile, isn't sold on the idea of a bullish demeanor to the market. Looking at the big picture, he expects the July futures contract to test "value areas" at $7.828 to $7.937 then $7.692 to $7.760 followed by an eventual test of $8176 to $8.342.
The Market Profile was originally developed by legendary trader Peter Steidlmayer and applied to grain trading. Steidlmayer would plot trades as they took place in the grain pit and noted that they often formed a bell-shaped curve. His early trading strategy would be to buy or sell the ends of the distribution, i.e. "value areas" with the idea that prices would return to the norm of the distribution.
While some were looking for injections as high as 117 Bcf, a Reuters survey of 21 industry players produced an average injection expectation of 105 Bcf. The number revealed Thursday came in well above last year's 81 Bcf injection and the five-year average build of 86 Bcf.
Evans said the market is still wrestling with whether the "storage glass is half empty or half full," referring to the fact that current supplies are well above the five-year average but still significantly below last year's levels.
While the 2,053 Bcf in storage as of May 25 is 355 Bcf ahead of the five-year average of 1,698 Bcf, current supplies are still 179 Bcf less than the 2,232 Bcf from a year ago. Even though year-ago levels were seen as overly healthy, the current deficit to last year's level still falls into the bulls' camp.
For the week, the East region injected 65 Bcf, while the Producing and West regions chipped in 28 Bcf and 14 Bcf, respectively.
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