While April natural gas futures on Wednesday continued their recent trend of shaving a few pennies a day, the real fireworks could be found in neighboring crude futures, which saw the April contract fall $3.38 to close at $42.33/bbl, just two sessions after trading as high as $48.83/bbl. April natural gas closed Wednesday at $3.798, down 4.2 cents from Tuesday.
"It is pretty boring in natural gas futures trading currently, but within the context about what else is going on in the energy complex, it is actually pretty interesting," said a Washington, DC-based broker. "Crude futures have been racing back and forth in this range between the low $30s/bbl and the high $40s/bbl. Crude now looks like it top-ticked at $48.83/bbl a few days ago and has now switched back to weakness. Despite the large drop of the last few sessions, there has been no real effect on natural gas. Case in point, natural gas was down a couple of pennies while crude was down some 5%."
In talking to some of his marketer customers, the broker said they seem to have already done most of their natural gas buying for 2009. "Right now, they are looking out to 2010 and 2011. They seem to be pretty OK with the discount they got for 2009 supply. They certainly did not buy the high, but they didn't get the absolute low either," he said. "On balance, they seem to believe they had an OK buying year. When the question is asked about who is going to come in and start the buying, the easy answer is 'I don't know.' I'm not sure who is left out there to be a buyer who hasn't already bought a significant chunk of their 2009 gas requirements. The end-users have already contracted, probably around the $5-6/Mcf mark."
The broker said the wild card this summer is going to be liquefied natural gas (LNG) supply. "The thing we have to get prepared for is the fact that the United States is the Saudia Arabia of natural gas storage. We have all of the storage in the world. If someone has LNG and are shopping it around but can't find a good price, the logical thing to do is to store it and wait for prices to come back," the broker said. "All of a sudden, the Gulf Coast starts building LNG supplies simply because foreign interests just want to stick it in our salt caverns. However, that gas is going to show up as supply in our system, keeping downward pressure on prices. The rub is when prices shoot back up, the U.S. likely won't get that gas because they can once again get $18/Mcf in Japan. I think this dynamic won't be a counterbalance as some expect. Instead it will likely exaggerate price moves in the market."
Market wisdom say natural gas bulls may have to be patient, for all indications are that supply and demand may take several months to build a foundation for improved prices.
Analysts see a key component to achieving a better balance between supply and demand in the industrial sector. "It is difficult for the gas market to rally when expectations for U.S. industrial end-users is so bleak," said Mike DeVooght, president of DEVO Capital Management, a Colorado trading and risk management firm. He noted that end-users are in something of a pickle, for they can't be forward buyers of futures contracts until they have an idea of what the demand for their products will be in the future.
In its most recent Short Term Energy Outlook the Energy Information Administration (EIA) predicted declining industrial demand for natural gas (see Daily GPI, March 11). "The outlook for continued economic weakness in 2009 is expected to take its greatest toll on industrial-sector natural gas consumption, which is expected to decline by about 6% [to 17.16 Bcf/d this year from 18.15 Bcf/d in 2008], more than offsetting the small projected increases in other end-use sectors," the agency said.
Nonetheless DeVooght is probing the long side of the market. "The weekly storage withdrawal number [last week of 102 Bcf] came in close to expectations and was not a market mover," he said. "We might be a little premature, but we feel natural gas is searching for a bottom. We are starting to probe the long side for speculators. We purchased October (light position) in the $4.500-4.600 range. We are standing aside for producers and end-users at this time."
Turning attention to Thursday morning's natural gas storage report for the week ended March 6, most industry estimates are for a withdrawal right around 100 Bcf. A Reuters survey of 26 industry players produced a withdrawal range of 76-110 Bcf with an average expectation of 98 Bcf. Evergreen, CO-based Bentek Energy said its flow model indicates a withdrawal of 101 Bcf, which would bring stocks 9.2% below the five-year high and 13.9% above the five-year average. The research and analysis firm expects an 81 Bcf draw in the East region, a 16 Bcf pull from the Producing region and a 4 Bcf pull from the West region.
The number revealed Thursday morning at 10:30 a.m. EDT by the EIA will be compared to last year's 113 Bcf withdrawal and the five-year average pull of 91 Bcf.
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