Hurricane Alex-inspired precautionary production shut-ins in the Gulf of Mexico last week proved inconsequential to U.S. natural gas supply as the Energy Information Administration (EIA) reported Thursday morning that a larger-than-expected 78 Bcf injection was made into storage for the week ending July 2. Natural gas futures values plunged on the news.
Just prior to the 10:30 a.m. EDT report, August natural gas futures were trading at $4.580, but in the minutes that immediately followed, the prompt-month contract broke below $4.500 support to $4.361. After notching a low of $4.355 later in the day, futures closed the regular session at $4.399, down 16.6 cents from Wednesday's finish.
One New York trader noted that Thursday's message was pretty straightforward. "Sure we broke below important support at $4.500, but the real news is we were able to close well below it too, which could take us out of that $4.500 to $5 trading range we've been in," he said. "I think the storage report came as a mild bullish shock, because folks had been anticipating something a little smaller after factoring in last week's shut ins."
Heading into the report, some market watchers expected a lower-than-normal build, thanks to Hurricane Alex and last week's Gulf of Mexico natural gas production shut-ins, which were pegged at 3-4 Bcf (see Daily GPI, July 7). Most estimates were for an injection in the low 70s Bcf. A Dow Jones survey was looking for a 73 Bcf build, while a Reuters survey of 24 industry players produced an injection range of 62 Bcf to 84 Bcf with an average expectation of a 72 Bcf injection.
While falling just short of the 80 Bcf five-year average injection for the week, the actual 78 Bcf build was larger than the date-adjusted 74 Bcf build from a year ago.
Citi Futures Perspective analyst Tim Evans called the report "bearish," but he noted that the ongoing heatwave could continue to reduce the surplus to the five-year average. "The build was bearish relative to expectations, although still modestly constructive compared with the 80 Bcf five-year average for the date," he said.
The year-on-five-year average surplus, which hit a peak of 325 Bcf on May 7, has now been reduced to 285 Bcf, which Evans expects to get even smaller. "This downtrend also looks likely to continue, given the ongoing forecast for warmer than normal temperatures across much of the continental U.S."
As of July 2, working gas in storage stood at 2,762 Bcf, according to EIA estimates. Stocks are now 23 Bcf less than last year at this time. For the week, the East Region injected 48 Bcf, while the Producing and West regions added 19 Bcf and 11 Bcf, respectively.
Credit Suisse analyst Teri Viswanath noted that the EIA on Wednesday in its Short-term Energy Outlook reaffirmed its end of season storage estimate of 3.81 Tcf (see Daily GPI, July 8), but interestingly enough raised its 2010 and 2011 price forecasts by 22 cents and 11 cents, respectively, to $4.70 and $5.17, "based on an expectation of slightly tighter balances starting in the second half of the year," Viswanath said. "In 2011, EIA expects consumption to remain mostly flat while domestic production declines by 0.4 Bcf/d, leading to a 50 cent increase in natural gas prices."
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