While not much was decided on Friday as the August natural gas futures contract trolled lower before closing the regular session nearly unchanged, the damage was done earlier in the week when the prompt-month contract failed to break above $4.900 and instead broke support at $4.500. After reaching a low of $4.339 on Friday, the August contract closed the day at $4.402, up three-tenths of a penny from Thursday's close but 28.5 cents south of the previous week's finish.
After notching a high of $4.900 on Tuesday following the long holiday weekend, the bulls' momentum faded and August futures scouted lower values for the week.
"I think a lot of things were really ironed out this week in terms of near-term price direction, but many within the market were surprised with the result," said a Washington, DC-based broker. "From a technical standpoint, we were starting to get some sort of advance here that looked like it was going to result in a larger rally. All of those chart patterns pointing to higher prices got shot to hell this week. With the break of support at $4.500 on Thursday, we're eyeing $4.200 as the next target. If the market gets below there, then we could test the lows. No one in the market can look at a natural gas futures chart right now and deem it as healthy."
She noted that the quiet tropics and Thursday's bearish 78 Bcf storage build for the week ending July 2 surely didn't help the bulls gain any traction. "If some shut-in gas thanks to Hurricane Alex and a stretch of nearly record heat can't boost this thing, I'm not sure what will," the broker told NGI. "Maybe some of this week's heat will be reflected in next week's market action, but I'm not holding my breath."
She added that the industry is entering the second quarter earnings period, which could affect gas futures prices. "While the natural gas market is not as responsive to the equity market as the crude market has been, if we see another weak earnings period with disappointments left and right dropping the Dow back below 10,000, that just adds some bearish guidance to an already bearish futures commodity. Hopefully that does not come to pass as I prefer my Dow running five digits as opposed to four."
Some analysts saw Thursday's nominally bearish 78 Bcf injection figure hinting at any increase in industrial demand for natural gas being more than offset by gains in production.
"This market has taken on an extremely heavy look this week as it shrugged off hot temperature patterns by breaking down into new one-month low territory. Obviously, a near-record level of supply has been prioritized over short-term demand strength. As pricing momentum shifted southerly this week, the market became highly sensitized to even the slightest bearish guidance," said Jim Ritterbusch of Ritterbusch and Associates. "Hence, the quick and pronounced response to [Thursday's] storage report. Although the 78 Bcf injection was close to our expectations and average builds, the market appeared to read some bullish subsurface implications into the number such as some slowing in industrial offtake or a stronger-than-expected pace of production."
The coming week may determine if weather bulls have run out of bullets. Forecaster Commodity Weather Group (CWG) of Bethesda, MD, expects temperature anomalies of 3-5 degrees higher. In its six- to 10-day forecast CWG sees warmer temperatures from Nevada to New England and from Minnesota to Mississippi.
"While the details for [the] week will continue to be challenging, the model consensus still favors the idea of a warm-to-hot overall national pattern, but not as severe as this week's levels in the East and interior South," said Matt Rogers, president of CWG. "Areas like Texas and the interior West should see hotter week-on-week temperatures that will act as an offset somewhat, and a big battle is brewing in the 11-to 15-day [forecast] regarding a potential strong Midwest heat event. We expanded the stronger heat coverage [Friday], but confidence continues to be low. For now, the Midwest looks more favored than the East Coast for this 11-to 15-day event. The tropics have returned to a quieter situation."
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