September natural gas futures traded in a 10-cent range on Tuesday between $4.276 and $4.370 before closing the regular session at $4.297, down 1.2 cents from Monday's finish.
Tuesday decline brought the down-day streak to four, leaving traders and analysts alike a little befuddled. For some market watchers, the weak futures prices in the face of record heat and a declining year-on-five-year average storage surplus doesn't exactly add up. "We're seeing weak prices in the face of some pretty hefty gas demand for air-conditioning load," said Tom Saal, a broker with Hencorp Futures LC. "Now, some market watchers are saying that we have oodles of supply. If that is the case, why are the injection numbers so skinny? The algebra just doesn't add up."
Saal said the really interesting thing about "today's market" is the "steady state of backwardation," where the cash price for the most part has been trading at a premium to the spot contract. "Backwardation usually occurs in the withdrawal season during the winter," he told NGI. "You rarely see it during the injection season or summer like we are this year. Normally during the summer you see a forward carry market where the spot contract is trading at a premium to the cash market, reflecting the cost of storage. Those numbers historically have been in the 10- to 15-cent area on average. Now there is literally almost no forward carry premium at all. People normally equate backwardation with a tight supply-demand balance, which you normally have in the winter when there are some terrific draws on storage. Now it has been pretty hot this summer, but it should still warrant some forward carry."
Saal and his colleague Ed Kennedy will host a two-day hedging seminar in Houston Nov. 11-12 where they will teach today's techniques for identifying price trends and market timing, including the use of fundamental and technical market indicators. Saal and Kennedy will also provide insight into where the market's going and why.
When markets don't behave like they have in the past, Saal said, it is important to use all the trading tools at your disposal. "What I always look for are aberrations and extremes. We definitely have an aberration with this backwardation, but pricewise we are not at an extreme. We saw these prices in May," Saal said. "If there is a lot of hedging being done by commercial hedgers, then you have to be prepared for when those hedgers buy them back, because that would be a bullish signal. The commodity market is a zero-sum game, so it is not a situation where they put the hedges on and the market ignores it. For every buyer there is a seller, and I think that is what we've seen over the last couple of days. I think we've seen selling by commercial interests because the country's storage level is approaching 3 Tcf, which is a lot of gas. I think people are getting out."
In the near term, Saal said the sellers will likely continue to put pressure on the market. "However, we have to be close to a bottom here," he added.
As for temperatures, the heat remains on for much of the country. Forecaster MDA EarthSat in its six- to 10-day outlook predicts below-normal temperatures from Montana to Colorado to northwest Minnesota, but above-normal temperatures across a broad arc extending from New England to the Southeast, Texas, the desert Southwest and California.
According to its most recent model run, "The biggest changes were in the hotter direction over the West during the first half of the period. A stronger ridge and offshore flow is in better agreement today across the West Coast, pushing temps towards 100 F in Burbank, CA, and into the mid to upper 90s in Sacramento," the forecasting firm said. The desert Southwest is also expected to be warm. EarthSat also added that a number of meteorological patterns were in alignment supporting the forecast. "The South and East should remain above normal, though extremes should be limited."
On the tropics watch, the National Hurricane Center is currently keeping tabs on three separate systems. One low-pressure system was over the southeastern Gulf of Mexico on Tuesday, and while it was showing signs of gradually organizing, the NHC noted that "the environment is not ideal for significant development." That said, the forecasting agency gave the system a 70% chance of becoming a tropical cyclone during the next 48 hours.
The two other systems on the radar were much further off, with one located 850 miles east-northeast of the Leeward Islands and the other about 700 miles east of the southern Windward Islands. The systems had 60% and 10% chances, respectively, to become tropical cyclones over the next 48 hours, according to NHC.
Some of the top traders contend that the funds are fearless in their pursuit of the short side of the market. "The funds appear to have started selling in this market [last] Wednesday or so, and they have knocked prices back dramatically," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. Beutel sees the below-par storage injections of the last few weeks as supportive, but "the production side remains heavy and aggressive, with plenty of output coming from shale gas wells. With increasing industrial demand, this market is more susceptible to shifts in temperatures, and funds seem to see every opening as an opportunity to push quotes lower."
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