The September natural gas futures contract went off the board with a bang on Friday as no change in the market's weak fundamentals and a scramble to square books ahead of expiration resulted in a 16.6-cent, or 4.4%, decline to $3.651, which is 46.6 cents, or 11.3%, lower than the previous week's close. Taking over the front-month contract title, October futures closed Friday at $3.705, down 13.8 cents, or 3.6%, from Thursday's close and 43.2 cents, or 10.4%, lower than the previous week's finish.
September's $3.610 low on the day marked an 11-month low for a prompt-month contract. A front-month contract has not traded lower since Sept. 23, 2009.
"The market has been plunging pretty sharply over the entire month of August as it rebalances toward the fall's slack demand shoulder season," said Gene McGillian, an analyst with Tradition Energy. "The overhanging fundamentals in the market really put a big kibosh on the second attempt the market made this summer to make it above $5. I think on Friday we saw some expiration liquidations come in, which is why the market dropped to a new 11-month low."
McGillian told NGI that while he believes the market has been hunting for a bottom for this year's slide, he doesn't believe it will be found just yet. "I expect to see some further selling at this point, but I'd be surprised if we didn't hold above the $3 level considering the fact that the summer's heat has really impacted the injections over the last two months," he said.
Taking a look at the weather in the tropics, which has recently ramped up activity, McGillian was quick to note that Gulf of Mexico (GOM) production is not what it once was to the U.S. gas market. "The Gulf's gas production is down to just above 10% of the country's supply as shale gas is soaring," he said. "The Atlantic hurricane season doesn't have the same weight on the gas market that it did as recently as a few years ago. On top of that, all of the current activity is pointing up the eastern seaboard, so the Gulf has been spared to date. I think this is why the market has dropped almost $1.50 over the last four weeks."
It's probably too early to thoroughly discount what has been a rather quiet hurricane season, and although neither Danielle, Earl or a third system appear headed for the GOM, Joe Bastardi of AccuWeather.com said, "Since a lot is being made about how 'quiet' it has been, I will break the silence and say that by Aug 31, [as many as] three hurricanes should be going and two of them may be major."
Danielle reached major hurricane status on Friday in being upgraded to Category 4. However, its path, along with that of Tropical Storm Earl, still appeared to be on a more northerly route that would spare U.S. interests, according to the forecasting firm.
Bastardi added that "Earl is going to be a major storm and give folks a lot of anxious moments. It will be tricky as the storm will be quite a bit farther west than Danielle later [in the week] when the pattern breaks down and it starts its recurve. The GFS [Government Forecasting System] has simply corrected to what it was missing before, and while I don't think it can quite get back to the East Coast yet, it will be tricky. All it will take is it moving faster through the shadow of the trough that is catching Danielle and that could get it as far back as 75W when it turns north. Right now I think the best idea is midway between 70 and 75W."
Bastardi is looking for the third system, currently a tropical wave, to become Fiona and develop into a storm in 48 hours.
There is still time for a hurricane to impact the Gulf, but "the market's inability to respond to a summer-long dynamic of a contraction in the supply surplus has resulted primarily from a hurricane season that has thus far defied most forecasts for a major upswing in activity," observed Jim Ritterbusch of Ritterbusch and Associates. "Consequently, the market continues to drain weather-related risk premium on almost a daily basis. Although at least three major tropical storms are progressing across the Atlantic, the track of these systems has been northwesterly and far removed from the GOM region."
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