May natural gas futures rose in active inventory report-driven trading Thursday. Government gas storage figures came in less than anticipated and prompted an immediate price advance.
Longer term, traders see a healthy injection season barring weather disruptions, and some suggest that more aggressive traders are poised to sell the market down. At the close May had advanced 7.1 cents to $4.212 and June was up 6.3 cents to $4.269. May crude oil gained $1.00 to $108.11/bbl.
Industry estimates were somewhat off the mark as the 28 Bcf build reported by the Energy Information Administration (EIA) came in well under what most were expecting. The 28 Bcf marks the first build of the traditional April-October injection season, but trying to forecast the figure at this time of year can get dicey as weather conditions are often quite variable and the exact timing when storage facilities switch from withdrawal to injection can be a huge unknown. Historical injection patterns bear this out. The five-year average build for this time of year is 27 Bcf, but a year ago a hefty 79 Bcf was injected.
"The numbers have been back and forth all calendar year. It's been tough trying to forecast the EIA weekly numbers," said Kyle Cooper, analyst with IAF Advisors in Houston.
Many analysts overshot the 28 Bcf injection to the high side. Cooper estimated 41 Bcf, and Bentek Energy predicted a 39 Bcf build. Citi Futures Perspective analyst Tim Evans was looking for a build of 44 Bcf.
"After two consecutive bearish misses, this smaller-than-expected 28 Bcf net injection may show that the supply/demand balance has not tipped as much in a bearish direction as had been anticipated," said Evans. "The report was particularly bullish compared with the 79 Bcf build a year ago and the year-on-year deficit was expanded to 137 Bcf as a result. Storage was 10 Bcf above the five-year average, with this comparison unchanged (at least with rounding) from a week ago."
Cooper indicated that the outlook for healthy injections was in place and said, "I don't think we will have the containment issue with storage facilities we had last year. That should take some of the pressure off the front end of the market, and I think we'll have a robust injection season since the injections will not be up against storage limitations."
Cooper offered the caveat that weather conditions can always be a factor, and "weather has been pretty bullish, and if weather started to not be so bullish, I think you could see quite a bit lower prices. Mother Nature has been bullish, and I don't know if it is going to let up anytime soon. With that in mind it's tough to get really, really bearish. Don't try to fool Mother Nature."
Summer refill could indeed be a challenge. In its most recent long-term outlook the National Weather Service for June, July and August forecasts above-normal temperatures to encompass the western third of the nation along with Texas, and the Gulf Coast states from Louisiana to Florida. The remainder of the country is forecast to be normal.
According to Cooper, there is now more storage capacity available, more than 4 Tcf, and the gas will be available to inject. "I think we'll get back to last year's levels, and those are very high. There won't be the issues of where to put gas in late October or early November."
Cooper also noted that the price curve can also act as incentive to store gas. Should summer-winter price differentials become wide enough, it would encourage more gas to be put in storage and hedged with sales of winter futures contracts. "Right now I think the curve is a little too flat, and I don't think we'll see the contangos we have seen in years past." At Thursday's close the June-November differential stood at 35.4 cents, not an especially appealing margin with which to profitably buy and store gas for winter delivery.
In addition to this week's miss, many analysts last week also missed the mark. Bentek overestimated the withdrawal when it forecast a pull of 58 Bcf and the actual figure came out at a 45 Bcf decline. Those missing 13 Bcf might have shown up this week and Bentek said there was some "upside risk" to its number. It said its "sample is strong on injections but shoulder season always brings higher volatility in the market as storage facilities and particularly non-salt domes switch from withdrawal to injection mode."
Bentek had predicted a build in the East Region of 14 Bcf, a gain of 1 Bcf in the West Region and an injection of 24 Bcf in the Producing Region. The actual figures were a build in the East of 7 Bcf, the West was flat, and the Producing Region added 21 Bcf.
Short-term traders often look at the release of the inventory figures as a prime trading opportunity rather than a chance to better ascertain underlying trends in supply and demand. The typical volatility connected with the release of the storage figure will often offer high-risk and high-return trading opportunities. Thursday's release of the data was little different, and one set of traders is looking for the chance to place well-positioned short trades.
Within the first five minutes of trading following the release of the EIA data May futures traded as high as $4.198. By 10:45 EDT May was at $4.220, up 7.9 cents from Wednesday's settlement.
"As long as the market stays above $4 the large traders will just keep it moving sideways, but if it jumps higher, they will sell," said a New York floor trader after Wednesday's close. "Prices could move to the mid $4.20s and still be a place you would want to sell it."
When asked where the large traders might bail if prices started a concerted move higher, he said, "Probably if it breaks over the $4.29 to $4.33 area, there may be a change of opinion. That may scare them out of a position, but at some point they will look to regroup and sell."
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