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Storage Stats, Weak Commodities Tug June to Double-Digit Loss

June natural gas futures fell hard Thursday as a double whammy of a moderately negative inventory report combined with a broad market downdraft in equities and other commodity markets to pummel prices. At the close June had fallen 31.6 cents to $4.261 and July was similarly lower by 31.3 cents to $4.331.

June crude oil spiraled lower by a whopping $9.44 to $99.80/bbl. May gold fell $34.00 (2.2%) to $1,480.90/oz and May silver tumbled $3.152 (8.0%) to $36.231/oz. The Dow Jones Industrial Average dropped 139 points to 12,584.

"We had a little bit of a bearish number that came out, 72 Bcf, and traders were looking for a 62 Bcf to 68 Bcf build. After that we were down about 18 cents, but it's just the bearishness in the markets [driving natural gas so low]," said a New York floor trader. It was his conclusion that even if the natural gas inventory number had come out as expected, June futures would have been extremely unlikely to have escaped Thursday's overall selling unscathed.

"Even though natural gas is unrelated to other commodities, [natural gas is falling] just in sympathy to the big moves we are seeing in other markets. Natural gas is down 31 cents, but crude oil fell over $9."

As far as how far natural gas might fall, he said, "You've got the $4.25 [support] level underneath, but if we get a rebound in crude and products, I think we will rebound a little bit just [in gas] on sympathy."

Technical traders see natural gas prices as having a way to go lower before falling out of the broad trading range in effect for the last several months; "$3.56 to 3.58 is the lower end of the fuzz ball congestion model," said Walter Zimmermann of United-ICAP. "If prices fall below that, we are going lower, but it's way to early to say if it can break that low. Basically, everyone was bearish natural gas to begin with, so you don't have the huge speculative long position that is plaguing equities and other commodities.

"Natural gas is under pressure but it's only a faint shadow of the intense panic long liquidation gripping the markets that have been plagued with wildly bullish excess sentiment extremes. "That's the good news. Even at $3.58 producers can still make money," Zimmermann said.

Market bears were out in force Thursday, but their fundamental argument is that abundant production from newly hatched shale wells along with conventional output is likely to provide ample gas to fill underground storage in preparation for the winter withdrawal season.

For the moment, injections are running about normal. The five-year average inventory for this time of year is 1,774 Bcf, and with Thursday's build report 1,757 Bcf is now in storage, just 17 Bcf short with a long injection season ahead.

Prior to the report's release, the market was looking for a leaner build. A Reuters poll of 25 analysts revealed an average 68 Bcf with a range of 55 Bcf to 76 Bcf. Citi Futures Perspective analyst Tim Evans forecasted a build of 67 Bcf, and industry consultant Bentek Energy, utilizing its North American flow model, predicted an increase of 70 Bcf. Last year 83 Bcf was injected, and the five-year average stands at 78 Bcf.

Bentek was right on track when it hinted in its weekly report that its estimate of a 70 Bcf injection had a chance of being lower than the government's figure. The company said its "projection of a 70 Bcf injection is believed to have most of the risk to the high side for Thursday's EIA report." It said there were strong injections in the East Region as well as the Midcontinent. Bentek also said there was the possibility of a "true-up" from the previous week when its projection was higher than EIA's number.

Even with plenty of supply in place, analysts were expecting little room for prices to move lower. "We still believe that natural gas prices have turned an important corner and that they are now headed higher," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consultant, in a recent note to clients. "We could see selling from the recent highs, but any return toward $4.45 should be met with new buying interest. At the same time, though, supplies will remain ample, with the latest numbers showing continental gas output in the US 3.3% higher than the year-ago level."

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