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Natgas Mostly Weathers Oil Selling Storm; June Slides

June natural gas prices worked lower amid a frenzy of selling in other petroleum markets. Natural gas traders see a pervasive interest by funds and managed accounts in pursuing the short side of the market, but they caution that any surprises could send prices sharply higher.

At the close June had fallen 6.5 cents to $4.181 and July skidded 6.2 cents to $4.241. June crude oil tumbled $5.67 to $98.21/bbl and June RBOB gasoline futures fell a whopping 25.69 cents to $3.1228/gal. The Dow Jones Industrial Average fell 130 points to 12,630.

Natural gas futures were relatively tranquil compared to the barrage of selling in other petroleum markets. The selling came as the Energy Information Administration in its weekly petroleum inventory report said builds were greater than expected. For the week ended May 6, crude oil stocks rose by 3.8 million bbl, but the market was looking for an increase of just 1.2 million bbl. Gasoline stocks grew by 1.3 million bbl, but a draw of 700,000 bbl was expected. In order to accommodate the selling, Nymex had to increase the maximum daily limits for RBOB gasoline as its normal 25-cent maximum was reached. Trading was halted for five minutes as the limits for crude oil were increased to $20/bbl, and heating oil and gasoline to 50 cents/gal.

"[Natural gas] prices rose to $4.21 and funds and black box traders used that as an opportunity to sell," said Eric Bentley, CEO of VKNG Energy LLC in New York. He said well funded directional traders were looking for a move down to $4 but added that many funds were holding short positions and "were vulnerable to something strange."

"I think you will see the market well bid in the $4.00 to $4.05 range," Bentley said.

At first glance it would seem that Thursday's EIA natural gas inventory report would offer little help to those pursuing the short side of the market. Expectations are for a build in the low 70s Bcf area, well shy of historical averages. Last year 93 Bcf was injected and the five-year average is 90 Bcf.

Houston-based IAF Advisors forecasts a build of 73 Bcf, and Ritterbusch and Associates expects an increase of 76 Bcf. Industry consultant Bentek Energy is also looking for inventories to increase by 73 Bcf.

In a report Bentek noted that most of the risk to its prediction was to the upside. "The East [Region] pushed the total injection lower as most facilities in the region reported lower injections week-on-week. Dominion leads the drop with a 2.0 Bcf decrease in inventories or 22%."

Bentek sees less gas now but more later. "Since the injection season started this April, less gas has been going into storage facilities despite all the production growth. The West [Region] is showing the lower injection rates since 2000 as additional gas is being sent to the Midcontinent where demand remained strong this April due to colder-than-normal temperatures. Overall injection rates are lower across all regions but they are expected to ramp up in the next month as inventories are projected to reach a new record high by the end of the season."

Analysts are circumspect about the likelihood of any weather-driven market advance. "Some meteorologists were talking about warmer-than-normal temperatures in the Southeast, and there is expected to be good support for a number of more southerly pipelines," said Peter Beutel, president of Connecticut-based energy consultant Cameron Hanover. "Northern temperatures have just hit their spring stride, with perfectly temperate days and cool nights and mornings. It is, however, not a recipe for strength."

In order for the market to advance, "Traders are going to need to build a foundation on southern demand, technical buying on the charts, nuclear refueling that can bring gas-fired units into service and [storage] injection interest to keep quotes from sliding further. It has been done before and can be done again, but it always seems like a cobbled-together and temporary solution."

Technical analysts are not impressed by the prospects for higher prices either. "We are seeing some divergence from an oversold condition on the intraday RSI [Relative Strength Index] (14 bar period), but at this time it looks more like a relief rally than any sort of bottoming action," said Brian LaRose, an analyst with United-ICAP. "[We] see the ratio retracements of the $4.729-4.149 decline as our candidates for resistance should natgas continue to advance from here. For now we will be viewing any rally as corrective in nature," he said in a morning note to clients.

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