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Analysts See Natural Gas Assets in Play; June Rises

May 19, 2011
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June natural gas futures rose Wednesday as analysts observed that the market was holding at current prices reasonably well in spite of predictions of abundant supply. At the closing bell June had gained 1.6 cents to $4.198 and July was up 2 cents to $4.266. June crude oil soared $3.19 to $100.10/bbl.

Analysts see the market holding $4. "The market is acting really well. We are getting into the highest injection periods of the year between now and July 4, and how much gas is injected during that time will determine if we can stay north of $4," said Bill O'Grady, vice president at Confluence Asset Management in St. Louis. "I think we will, and if the market fell to $3.50, I would think about buying it."

Thursday's inventory report will give some idea of just how much gas is likely to be stored by July 4. Last year 78 Bcf was injected and the five-year average stands at 91 Bcf. Ritterbusch and Associates is looking for a gain of 91 Bcf and Houston-based IAF Advisors expects a build of 88 Bcf. Industry consultant Bentek Energy forecast an injection of 91 Bcf as well.

In its weekly report Bentek said it thought most of the risk in its estimate was for higher injections. "The East and West regions reported strong injections, but the Producing sample was flat week-on-week, pushing the U.S. injection down. A similar gain to the East and West regions in the Producing Region would have resulted in the first three-digit build." Bentek sees an injection of 57 Bcf in the East Region, 11 Bcf in the West Region and 23 Bcf in the Producing Region.

Natural gas bulls may want to rethink what is going to cause a summer price rally. Hot summer weather and hurricanes may not be the substantive price drivers during the summer they used to be. O'Grady observed that "less and less supply comes from The Gulf of Mexico, and hurricanes matter, but it's not like it was 10 years ago. It's probably going to get hot at some point but it's not hot now." He noted that the cool wet spring may keep summer temperatures lowered, and "my meteorological friends say it takes a lot of energy to dry soil out."

"If I were trading energy markets, I probably wouldn't be paying much attention to natural gas. There is not enough activity compared to oil. There is some big money buying up natural gas assets, though, and I think they [Chinese] are buying shale assets because they want to learn how to do it," said O'Grady.

During Tuesday's trading the market received two unfavorable economic reports. The Commerce Department said April housing starts were less than expected, and the Federal Reserve reported lackluster industrial production and capacity utilization levels. At 10:30 a.m. EDT traders got to see if that weakness impacted energy usage.

Apparently not. The Energy Information Administration was expected to show for the week ended May 13 that crude oil inventories rose by 1.7 million bbl and gasoline stocks grew by 950,000 bbl, according to a Bloomberg survey of 15 analysts. Any increase greater than expectations could signal weaker energy demand and a softer economy.

On Tuesday the industry-funded American Petroleum Institute (API) reported an increase of 2.67 million bbl. The difference in the two figures lies in the fact that the API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

Bulls were pleasantly surprised. Crude oil inventories were flat and gasoline stocks increased a miserly 100,000 bbl.

Analysts saw the market's reaction to Tuesday's economic news as somewhat curious. "Natural gas prices lost almost 14 cents/MMBtu yesterday [Tuesday] as the bears reacted to the latest industrial production report. This market has been very selective in reacting to economic news of any sort, and it has not really received much of a leg up from any of them, but yesterday's figures seem to have touched a nerve," said Peter Beutel of Connecticut-based Cameron Hanover in a morning report to clients. "The feeling was that lower or static output would translate into a lower baseload of industrial natural gas demand. It is almost a throwback, quite honestly, because it has been a long time since industrial baseload has been much of a consideration here. Nonetheless, that was the story, and it makes some sense.

"Technically, we still see reasons to be optimistic, but without any help, prices could have trouble advancing."

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