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Hefty Storage Injection Seen, Arlene Heads for Mexico; August Eases

August futures declined Wednesday as traders saw little impact from a Gulf of Mexico storm and expected Thursday's government inventory report to show increases above historical averages. At the close August had fallen 3.9 cents to $4.315 and September slipped 3.9 cents as well to $4.334. August crude oil vaulted higher adding $1.88 to $94.77/bbl.

Traders using quantitative market models still see the market in a downtrend. "The August contract is right up against a [down]trend line at $4.38 to $4.39, and I would be selling rallies in this market," said an Oklahoma City broker.

He acknowledged that "it has been a very difficult market [in which] to make money on either the short side or the long side. Forever it seems that it has gone nowhere but sideways. If someone put a gun to my head and said 'trade the natural gas,' I would be selling rallies up against the trend line," he said.

The broker commented on the current storm season, saying that "the storms never seem to last. They either fade out or miss landfall."

One factor that is not apt to fade out quickly is the importance of weekly government storage figures. At present working gas inventories are 258 Bcf below last year and 64 Bcf shy of the five-year average. Estimates of Thursday's injection suggest that the supply deficit should close modestly since last year 63 Bcf was injected and the five-year average stands at 77 Bcf, and most estimates are in the 80s Bcf range. Citi Futures Perspective analyst Tim Evans expects an injection of 83 Bcf, and Houston-based IAF Advisors is looking for a build of 81 Bcf. Industry consultant Bentek Energy, utilizing its North American flow model and other techniques, predicts an increase of 78 Bcf.

Bentek says there is the most risk to the upside for the report, which covers the week ended June 24. "The large build reported by EIA last week [98 Bcf] could weigh in if storage facilities have started to behave differently in response to higher demand. Temperatures are only about three degrees warmer week-on-week, causing the decrease in injections from the previous storage week," the firm said in a report. Bentek said the East is likely to inject 54 Bcf, the Producing Region 11 Bcf, and the West Region 13 Bcf.

Prices had been steady overnight as what was a loose aggregate of storms and thundershowers in the southern Gulf of Mexico morphed into a tropical storm. Unless the storm makes a radical change of direction, no impact is expected on Gulf infrastructure, but at 5 p.m. EDT the National Hurricane Center reported that Tropical Storm Arlene was about 85 miles east of Tuxpan, Mexico and was moving to the west at 7 mph. Arlene's winds were up to 50 mph and it was expected to make landfall on the Mexican coast Thursday. Commodity Weather Group of Bethesda, MD, characterized the storm as "somewhat disorganized."

Analysts suggest that outside of tropical disturbances, near-term temperatures are likely to maintain prices. "Beyond weather updates, the next significant fundamental news for natural gas will be Thursday's DOE storage report. Our forecast is for 83 Bcf net injections, a level that would look bearish compared to both the 63 Bcf build from last year and the 77 Bcf five-year average for the period," said Tim Evans of Citi Futures Perspective in a post-close note to clients. "That said, we've seen a few other projections in the 75-80 Bcf range and so a more neutral outcome is certainly possible. As for the forward outlook, it looks as though there will be enough heat in the week ending July 8 to produce a below-average storage injection, and that prospect could help to keep a floor under prices in the near term."

Commodity Weather Group in the six- to 10-day forecast predicts above-average temperatures from Texas and Oklahoma to Virginia and Maryland. Higher-than-normal readings are also expected in California, the Great Basin and the Northern Rockies.

"While not severe, the forecast [Wednesday] continues above-normal temperatures in the Midwest and East a bit longer into Tuesday-Wednesday of next week before the next cool push arrives around Thursday-Friday," said Matt Rogers, president of the firm. "The net result is an uptick in cooling demand for the July 8 week. Otherwise, the 11- [to] 15-day continues to focus the best heat toward the South and interior West (monsoon influences still limit high-temperature heat in the Southwest)."

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