The physical market bounded sharply higher Tuesday, prompted by a strong screen and low inventories at some points. Nearly all points recorded double-digit gains. At the close of futures trading, October had added 18.0 cents to $2.992 and November had climbed 16.3 cents to $3.104. October crude oil gained 63 cents to $97.17/bbl.
California traders were on the receiving end of a double whammy as not only were screen prices soaring, but PG&E declared a low inventory OFO for Wednesday. Tuesday's pipeline inventory was 3,969 MMcf/d, less than the 4,000 MMcf/d pipeline minimum.
Outside of the low OFO and an exuberant futures markets, California traders saw little on the fundamentals front to justify the huge moves in next-day gas prices. "We might have some heat in the forecast but nothing extreme. Temperatures may be 2 to 3 degrees above normal. Volume at the [PG&E] citygate was huge," said a California trader.
Forecaster Wunderground.com predicted that Tuesday's high in San Francisco of 72 would hold for Wednesday before slipping to 68 on Thursday and 66 on Friday. The normal high in San Francisco at this time of year is 74.
The National Weather Service in San Francisco said "Little change in weather conditions is expected for...[Wednesday] across the district with near-normal temperatures along the coast and locally inland...and warm temperatures well inland. We will see a gradual warming trend as the week progresses with high pressure aloft building over the West Coast."
Next-day gas into Malin vaulted 24 cents to $2.82, and deliveries to the PG&E Citygate gained 21 cents to $3.31. At SoCal Citygate Wednesday gas was quoted 17 cents higher at $3.23, and at the SoCal Border gas for Wednesday came in at $3.13, up 19 cents. On El Paso S Mainline next-day gas surged 30 cents to $3.27.
Midwest buyers are girding for some warmth during the month. "We are seeing a few hot days here and there," said a Nebraska buyer. The buyer said much of his company's purchases were at index so the day's price surge didn't have much of an impact.
Gas into Northern Natural at Ventura jumped 18 cents to an average of $2.88, and deliveries to Chicago Citygates were 20 cents higher at $2.96. On Alliance parcels for Wednesday were 18 cents higher at $2.98, and deliveries to Consumers came in 20 cents higher at $3.04. Gas on Michcon went for 19 cents more at $3.03.
Gas in the Midcontinent enjoyed the same exuberant environment as California and the Midwest. Wednesday deliveries on ANR SW rose 20 cents to average $2.73, and gas into the NGPL Midcontinent Pool added 18 cents to $2.73. Wednesday volumes on the NGPL Amarillo Mainline tacked on 19 cents to $2.83. Oklahoma Gas Transmission Wednesday deliveries rose 20 cents to $2.73, and gas on Panhandle Eastern gained 21 cents to $2.73.
The day's surge was widely attributed to an anticipated low injection to be reported in Thursday's Energy Information Administration (EIA) storage report, but that had been expected ever since Hurricane Isaac caused Gulf shut ins of over 3 Bcf/d.
"The market was underpriced," said Tom Saal, vice president of INTL FC Stone in Miami. He added that a lean storage build was a credible explanation for the day's advance. Saal, a longtime student of Market Profile, sees the market's next objective, known in Market Profile terminology as a value area, at $3.141 to $3.197, but "we are still in a big fat range," he said.
Data from the Commodity Futures Trading Commission showed a recent large shift by directional traders to the short side of the market, thus Tuesday's rise had a footprint of nervous shorts exiting the market. The Commitments of Traders Report for the week ended Sept. 4 showed holders of long futures and options by managed money at IntercontinentalExchange (2,500 MMBtu per contract) reduced long holdings by 11,316 to 482,202 and increased short futures and options by 23,431 to 212,654. At the New York Mercantile Exchange (10,000 MMBtu per contract) long futures and options increased by 6,750 to 212,256, and short positions rose by 8,783 to 233,262.
When adjusted for contract size, long futures and options at both exchanges grew by 3,921, and short holdings rose 14,641. For the five trading days ended Sept. 4 October futures rose 22.1 cents to $2.854.
Much of Monday's gains took place during the last 10 minutes or so of trading, and indications circulated that a major player had revised its estimate downward of Thursday's gas storage injection figure. The theme of a smaller than normal inventory addition carried through to Tuesday's trading as well.
Others saw a technical correction to an oversold market. "[N]atural gas futures moved sharply higher after making a new low on Monday in what looked more like a technical price reversal than any clear shift in the underlying fundamentals," said Tim Evans of Citi Futures Perspective in closing comments Monday to clients. "If anything, production from the Gulf of Mexico recovered further over the weekend from Hurricane Isaac with just 275 MMcf/d off line, while the temperature forecast for the next two weeks looks cooler than both last year and the five year average."
Jim Ritterbusch of Ritterbusch and Associates said Tuesday that "Reasons behind [Monday's] price spike remain nebulous. However, we viewed the advance as related to some speculative profit-taking at the lower price levels out of short positions.
"In any event, Isaac has renewed the dynamic of a sharp contraction in the supply surplus following a brief one-week respite last month. The reduction in the supply overhang will be particularly pronounced against a year ago as the storage surplus will likely be cut by a whopping 50 Bcf with Thursday's number." Ritterbusch said he is looking for a 28 Bcf build.
"Given the magnitude of this slowdown in seasonal storage accumulation, we feel that anticipation of the number was an important driver behind [Monday's] price advance. But at the same time, the 5% rally should also be viewed as a discounting process in which a bullish surprise in the data may exert only limited price impact," Ritterbusch said in a morning note to clients.
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