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Bearish Sentiment Pervasive; October Called A Penny Lower

October natural gas is seen opening a penny lower Friday morning at $3.81 as traders cite the ongoing dynamic of storage deficit contraction and little in the way of supportive weather on the horizon. Overnight oil markets rose.

Analysts see further price deterioration ahead as weather forecasts prove unsupportive and the back half of the hurricane season should see some storm premium dissipate. "The deficit against five-year averages has shrunk to roughly 14%, or 463 Bcf. With similarly sized large supply builds likely ahead during the next couple of months, [Thursday's] report reinforced our expectations for a peak supply north of the 3.6 Tcf level," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients. [Thursday's] sharp selloff also provided some indication that this week's price spike on Monday-Tuesday was overcooked and destined for evaporation.

"November futures that dropped down to within about 5 cents of last Friday's close appear destined for fresh lows to below the $3.76 level likely by Monday. Meanwhile, we see nothing particularly bullish about the short term one- to two-week temperature outlooks, and we also see a need for some storm premium evaporation now that the statistical peak of the hurricane season has passed. In sum, we are maintaining a bearish trading posture in quest of fresh lows and a drop to about the $3.65 region where we may begin to consider the long side of the winter contracts."

In its September Short Term Energy Outlook, the Energy Information Administration estimated storage at "3,477 Bcf at the end of October, 339 Bcf lower than at the same time last year."

Industry consultant Genscape said the 92 Bcf build Thursday "saps the strength out of the winter contract [and] also marks the 16th week this summer that injections have set a five-year high. The build brings working gas in storage to 2,801 Bcf. This closes the deficit to last year's same-date inventory to 452 Bcf, and brings current inventories to within 464 Bcf of the five-year average.

"Thursday's bearish announcement caused the 2014-2015 winter strip to fall to $3.97. That marked a $0.13 drop from Wednesday, the largest day-over-day decline of the contract since mid-July. Nonetheless, the year-on-year deficit continues to prop up prompt winter prices. Nonetheless, the persistent inventory gap to last year and normal levels has made trading of prompt winter this September much stronger than last September. Month-to-date, the prompt winter contract has traded at an average $4.02. Last September, prompt winter trading averaged $3.85."

There may not be a great need for near-term gas for power generation across the expansive MISO (Midwest Independent System Operator) grid going into the weekend. Forecaster WSI Corp calls for load killing rain and cool temperatures. "A secondary disturbance is expected to bring a swath of light rain across portion of the Midwest and Great Lakes during the next couple of days. A reinforcing area of cool and dry high pressure should settle in behind this system as the weekend progresses. Yet another quick moving cold front may trigger a few showers late Sunday into Monday, which will bring more cool air into the power pool early next week. Period rainfall amounts may only range 0.1-0.25 inches."

Wind generation looks to be variable. "A northerly breeze will support light wind generation today into early Saturday with output around 1 GW. A southerly flow ahead of a cold front may lead to a sharp spike in generation during Saturday night into early Sunday. Output may briefly peak over 4-5 GW. Wind generation should subside and become light during Sunday into early next week," WSI said.

In overnight Globex trading, October crude oil rose 15 cents to $92.98/bbl and October RBOB gasoline gained a half cent to $2.5320/gal.

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