August natural gas futures expired on a positive note Friday, gaining 16.7 cents to settle at $6.110 in active trading on the New York Mercantile Exchange. Traders cited short-covering as the dominant factor leading to the rise, but in the larger scope they noted that fundamental factors continued to favor the bears. Uninspired temperature and tropical forecasts could lead to a repeat of last year’s price collapse.
“Unless something changes pretty dramatically with temperatures or tropical storms, the natural gas market will head down to the levels experienced in the fall of 2006,” said Kyle Cooper, senior analyst with IAF Advisors in Houston. Cooper noted that in spite of a late summer heat wave last year, “there was still the big price collapse in September and October, and I think that is very possible this year unless we see something significant on the storm front. We will have more storage and ample supply despite Friday’s gross domestic product (GDP) numbers.” The Commerce Department Friday reported a stout 3.4% annual GDP growth rate for the second quarter of 2007. It was the highest gain since the first quarter of 2006.
After trading as high as $8.619 Aug. 1, 2006, natural gas futures began a rapid descent, reaching as low as $4.05 slightly less than three months later on Oct. 27.
Cooper cautioned that something could change and weather could suddenly get very hot. “You never know about tropical storms, and we are just getting into the [heart of the] tropical season, so it is way to early to call this season a bust.” He added that from a climatological standpoint every day the summer progresses “it becomes harder and harder to get the kind of heat across the country that resulted in the draws we had last year.”
A searing heat wave during the summer of 2006 resulted in low builds in natural gas inventories and an unusual summer draw. For the week ended July 21, 2006 additions to inventories tallied a mere 2 Bcf, and for the week ended July 28 the draw was15 Bcf. For the week ended Aug. 4, 7 Bcf was withdrawn.
Cooper noted that as the summer progresses and the angle of the sun declines, “it’s going to be real difficult to get Chicago to 100 degrees by the end of August. The ground in Texas and portions of the South is saturated and we could have extreme humidity, but it will be hard to get extreme heat.”
It seems the market is filled with contrarians, and Cooper did offer the caveat that “the market is very short, and some people are saying the market did make a technical double bottom at $5.75 and held on a spot basis so it’s ‘off to the races.’ I even had one fellow tell me that the turnaround in the [Japanese] yen was going to lead to higher natural gas prices.”
On a more serious note he did admit that a $1 rally in natural gas would not be surprising, but “I just expect it to come from lower levels.”
MDA EarthSat in its most recent six- to 10-day forecast calls for little change. It predicts above-normal temperatures being confined to the Midwest and Great Plains. The East Coast is expected to be seasonal.
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