October futures limped to a weak expiration Wednesday on the eve of a government report expected to show a storage increase well above historical norms. At the close October had retreated 6.8 cents to $3.759 and November had given up 7.6 cents to $3.799. November crude oil tumbled $3.24 to $81.21/bbl.
Students of the price curve observed trading last week that may augur still lower prices. “Last week during the day the back of the curve was severely depressed relative to the front of the curve, and it looked to be partial fund liquidation as a result of what was going on in the equities market. We were approaching the end of the quarter, but we also heard through the ‘grapevine’ that there might have been some producer selling,” said a Chicago banker.
“There were some opportunities for some long-term buying last week, and I think very few took advantage of that who should have. It could indicate further weakness to come.”
The banker said it was fast approaching the “show me” time of year. “Are we going to have a cool start to the winter or not? Although in October it’s a little early, but when we get into November we’ll be watching those temperatures very closely.”
Perhaps it might be a good idea to start watching now. AccuWeather.com reported that “as much colder air rolls into the East and South this weekend, the first snow showers of the season will visit some of the high ground in the Appalachians. The warm, humid conditions and tropical downpours present along much of the Atlantic Seaboard at midweek will be replaced by colder air and chilly showers.”
AccuWeather.com Chief Meteorologist Elliot Abrams said, “Where that air becomes cold enough, over the highest elevations, wet snow can mix in with the rain showers or even completely change over to snow for brief episodes.”
The banker added that “for me it’s always been a question of what kind of temperatures do we have through Thanksgiving. When we come back from that long weekend we should have a pretty good sense as to how the marginal molecule will be behaving, and if it looks like its going to be cold and people will be drawing down inventory, that should keep a little bit of a bid under the market. If we don’t have cool temperatures when we come back and it’s forecast to be 50 or 60 degrees in Chicago, you have to believe that one of two things are happening, there’s no demand and at some point even in December some people will start dumping storage onto the market.”
“I think there’s a chance [currently] we could drop 50 cents, but I don’t think we stay down there for any length of time. When we see this end-of-season weakness because there is nothing going on, it tends to be concentrated in the front of the curve. Spreads will start to widen out, and if calendar 2014 normally drops 10 cents on a 50-cent move in the front, I think it would drop only 4-5 cents.”
Weakness in the front of the curve is just what bears would like to see once the Energy Information Administration (EIA) releases inventory data on Thursday. Expectations are running high that the EIA will report a triple-digit build.
For the week ended Sept. 23 analysts at Citi Futures Perspective in New York calculate a gain of 93 Bcf and industry consultant Bentek Energy, utilizing its North American flow model, predicts an increase of 104 Bcf. A Reuters survey of 28 traders and analysts revealed an average 100 Bcf with a range of 91 Bcf to 110 Bcf. The report will be released at 10:30 a.m. EDT.
Last week 89 Bcf was injected, slightly below expectations in the low 90s Bcf range, but October futures still retreated 2.5 cents to $3.705.
Tuesday’s quiet options expiration had traders correctly anticipating an equally uneventful expiration of October futures on Wednesday and looking ahead to Thursday’s storage report. “Thursday’s DOE [Department of Energy] storage report is also coming into sharper focus, with some of the estimates we’ve seen so far coming in above 100 Bcf, even more bearish than our forecast for a 93 Bcf refill,” said Tim Evans, analyst with Citi Futures Perspective in New York. “The actual data will also compare with a 77 Bcf gain a year ago and a 72 Bcf five-year average rise, eroding both the 129 Bcf year-on-year deficit and the smaller 35 Bcf year-on-five-year average storage deficit of Sept. 16.”
Not only does Evans calculate a plump 93 Bcf build for Thursday’s report, but the following week he estimates another stout build report of 91 Bcf, also well ahead of prior-year and five-year averages. “Placed into the most bearish context, we note that the deficit had been as much as 80 Bcf back on Aug. 5 and that the swing to a surplus could well extend beyond Oct. 14, a bearish trend that puts increasing downward pressure on prices. If we step back and look at the larger picture, however, we see that storage was a similar 68 Bcf above the five-year average back on March 25, and so there has been little net change over the past six months, a neutral sideways trend. Storage remains ‘near average.'”
Somewhat contrary to the Chicago banker, an eventual rise is clearly within Evan’s crystal ball. “With the more recent trend still bearish, we continue to see some risk that prices do flush to new lows, much as they did a year ago when the $3.212 low trade in nearby futures didn’t occur until late October when the…injection season was nearly over. This still didn’t preclude nearby futures trading as high as $4.637 in December or to an eventual $4.879 in January. We continue to see comparable upside potential this year, weather permitting,” he said in a note to clients.
Any price decline is not on the radar of market technicians. “Over the first three weeks of August natgas flirted several times with sentiment at 18% bulls. There was no ensuing short-covering rally — only congestion during which sentiment crawled back up to 27% bulls by mid-September,” said Brian LaRose, market analyst at United-ICAP. “By [last] Friday Market Vane sentiment had dropped back down to only 18% bulls. The lesson of the last three years is that natgas does not sell off from only 18% bulls.”
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