While the energy industry had been expecting a below-normal storage injection for last week, they weren’t expecting it to be as low as it turned out to be. The Energy Information Administration (EIA) reported Thursday morning that only 73 Bcf was put into underground natural gas storage for the week ended June 10.
As a result of the bullish injection, July natural gas futures went on yet another tear higher. Immediately following the 10:30 a.m. EDT report, the prompt month jumped 10 cents to trade at $7.60. As of 10:46 a.m., July natural gas notched $7.70, a new high for July during its prompt month stint. The contract ended up closing on the day at $7.613, up 17.2 cents from Wednesday.
IFR Energy Services’ Tim Evans said the impression seems to be that “while there are still a few lots of fund short exposure out there, lets see how much they’ll pay. There is an element here of simply exploiting short vulnerability and the lower than expected injection does add a little bit of uncertainty to the mix.”
Evans said he really thinks traders are ignoring the storage surplus and focusing on the petroleum market instead. On Thursday, July crude settled $1.01 higher at $56.58/bbl.
“I would say we are banking on ongoing strength in the petroleum complex as camouflage because fundamentally the only way the natural gas price looks cheap is if you compare it to heating oil on a BTU basis,” he told NGI. “The other way to look at it is to say we just had some heat, we just had a tropical storm and the long range forecasts are for more heat and more hurricanes. So, we better not be short.
“Looking at my spot continuation chart, we are coming up toward the $7.85 level notched by the May contract on April 4, 2005, which is the prompt month peak to date for this year,” Evans said. “That was an all-time record for that time of year. Every time we have been at or above that $7.85 mark in the past, it has been between October and February. For this time of year, the current price level is extraordinary as well.”
On the upside, Evans said that beyond the April 4th high of $7.85, the $8.00 mark offers some psychological resistance before reaching $8.10, and then $8.23.
Advest Inc.’s Jay Levine agreed that the EIA’s report came in on the low side of expectations. “While it was within the realm of expectations — that being 68-100 Bcf — on the surface it just adds fuel to the already ‘bullish’ fire.”
Due to the significant heat last week in a number of high natural gas demand regions in the U.S., the energy industry had been banking on a smaller-than-normal injection. The National Weather Service reported that for the week ended June 11, cooling degree days in New York, New Jersey, and Pennsylvania reached 69 or 50 above normal. Ohio, Illinois, Indiana, Michigan, and Wisconsin tallied a muggy 80 CDD or 53 higher than normal.
One school of thought suggests that even normal summer weather patterns will result in higher demand for natural gas-fired electrical generation because of the greater number of gas-fired combustion turbines available to generate electrical power. According to Andy Weissman, chairman of the investment firm Energy Ventures Group, normal weather should result in much higher generation demand than last year. He anticipates that prices will rally further if predictions of a hot summer are realized.
Others agree that Thursday’s storage report says a lot about how this summer might play out. “The low storage injection suggests that higher temperatures are going [to] reduce injections more than historically and thus the supply-demand balance could be quite tight this summer,” said Ron Denhardt, vice president of Natural Gas Services for Strategic Energy & Economic Research Inc. “This is only one observation, but the low storage injection level, along with a sharp increase in oil prices is very bullish for gas.”
Prior to the report, the industry consensus appeared to be centered around an 85 Bcf injection. Shooting even lower, but still not low enough, the ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 77 Bcf build.
When compared to historical EIA data, the 73 Bcf addition was significantly lower than both last year’s injection and the five-year average build, which were both 95 Bcf.
Working gas in storage now stands at 1,963 Bcf, according to EIA estimates. Stocks are 216 Bcf higher than the same time last year and 294 Bcf above the five-year average of 1,669 Bcf.
The East region contributed 49 Bcf to underground stores for the week, while the West and Producing regions each chipped in 12 Bcf.
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