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Bulls Remain in Charge as Futures Pushed Near $11 Again
Despite trading within a slim 10-cent range, May natural gas futures on Friday knocked on the $11 door for a second consecutive session, only to be rebuffed once again. The prompt-month contract traded between $10.875 and $10.970 before closing out the day at $10.963, up 17.3 cents from Thursday and 37.6 cents higher than the previous week’s finish.
The bull move has been on quite a run during the month of April. Over the last three weeks, the May contract has gained an astounding $1.641. While traders see the current price territory as being in the upper end of the expected range, market participants are well aware of the potential for even higher values.
“While the trading range was small on Friday, it was certainly a strong close to a fairly powerful week,” said a Washington, DC-based broker. “We had a big day on April 18 and came out after the weekend and had a good Monday. Sold off a little bit on Tuesday, which was followed by a good rally on Wednesday and marginal gains on Thursday. Then, rather than sell it on a Friday, they really bought it on a Friday. It definitely looks bullish to me still.”
The current higher price level is not sitting well with some market experts who don’t see enough supportive factors to justify the lofty price territory. However, the broker said there are some signs that prices belong here. “These elevated prices make sense to me on a technical basis, but I think we have now moved up into the top of this channel. A little sell-off wouldn’t be a surprise to me, maybe down into the $10.60s or $10.70s. We are not talking about a $1 sell-off, we expect it to be more of a 20- to 50-cent oscillation down to the bottom of this upward trading channel,” he said. “If this is the fifth and final wave of the advance, then it will eventually break. In terms of these higher prices making sense from a fundamental standpoint, the market is starting to look more and more at the fact that this commodity is going global and is going to trade against oil and oil parity,” so there might be some revaluing going on. “The market is starting to vote with its pocketbook. Either natural gas prices are going to have to rise or crude prices are going to have to fall. Right now, I think it seems to be saying maybe natural gas prices need to rise.”
He added that the Independence Hub’s prolonged outage in the Gulf of Mexico could really start impacting futures prices. “It is obviously a major supply point and 900 MMcf/d off-line could really affect calculations,” he said. “If it is going to go on for a couple more weeks, then you have to wonder how it is going to affect storage injections throughout the summer. If people are making moves based on their weather input and their storage assumption, the outage at Independence would likely make them have to ratchet up their values.”
If natural gas futures were to make yet another break to the upside, the broker said $11.600 to $11.700 could be next. “These things sometimes have a final push. After chopping around and breaking out, there is sometimes one final spasm either up or down and then everything sort of returns to ‘normal’ and that is the end of the rally or sell-off,” he said.
Thursday’s Energy Information Administration inventory report of a 24 Bcf injection was considered a little short based on expectations closer to 30 Bcf, but in the larger picture it gave little indication that injections were on track to reach what some analysts consider necessary higher supply levels. Uncertainties loom as the industry gets set to grapple with storage injections burdened by the uncertainties of summer weather and tropical developments.
“Although the deficit against last year narrowed by another 24 Bcf, we continue to view last year’s supply of almost 1.6 Tcf as a needed comfort level capable of absorbing occasional supply disruptions or exceptional hot spells during the upcoming summer,” said Jim Ritterbusch of Ritterbusch and Associates. Ritterbusch believes that current supply of 1.285 Tcf “doesn’t provide much margin for error during the coming months regarding unforeseen nuclear or hydro events that could shift supply to an even larger deficit.”
Ritterbusch is maintaining a bullish stance tempered by the thought of a market pullback in the short term. “Overall we are maintaining a bullish stance in this market while maintaining an opinion that it is a bit stretched on the upside. With this in mind we will suggest holding a small long core position while awaiting price pullbacks of 30-40 cents in the summer futures to reestablish a full trading unit on the long side,” he said in a Friday morning note to clients.
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