August natural gas futures closed lower Thursday following the weekly government inventory report showing stocks were built at a greater rate than had been anticipated.
The Energy Information Administration (EIA) reported that natural gas inventories rose by 84 Bcf, well ahead of the mid-70 Bcf injection that the market was anticipating. At the close August futures had eased 2.5 cents to $4.378 and September had fallen 2.9 cents to $4.358. August crude oil fell a hefty $2.36 to $95.69/bbl.
Analysts interpreted the increase as indicative that production gains were more than capable of offsetting increased use of natural gas for power generation. “The second consecutive larger-than-expected build in U.S. natural gas storage reinforces the idea that U.S. natural gas production has grown sufficiently to translate above-normal temperatures into a near-average build in storage,” said Tim Evans, analyst with Citi Futures Perspective in New York. Evans is still looking at a modest flow of below-average storage injections, but it is a weaker supportive trend than expected and he warns that the market will be more vulnerable on the downside should temperatures moderate.
Analysts see the market’s ability to suffer only modest losses in the face of a surprisingly bearish inventory report as constructive. “August futures are currently trading some 16 cents above levels that existed just prior to last week’s bearish storage figure that was followed by another surprisingly strong build this morning,” said Jim Ritterbusch. “Consequently, we are maintaining a near-term bullish trading view in anticipation of a minimum upside price move toward the $4.50 area per nearest futures as we anticipate continued support at about the $4.25 area.”
The day’s trading got off to a slow start. It didn’t take moderating temperatures but only a deceleration of the ongoing dynamic of weather forecasts calling for ever-hotter temperatures to prompt August futures to open 3 cents lower. Forecasters saw the dominant ridge staying in place over the central U.S. Commodity Weather Group of Bethesda, MD, in its morning six- to 10-day outlook predicted the large ridging pattern to remain in place from Maine to Nevada and northern Minnesota to South Texas. “The big picture theme right now is that we continue to see variations in the details of the impressive mid-summer Midcontinent hot ridging pattern, but the overall hot-dominated regime does not really go away,” said Matt Rogers, president of the firm.
“Late in the six- to 10-day period, the hot ridge is seen to flatten somewhat, which should ease the heat temporarily in the Midwest (especially upper parts), while sending a hotter surge toward the East Coast (peaking on days 10-11). By mid to late 11- to 15-day, the hot ridge is seen rebuilding stronger in the middle and pulling back from the East Coast to allow for another brief cooling toward seasonal. This ebb and flow is tricky on timing, but the big picture is still hot. The Tropics remain quiet.”
With documented heat from the prior week in place, market bulls were hoping for a reversal of the unexpectedly large builds that had sent prices tumbling a week earlier. For the week ended July 1, the EIA reported a plump 95 Bcf build, well ahead of the mid-80s Bcf that traders were expecting. August futures dropped 8.4 cents to $4.133.
Traders were looking for a build about equal to last year but below the five-year pace. Last year 78 Bcf was injected, and the five-year average stands at 88 Bcf.
A Reuters survey of 26 analysts showed a sample mean of 76 Bcf with a range from 50-89 Bcf. Ritterbusch and Associates was looking for a build of 75 Bcf, and industry consultant Bentek Energy, utilizing its North American flow model, had predicted a build of 78 Bcf.
Through Wednesday August natural gas futures had put together a four-day run higher, but technical analysts aren’t jumping on any bullish bandwagon just yet. “While Wednesday’s break above $4.337 confirms the leg down from $4.983 ended at $4.064, we are reluctant to jump aboard the case for a sustainable recovery,” said Brian LaRose, analyst at United-ICAP, in a post-close note to clients. In order for him “to change [his] tune, $4.787 will need to be exceeded. Until this can be accomplished, we will be viewing any continued advance as corrective in nature…[T]he seasonal cycle will start favoring the bulls in August.”
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