A modestly bullish Energy Information Administration (EIA) inventory report Thursday thwarted the pervasive downtrend in gas futures prices for the time being, but August natural gas futures managed only a modest 1.8 cent gain to settle at $5.943 in active trading on the New York Mercantile Exchange.

The EIA reported a widely anticipated build of 71 Bcf, putting stocks at 2,763 Bcf, above last year’s plump 2,757 Bcf level. But while the 71 Bcf build was expected, the 7 Bcf reclassification of base gas to working gas was not. Thus, the net gain was a more miserly 64 Bcf.

“The market reacted once it realized the 7 Bcf reclassification. Prices rallied to $6 but that was about it,” said a New York floor trader. He added that after the rally August futures traded in a narrow range from $5.94 to $5.97.

Longer term, analysts see the reclassification from a somewhat different perspective. They are beginning to see a glimmer of increased demand as natural gas prices languish under $6. “On the surface it looked like everyone was pretty close predicting a 70 Bcf injection, but the 71 Bcf build reported by the EIA included a 7 Bcf reclassification of base gas to working gas,” observed Stephen Smith of Stephen Smith Energy Associates, a Natchez, MS, energy consulting firm.

“That means the supply-demand build was only 64 Bcf. There are two ways to approach the problem. You can model supply-demand or you can try to add up all the gas in storage. Generally analysts rely on a blend of the two, and their models came up with about 70 Bcf. The error was either missing supply, which I don’t think it was, or there was some demand out there that wasn’t in place a week earlier.”

Smith cited economic differentials between natural gas and residual fuel. According to Smith, 1% residual fuel is about $9/MMBtu and with natural gas approximately $6, the $3 differential is wide by historical standards. “Currently the difference is about $2.65, and I think what the EIA figures are saying is that anytime you approach a $3 difference between residual fuel and natural gas, the market will find a way to use more gas.”

“The report was well within expectations,” noted Managing Director Ed Kennedy of Miami-based Commercial Brokerage. “A yawner as far as the market was concerned; the bulls were looking for something [smaller] than 71 Bcf. Now we have above-normal storage levels and below-normal summer heat. I mean, it is the end of July and it has yet to reach 100 degrees in Dallas.”

He may have a point. For the first three weeks of July, cooling degree days were down 14% compared to normal in the key West-South Central region of the country. Meanwhile for the same period, cooling degree day accumulations across the entire U.S. were down 15% from year-ago levels.

However, near-term weather forecasts may resurrect the bullish case. The AccuWeather six- to 10-day forecast calls for above-normal temperatures across major Midwest and eastern energy markets. North and east of a line from northern Idaho to Central California to South Carolina is forecast to be above normal. Only central and East Texas is expected to be below normal, the forecaster said.

The tropical outlook is not encouraging for bulls. The National Hurricane Center (NHC) is monitoring thundershowers in the western Gulf of Mexico, but “surface pressures are not falling and upper-level winds are not favorable for significant development,” the NHC said.

But even in the absence of storms, the market is still gearing up for the potential of supply-disrupting weather. Looking ahead to September, Kennedy sees a continued influence and potential volatility in futures from the nearby options market. “Open interest in September futures is huge and that is a result of people lining up their options on either side of the market. September is the big hurricane month and options are a good way to protect against adverse price action in either direction, Kennedy said.

Kennedy and his colleague Tom Saal of Commercial Brokerage Corp. will host their annual natural gas futures and options workshop at the New York Mercantile Exchange Oct. 3-4. For more information on attending, visit https://workshops.gasmart.com/nymexworkshop07/

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