After logging another day of strong gains across the board in the natural gas cash market, industry insiders were scratching their heads in confusion over the firmness, especially in light of bearish fundamentals. While some industry veterans said Tuesday’s strength was likely tied to the 47.1-cent climb in futures on Monday, others saw the mercurial rise in crude futures as having a “trickle down” effect on natural gas futures and cash prices.
Despite near-record natural gas storage levels and low demand due to moderate temperatures, most U.S. cash market points recorded gains from a few pennies to nearly 30 cents, while the Rocky Mountain region once again stood out with some points jumping almost $3/MMBtu. Kern River averaged $5.19/MMBtu, up $2.97 from Monday, while Northwest Domestic increased $2.80 to $5.01/MMBtu.
In response to dollar-plus gains for a second consecutive session at some points in the Rockies, one gas buyer noted that the region was just catching back up following some pipeline constraint-induced price lows. Over the last month, cash quotes on some points in the region have been as low as 7 cents/MMBtu (see Daily GPI, Sept. 12). “While the price gains in the Rockies are significant, they really couldn’t get any lower than they have been,” the buyer said. “They could only go up.”
Prior to the Energy Information Administration’s Thursday storage report for the week ended Oct. 12, working gas inventories are at 3,336 Bcf. Current stocks are just 125 Bcf below last year’s 3,461 Bcf record, which was set in the storage report for the week ended Oct. 20, 2006.
“Cash prices are up for whatever reason, but storage is full, so I don’t quite understand what is going on here,” said a Northeast utility buyer. “Temperatures are slightly warmer than normal up here as well, so add that into the equation. With all of these bearish indicators, I just don’t know why prices are so strong.”
He added that his company was in the position where storage is basically full. “Because our storage is packed, we are not buying any gas, so we weren’t doing much trading Tuesday,” he said. “We sold a little bit of gas down on the Tennessee 500 Line.”
One Midcontinent buyer confirmed that prices were strong but he wasn’t very active on Tuesday. “There was not a whole lot going on in the market. I really did not have a whole lot of business to do out there. Things were pretty quiet.”
In addition to a healthy supply of natural gas, the 2007 Atlantic hurricane season is looking more and more like the lackluster 2006 version, despite the lofty forecasts during the spring. While there still could be a storm that threatens the Gulf of Mexico in the final month and a half of the season, some traders have already turned their attention to the winter heating season, which also looks bearish. According to the National Oceanographic and Atmospheric Administration (NOAA), most of the country this winter will likely experience above-average temperatures (see Daily GPI, Oct. 16).
Others in the energy industry said that the firm cash prices are a result of a “trickle down phenomenon” from the “buying frenzy” that has been going on in crude futures, which traded above $88/bbl on Tuesday before notching a new all-time record high settle of $87.61/bbl.
“Nothing has changed fundamentally in the natural gas markets, so I think we are seeing some spillover from the crude complex,” said a New York broker. “While we have had some bullish government reports about tight crude supplies and some reports of unrest in the Middle East, a lot of the run-up in crude is being backed by funds. This is not about supply. This event has rubbed off on natural gas futures, and the cash [market] has been trying to stay close to futures. The Henry Hub was about 15 cents under futures Tuesday morning. There really appears to be a total disconnect to the key fundamental picture here.”
Futures and cash are keeping a close relationship indeed. As of the close of the regular session Tuesday, November natural gas futures closed at $7.367, while Henry Hub for Wednesday delivery averaged $7.290.
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