Making it the second day in a row for double-digit gains, the Nymex May natural gas futures contract on Tuesday looked like it had no intention of exiting meekly when expiration rolls around Wednesday. As the prompt month successor, June also put on a strong performance, settling 9.9 cents up on the day to close at $5.97.
Looking to solidify its symbiotic relationship with crude, May natural gas followed its liquid big brother upward a second day, closing at $5.874, up 11 cents on the day. The nat gas prompt month traded within the $5.81-5.895 range on heavy volume, with 99,794 contracts changing hands. June crude closed at $37.53, up 56 cents on the day.
“The natural gas market has piggybacked off the rising petroleum complex for follow-through gains, but we have to wonder if the market isn’t getting a bit ahead of itself,” wondered Tim Evans of IFR Energy Services. “At the very least, we think the market may be ready to take a day off from the rally, in conjunction with Wednesday’s May contract expiration, while traders also await Thursday’s DOE report.”
In concert with rising natural gas and crude futures prices, Federal Reserve Board Chairman Alan Greenspan made what many considered bullish remarks Tuesday before the Center for Strategic & International Studies in Washington, DC (see related story). He said that these elevated long-term prices, if sustained, could alter the way in which the United States consumes energy.
“The dramatic rise in six-year forward futures prices for crude oil and natural gas over the past few years has received relatively little attention for an economic event that can significantly affect the long-term path of the U.S. economy,” Greenspan said. “Six years is a period long enough to seek, discover, drill and lift oil and gas, and hence futures prices at that horizon can be viewed as effective long-term supply prices.”
The Nymex six-year strip closed Tuesday at $5.205, roughly 90 cents less than the one-year benchmark strip, which closed at $6.116.
Greenspan noted that until recently, long-term expectations of oil and gas prices appeared benign. “When choosing capital projects, businesses could mostly look through short-run fluctuations in prices to moderate prices over the longer haul. The recent shift in expectations, however, has been substantial enough and persistent enough to influence business investment decisions, especially for facilities that require large quantities of natural gas.
“Although the effect of these developments on energy-related investments is significant, it doubtless will fall far short of the large changes in our capital stock that followed the 1970s surge in crude oil prices,” he said.
Tuesday wasn’t the first time the nation’s chief economic guru weighed in on the issue of natural gas prices. The market shot higher last May following Greenspan’s testimony before the congressional Joint Economic Committee in which he expressed concern over high natural gas prices and tight supplies (see Daily GPI, May 22, 2003; May 22, 2003).
However, history has shown that the natural gas futures market has not always used Greenspan’s comments as a spark. After peaking at $6.625 in early June 2003, the natural gas market was thrust into a 15-week downtrend that futures analysts half-jokingly referred to as the “Greenspan Downtrend.”
Most expectations for the Energy Information Administration’s (EIA) storage report for the week ended April 23 are for injections that are significantly higher than last year’s figure, as well as the five-year average. Stephen Smith of Stephen Smith Energy Associates is projecting an 87 Bcf build, which would be significantly higher than last year’s injection of 52 Bcf and the five-year average build of 46 Bcf. An 87 Bcf injection would take gas in storage from 1,077 Bcf to 1,164 Bcf.
Kyle Cooper of Citigroup said he expects a build between 74 Bcf and 84 Bcf. “This report should easily expand the surplus to last year and the three-year average while reducing the deficit to the five-year average,” he said. “Again, a build of this magnitude would be considered bearish on both an absolute basis and also on a temperature adjusted basis. A build of this magnitude would place inventories on track to easily exceed 3,100 Bcf at the end of Oct. 31.”
Adding his two cents, Evans sees the potential for a bearish 60-80 Bcf net injection, “so a more defensive posture [regarding nat gas futures] may also be warranted on that account,” he said. “The longer-term weather outlook remains the chief bullish fundamental factor, with warmer-than-normal temperatures and an active hurricane season expected. While these outcomes are uncertain, some bullish variance with last year’s cool summer and quiet hurricane activity (at least in the Gulf of Mexico) does seem likely.”
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