While July natural gas futures recorded lofty gains of their own, the commodity on Friday once again took a back seat to big brother crude, which saw the July futures contract gain an astounding $10.75 to close out the day’s regular session at a record $138.54/bbl. July natural gas continued to hone in on the $13/MMBtu price level by gaining 17.4 cents Friday to close at $12.693, up 99 cents from the contract’s finish in the previous week.
“The energy markets are just acting ridiculous. Friday was just the latest example of this behavior,” said Steve Blair, a broker with Rafferty Technical Research in New York. “People continue to ask me whether there is some bullish news out there that they are missing. The answer basically is ‘no.’ When a market goes straight up like crude has, there is no doubt that there are going to be periods where it comes off and there will be some profit-taking or selling into the market. When it starts on its way back up again, watch out. Crude sold off to just under $122/bbl over the last two weeks and gained more than $16 over the last two sessions. When it started to rally, everybody jumped on the bandwagon and it took off like a banshee.
“There are still a lot of people out there who want to blame this on supply and demand. I still don’t think that is the case. I think this is pure speculation and has a lot to do with what they are calling ‘index speculation.’ Most regular type of hedge funds fall under speculative limits, but the banks, or the entities that run the index funds, fall under the guise of commercial participants. As such, they can apply for expanded limits under the guise of hedging. As more and more money goes into these index funds, the core position they develop gets bigger and bigger and they are never really a seller. They might roll their positions, but that is not selling.” As Michael Masters, managing member of Masters Capital Management, testified before the Senate last month, these index funds are creating “artificial demand,” Blair noted.
The broker added that selling into the bullish moves in crude or natural gas would not be wise. “We are in the modern age now, so I wouldn’t say it is like stepping in front of a freight train. I would say it is more like stepping in front of a Titan rocket,” he said. “It is a very touchy situation. I guess you could say that natural gas is probably one of the only energy markets that is paying some attention to fundamental issues, but that is even questionable. Crude is certainly having an impact on natural gas futures, so I think we are going to stay strong here. Outside of that, people are going to continue to have their eyes peeled on tropical weather, temperatures and storage. After we penetrated $12.640 Friday, our next resistance level is at $13.040. There might be some more upside here.”
Thursday’s inventory report failed to minimize supply concerns and traders maintain a bullish posture. Some of the top traders are focusing on the supply deficit relative to last year. Although Thursday’s reported injection of 105 Bcf brought the deficit within one Bcf of the five-year average, much work needs to be done if the industry expects to narrow the 326 Bcf shortfall relative to last year. “We would continue to emphasize that the current storage deficit against the past couple of years is a much more meaningful measure of supply adequacy than comparisons against five-year averages,” said Jim Ritterbusch of Ritterbusch and Associates. He added that year-over-year increases in production are not that significant and have been “negated by a sharp downdraft in LNG [liquefied natural gas] imports as higher overseas prices have steered cargoes away from the U.S.”
Ritterbusch advised playing the market strictly from the long side and suggests “holding a base or core long position,” but he “will await a major price pullback to the $11.000-11.500 zone before reestablishing a more aggressive or investment-type bullish holding.”
Bears for the moment can rest assured that there will be no tropical developments over the weekend. AccuWeather.com reports that it sees no organized features in the entire Atlantic Basin. It did say it was following tropical waves at 25W, 54W and 78W. The waves were moving smartly to the west at a rapid clip, but they were not showing any signs of development. “Another feature that is being watched is a weak upper-level low located near 25N 66W. During Thursday afternoon some thunderstorms formed over the southeast part of the system. However, we don’t see this activity showing any signs of real development,” said meteorologist Matthew Rinde.
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