July natural gas futures on Friday finished last week with a steady climb, leaving some to wonder whether the previous week’s $5.750 low by the then-front month June contract might stand as a low for the move. July natural gas ended up reaching a high of $6.690 before closing at $6.623, up 17.5 cents on the day and 46.9 cents higher than the previous Friday’s close.
The push higher in natural gas was aided by strength across the petroleum complex as unrest in large oil-producing countries continued across the globe. The Iranian president on Friday declared that Iran won’t abandon its nuclear plans under pressure from the West. Tension also continued to build in Nigeria as eight foreign oil service workers were abducted from an offshore rig.
As a result, July crude gained $1.99 on Friday to close at $72.33/bbl, while July unleaded gasoline and July heating oil climbed 7.03 cents and 4.38 cents, respectively, to close at $2.1975/gallon and $2.0145/gallon.
“With natural gas finishing the week strongly, I think that tells us a few things about this market’s current position,” said Steve Blair, a broker with Rafferty Technical Research in New York. “While the storage report of an 80 Bcf injection wasn’t wildly bullish, I think it was low enough to continue the price push to the upside with the understanding that none of this hot weather was in that storage number and that it will likely show up in next week’s report. I know that all this week, the Northeast and some other parts of the country were experiencing some significant heat, which will translate into lower injections in the next two reports, at least. I think that is probably what is helping to keep this market propped up.”
As for whether the bears have turned over the keys to the car, Blair said that is not crystal clear just yet. “Until these storage numbers come out, we may very well just be getting back into that $6.50 to $7.50 range that the market was so comfortable in for such a long time. We got all of those low draws prior to injection season and then we saw good-sized injections since, so it may very well be that unless there are any big surprises in the upcoming reports, we will likely be comfortable back within that range.”
Despite all of the hurricane talk as the updated forecasts from government and private entities have hit the market over the last couple of weeks, Blair said hurricanes should not be the focal point just yet. “I don’t think hurricanes are going to be much of a factor for the next month or two,” he said. “It is very rare that we get a major hurricane this early in the season. I think the weather is going to be the factor to watch for at least the first two months.”
As for the market’s overall price level, Blair said sub-$6 gas really appeared to be the sweet spot. “Like I have been saying the last couple of weeks about under-$6 being the bargain price level, I think that advice has certainly borne fruit,” he said. “We just couldn’t keep the market down. Even though we stayed under $6 for a day or two before June expired, July then came in and obviously tried…but failed to get below that level. I would be very surprised if we saw sub-$6 gas again for the rest of the summer.”
Thursday’s reported injection of 80 Bcf for the week ended May 26 puts inventories at a plump 2,243 Bcf, 477 Bcf ahead of last year’s pace and a whopping 706 Bcf greater than the five-year average. With such a large surplus, analysts see little chance that even hot summer weather and an active hurricane season can whittle down the oversupply.
“Gas may trade higher in front of hurricanes and hot weather, but hot weather and hurricanes aren’t enough to eat through this overhang of excess gas we have,” said David Pursell of Pickering Energy in Houston. He predicted that the U.S. has an overcapacity of 400-500 Bcf.
<>Others agree. “I don’t see a whole lot being taken out of the storage surplus between now and September. Something has to change,” said Kyle Cooper of IAF Advisors, Houston. “Cash prices will get crushed near the end of the injection season. In October, there is a 50-50 chance that Rockies gas will trade with a $1 handle. It might be $1.99 and it might be for the weekend, but there is a 50% chance that will happen.”
Low prices are not without consequences. He added there might be drilling projects that would be reevaluated if prices fell that hard, but no producer is going to willingly shut-in a flowing gas well. “The cost of shutting in a well far exceeds current price levels,” he said.”
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