After absorbing the inconsequential natural gas storage report for the week ended Aug. 25, October natural gas futures traders, staring at nothing but bearish fundamentals, pushed the market lower Thursday, briefly plunging the prompt-month below the psychological $6 price level. October natural gas ended up closing out the day at $6.048, down 24.2 cents.
With the 48 Bcf injection into storage slightly less than most industry expectations, traders turned their attention to the lack of Gulf of Mexico storm activity and to the mild temperatures blanketing much of the East, which is a result of Tropical Storm Ernesto’s northern path.
Just prior to the Energy Information Administration’s (EIA) 10:30 a.m. EDT report, October natural gas futures were trading at $6.150. Immediately following the report, the contract dropped to $6.070 before rebounding higher to $6.240 as of 10:43 a.m. on a round of fund-buying, according to one broker. In the afternoon, October natural gas put in a low of $5.97 before rebounding slightly to settle. Thursday’s low was the lowest a prompt month has been since July 21, when the August contract put in a $5.88 intraday low.
“The storage report was really meaningless. We are going to be full with 3.3 Tcf in storage by the end of the injection season. OK, next story,” said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. He added that “the morning rally was due to fund-buying, but I don’t understand what they are seeing.”
Kennedy said excess gas is expected to be all over the market. “I am looking at the decrease in electrical generation all over the country,” he said. “The heat wave has broken in Texas, Oklahoma and Kansas, while we have chamber of commerce weather from Chicago to Boston. You’re going to have excess gas on this market.”
Pointing out Thursday morning that the cash market was at $5.80, Kennedy said “Futures are not going to rally off of that folks.” He also predicted that October futures would see $5 in front of the price at some point Thursday, a prediction that ended up proving true.
Following settlement Thursday, Kennedy said, “Cash was at $5.60, so futures still have a 40-cent premium. If the cash market doesn’t rally Friday, then watch out. We are seeing some scaled-down buying in October and fund-buying in the winter months. I think they are wrong. There is going to be a day of reckoning on these winter months. Storage is going to be filled early and we are heading into some of the lowest demand of the year during this shoulder period. The low-demand period also looks like it is starting early.”
As for the futures market’s direction, Kennedy said he sees lower prices. “I think we have dimes lower on October and dollars lower on the winter months,” he said. “I really don’t know what these funds are looking at when they are buying. Unless someone is forecasting another ice age for this winter, these winter prices are way too high.”
Most storage report projections appeared to have been looking for an injection in the 50s Bcf area. A Reuters survey of 18 industry players expected the EIA to reveal a 54 Bcf injection for the week. The ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus estimate of a 50.5 Bcf build. Golden, CO-based Bentek Energy was projecting a storage injection of 51 Bcf.
The 48 Bcf injection reported by EIA Thursday morning fell short of last year’s 58 Bcf injection and the five-year average build of 67 Bcf.
As of Aug. 25, working gas in storage stood at 2,905 Bcf, according to EIA estimates. Stocks are 280 Bcf higher than last year at this time and 320 Bcf above the five-year average of 2,585 Bcf. The East region injected 34 Bcf, while the West and Producing regions both injected 7 Bcf.
As for the weather, the cooling trend being ushered in by Ernesto continues. AccuWeather said that Thursday’s high in Philadelphia was expected to reach only 74 degrees and Friday is forecast to reach a mere 72. The normal high in Philadelphia this time of year is 81. In Chicago, Friday was anticipated to see a high of 74. The normal high in the windy city is 80.
Seasonal weather factors also come into play. “Labor Day is coming up and that’s always seen as lowering demand,” said Kyle Cooper, analyst with IAF Advisors in Houston. “Until you get a storm or lower injections (of gas into storage) in coming weeks, prices will be lower.”
In observance of the Labor Day holiday weekend, the New York Mercantile Exchange’s natural gas futures market will close at 1 p.m. Friday.
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