October natural gas futures exploded higher on Wednesday as massive short-covering entered the market ahead of the contract’s expiration at 2:30 p.m. EDT. While the prompt month was in positive territory all day, it jumped significantly higher in the last 30 minutes of trading to notch a new record high of $14.80, before expiring at a prompt-month record settle of $13.907, up $1.251 for the day.
There was no lack of bullish news for the energy complex to digest. The Minerals Management Service (MMS) said Wednesday natural gas shut-ins in the Gulf of Mexico from the two hurricanes actually increased from Tuesday’s 7.856 Bcf/d to 8.027 Bcf/d, leaving approximately 80% of the Gulf’s natural gas production offline.
At the same time, the Natural Gas Supply Association (NGSA) released its latest winter outlook Wednesday, which predicted there will be no gas “shortages” for firm customers this winter. However, that same outlook warned that consumers should still be concerned about winter gas prices, noting that the cost of the gas that was put into storage for this winter is about $2.35/MMBtu higher than the cost of gas stored for last winter (see related story).
The petroleum futures complex recorded big gains as well on Wednesday. November crude closed $1.28 higher at $66.35/bbl, while October unleaded gasoline gained a whopping 17.29 cents to settle at $2.3393/gallon.
Nymex, which uses a weighted average of the trades done during the last two minutes of trading in a regular trading session, uses the last 30 minutes of trading to calculate the final settlement on expiration day. In the last half hour of natural gas trading Wednesday, the expiring October contract increased 95 cents.
“I am at a loss for words,” said Tom Saal of Commercial Brokerage Corp. in Miami. “This is an expiring contract, so I think what we really saw Wednesday was massive short-covering. I think the funds, locals and commercial traders were buying back their short hedges.”
As for the bullish MMS report, Saal said he didn’t think it affected the expiring prompt month very much. “While the MMS shut-in report was bullish, I don’t think that contributed much to October,” he said. “That contract expired Wednesday, so trading in it was just a matter of people getting out of their positions. Some of the other months were pretty strong as well, so that is going to take hold.”
Taking over as the new prompt month, November natural gas finished Wednesday’s regular session 98 cents higher at $14.10, while January and February of 2006 finished higher by 83.5 and 80.5 cents, respectively, at $14.875 and $14.665.
Adding strength on Wednesday, Saal said, was Nymex’s force majeure on the Henry Hub October standardized contract (see Daily GPI, Sept. 28). Due to the ongoing force majeure at Sabine Pipe Line’s Henry Hub facility near Erath, LA, Nymex said Tuesday that its prior declaration of force majeure relating to all remaining delivery obligations in the September 2005 Nymex Division natural gas futures contract will continue to remain in effect. In addition, the exchange declared force majeure for the October 2005 natural gas contract.
“I think October was going to go higher just because the shorts stuck around too long,” Saal added. “As you go through time on an expiring contract, the market gets thinner and thinner and people have to bail at some point.”
Looking at the futures market in the near future, Saal said, “If you have to hedge, you just have to go out a month or two on the long side and we will see what happens when the dust settles surrounding all of this hurricane damage.”
Turning attention to Thursday mornings natural gas storage report for the week ended Sept. 23, industry experts are a little unsure on how large the injection will be. While a portion of gas production in the Gulf of Mexico was offline last week due to damage from Hurricane Katrina and in anticipation of Hurricane Rita, demand destruction from higher prices and hurricane destruction remains the wild card.
While noting that a Bloomberg survey of 12 analysts was calling for an average injection of 68 Bcf, Citigroup’s Kyle Cooper said he was looking for a build between 54 and 64 Bcf. Noting that his confidence in the number this week is “exceedingly low,” Cooper said next week’s report could bring more questions. “The demand loss this week may be even more significant with large portions of Southeast Texas, an area more heavily populated than Louisiana, shut down,” he said.
The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 59 Bcf injection. The number that the Energy Information Administration report reveals Thursday at 10:30 a.m. EDT will be compared with last year’s 69 Bcf injection and the five-year average build of 78 Bcf.
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