Sparked by a rush from funds to cover their short positions, August natural gas futures on Tuesday morning exploded to the upside, notching a high trade of $8.10 as of 10:53 a.m. EDT. The prompt month slipped under the psychological $8.00 level in the afternoon, but still managed to finish strong on the day at $7.885, up 39 cents from Monday’s settle.
“We are just feeding off of some fund short-covering here,”said Tim Evans of IFR Energy Services. “The funds have been very patient, playing the market from the short side and sitting with some pretty healthy-sized short exposures. I think we have reached or pushed through their pain threshold. Now it looks like they are finally taking the hint and covering up.”
In terms of price progress, Evans noted that the August contract did not even blink in morning trade as it took out the April spot high of $7.85. “We’ve been in this range before, so we have a fair amount of consolidation around the $7.00 to $7.50 area,” he said. “We are now exiting that range to the upside, so that kind of announces another leg higher here.”
Evans noted that there are a number of factors currently lending support to the bullish case. In addition to a couple of low-confidence forecasts for significant heat, there is also the newly upgraded Tropical Storm Emily (see related story).
“I don’t know if it will even get to the Gulf of Mexico, but the threat of that happening is just another pressure on the funds to cover,” Evans said. “I also think the Minerals Management Service report on Dennis shut-ins on Monday was bullish. I was surprised that we lost 18.1 Bcf in just that short span. That was an impressive number.”
August crude was also up on the day, trading as high as $61.25/bbl before settling at $60.62, a $1.70 increase from Monday. However, Evans said he really believes natural gas is the driving market in this move. “If natural gas wasn’t jumping out of its shoes right now, I think crude might be trading at $59.50/bbl,” he said. “Natural gas has the clearer bullish case at the moment.”
Looking ahead to Thursday morning’s natural gas storage report for the week ended July 8, the number reported by the Energy Information Administration will be compared to last year’s 108 Bcf injection and the five-year average build of 98 Bcf.
First Enercast Financial is predicting an injection of 90 Bcf for the week. “Tropical Storms Arlene, Cindy and [Hurricane] Dennis have reduced natural gas production in the Gulf resulting in lower injections so far this summer season,” the company said. “However, this reduced supply was offset by lower demand due to the [July] 4th holiday and insignificant weather during this week. Next week’s storage is expected to report lower as Gulf of Mexico disruptions are realized and industrial demand returns to a standard workweek. Storage effects on price are limited; as storm patterns and crude remain dominant factors moving weekly changes.”
The real weather news may be the pervasive heat expected this week in major energy markets. The National Weather Service (NWS) is predicting a hefty increase in cooling degree days (CDD) in the key areas of the industrialized Midwest and Mid-Atlantic. For the week ending July 16, the heartland states of Ohio, Indiana, Michigan, Illinois, and Wisconsin are expected to see 73 CDD or 17 above normal. The populous states of New York, New Jersey, and Pennsylvania are forecast to endure 84 CDD or 28 more than normal.
Accumulations of CDD are well ahead of a normal pace. For the season the Mid-Atlantic has so far tallied 268 CDD or 64 more than normal, and the Midwest states above have sweltered through 319 CDD or 55 higher than seasonal norms. For the season, the entire U.S. is currently 8% warmer than normal according to CDD tallies by the NWS.
Longer term, traders are more circumspect about temperatures and tropical activity. “You can throw all the news you want at these (petroleum) markets, but they are going higher,” said a trader with Coquest in Dallas. He characterized the news of hurricanes and heat as “chocolate syrup” on top of a (energy) market’s “ice cream.”
He added that “you have got to be able to live through the $2 and $3 setbacks in crude oil and the 30 cent pullbacks in natural gas, but otherwise these markets are headed higher. The hedge funds just keep on buying. I think the natural gas futures will see $8.40, but I’m not quite sure how it will get there.”
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