July natural gas futures closed sharply higher Monday as weather forecasters called for normal to above-normal temperatures across the country. Traders noted a strong technical feature to the market and said they expect a settlement above $13 this week. At the close July had added 30.8 cents in rising to $12.933 and August futures gained 30.9 cents to $13.037. July crude oil eased 25 cents to $134.61/bbl.
Forecaster MDA EarthSat in its six- to 10-day forecast called for normal temperatures throughout much of the country but above-normal temperatures and increased cooling demand from Texas westward. Only westernmost Washington was forecast to be below normal. “The areas of best confidence here this morning are from Texas to the interior West, where both the American and European [weather models] agree on temperatures that are generally above normal,” said Matt Rogers, director at MDA EarthSat. He added that the areas were also drier than normal, “supporting the warm outlook and above-normal cooling demand.”
Oil and natural gas markets have been under intense scrutiny for signs of speculation and unwarranted price levels, but traders looking past immediate weather and other short-term factors and trying to gain a broader perspective of energy demand suggest that an important determinant of future oil and natural gas prices in the U.S. will come from Chinese government efforts to rein in demand growth. China subsidizes oil consumption and efforts to slow demand growth center around controlling rampant inflation.
“What the so-called smart people who look at this say is if the Chinese inflation rate drops, then the government may have room to raise prices [and lower demand] without stoking inflation too much,” said a Washington, DC-based broker analyst.
“If their inflation goes up too much, the government is likely to say, ‘We don’t want to stoke inflation much by raising gasoline prices,’ and they won’t lower the subsidy. If the inflation starts dropping, they may feel they have some room and can take a little bigger bite out of the public’s pocket.”
Retail Chinese gasoline and diesel fuel prices were hiked about 11% in November but have remained frozen since.
The National Bureau of Statistics said Thursday inflation in China slowed to a 7.7 % annual rate in May from 8.5 % in April. Producer prices rose 8.2% from April’s 8.1%. Inflation is an important political concern in a country where many families spend about half their incomes on food.
Periods of high inflation in the 1980s and 1990s helped trigger protests, a scenario that Chinese leaders are keen to avoid as the country comes under intense foreign scrutiny ahead of this summer’s Beijing Olympics.
Monday’s advance may be just what some were looking for. Market analysts focused on technical dynamics expect prices of more than $13. “Look for July to test the resistance at $13.015 area. Sellers be ready,” said Ed Kennedy of Commercial Brokerage in Miami in a morning note to clients. Kennedy also counsels end-users to “only use options to protect the upside.”
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