Despite nearly a perfect storm of industry mishaps that could impair domestic natural gas supply down the road, the July futures contract on Tuesday was repelled by resistance at $5 once again before closing the day’s regular session at $4.808, down 10.8 cents from Monday’s finish.
After recording highs of $4.977 last Friday and $4.944 on Monday, the prompt-month contract made its third and best run at $5 on Tuesday, but was turned around at $4.995 on a round of profit-taking. Uncertainties surrounding the future of domestic supply are believed to be partially responsible for the recent breakout to the upside from a three-month trading range.
“While current storage levels are still very bearish, traders are facing a long list of supply concerns going forward,” a New York trader said. “On top of the Deepwater Horizon fiasco in the Gulf, which basically resulted in a moratorium on deepwater and shallow-water Gulf drilling, we’ve now got two large accidents in the Marcellus Shale over the last week and a pipeline explosion in North Texas. These things do not reflect well on the oil and gas industry and could attract stiffer regulations, which could translate into higher producer costs, which would ultimately reduce the amount of gas being produced.”
A natural gas well targeting the Marcellus Shale near Moundsville, WV, is still on fire following an explosion Monday (see related story), while a blowout last Thursday at an EOG Resources Inc. Marcellus well in Clearfield County, PA, prompted the Pennsylvania Department of Environmental Protection (DEP) to order on Monday that the company suspend all of its natural gas well drilling activities in the state (see Daily GPI, June 8). Adding to the recent mayhem, a section of Enterprise Products Partners LP’s North Texas pipeline ruptured in an explosion Monday about 15 miles south of Godley, TX (see related story).
Futures bears did receive a little bit of good news Tuesday as some clarity was brought to the Gulf of Mexico drilling situation. While President Obama announced a six-month moratorium on deepwater Gulf drilling late last month (see Daily GPI, May 28), it was learned last week from the Interior Department that all drilling in shallow Gulf waters also was being shut down until operators complied with new safety rules and inspections (see Daily GPI, June 7; June 4). That all changed on Tuesday after the Interior Department issued a directive to oil and gas lessees and operators on the Outer Continental Shelf implementing stronger safety requirements, and saying shallow-water drilling that is in compliance with the new requirements could continue (see related story).
Some market watchers were unimpressed with Tuesday’s dip in futures values. “The natural gas market is seeing a bit of profit-taking off the recent rally, with the current break from warmer than normal temperatures giving a downward tug at the front of the curve,” said Tim Evans, an analyst with Citi Futures Perspective in New York.
He noted that the “big fundamental debate” remains the active 2010 Atlantic hurricane forecasts and what the appropriate price level should be to discount the corresponding risk to 6.6 Bcf/d of Gulf supply.
“With no new updated seasonal forecasts this week and no current storm threats on the horizon, the market may be losing some of the urgency that characterized the buying last week, although we can expect the tension to ratchet up along with the storm activity itself as we move into the busier part of the season,” said Evans. “We might have to wait until July until the first named storm and possibly longer until one tracks through the Gulf.”
Jim Ritterbusch of Ritterbusch and Associates views much of the recent price strength as defensive and motivated by fund short-covering, but in his view fundamentals are also improving. “Although we viewed most of the recent upside price breakout as technically motivated, fundamental dynamics appear to be shifting, a development that has forced us to revise our expected trading parameters higher by about 25-50 cents. These shifts in the supply-usage balances appear subtle from our viewpoint but have nonetheless been able to spike the market by more than 20% from the late May lows,” he said.
Current weather forecasts are playing into the bulls’ hands as well. The National Weather Service (NWS) in its six- to 10-day forecast predicts above-normal temperatures for almost all of the country. The only exceptions are the southern Rocky Mountains and southern plains bordered by a broad arc extending from Southern California to western Nebraska to South Texas.
Forecasts may not translate into much immediate impact on air conditioning load. NWS also forecasts cooling requirements for the week ending June 12 as slightly below normal for major energy markets. New England is expected to see 10 cooling degree days (CDD), or just two more than normal; and New York, New Jersey and Pennsylvania are forecast to have 14 CDD, or six fewer than normal. The Midwest from Ohio to Wisconsin is expected to be at 28 CDD, its seasonal norm.
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