Natural gas futures bears were stymied for a second straight day Wednesday as April natural gas failed to dredge new territory. After putting in a low of $4.680, the prompt-month contract finished the regular session at $4.757, up 4.9 cents from Tuesday’s close.
While most traders agree that bulls don’t have much of a case for any sort of meaningful rebound, they also agree that with the year-on-year and year-on-five-year storage surpluses erased, the downside is likely limited as well.
“We’ve seen small gains the last two days, so it looks like we might have found some price support for the time being,” said Tom Saal, a broker with Hencorp Futures in Miami. “Looking at the charts, $4.600 is a big support number, and I think that has now been proven.”
Saal said the $1.35 drop in front-month futures values over the last two months really reveals what kind of market traders have been operating within. “I thought it was pretty clear we were in a bear market when we got the coldest weather in years and weren’t able to get much above $6,” the broker said. “Now that we’ve come off significantly, we’ve started to meander a little bit. I thought we would probably test even lower, but I expected that to happen during February. Now the market looks to be pretty comfortable.
“Looking ahead, we’re going to be moving from storage withdrawals to injections. The injection play is, of course, to buy summer contracts and then sell the winter months, so there might be some incremental buying interest in the injection months going forward.”
Citi Futures Perspective analyst Tim Evans thinks traders have been biding their time ahead of fresh storage data. “The natural gas market is modestly higher on what could be light volume short-covering ahead of Thursday’s DOE [Department of Energy] storage report,” he said Wednesday afternoon.
For the week ending Feb. 26, Evans said a Reuters survey shows consensus expectations for 131 Bcf in net withdrawals, with estimates ranging from 117 Bcf up to 155 Bcf. “We’re near the top of that range at 150 Bcf, but any market reaction will likely be driven by comparison with the consensus figure of 131 Bcf and the five-year average of 124 Bcf,” the analyst said. “One way or another, we can also expect trading volume to pick up after the DOE report, even if the net withdrawal comes in as expected. If nothing else, knowing the number will take the risk of a storage surprise out of the market for another week.”
Bentek Energy is projecting a withdrawal of 118 Bcf to be reported this week, bringing inventory levels to 1,735 Bcf. The research firm expects a 73 Bcf draw from the East Region, a 29 Bcf draw from the Producing Region and a 16 Bcf draw from the West Region. “A 118 Bcf withdrawal would reduce inventory levels to within 85 Bcf of last year’s season-ending level of 1.65 Tcf,” Bentek noted in its weekly Natural Gas Storage Outlook.
How rapidly natural gas inventories are rebuilt this spring is likely to be a key market driver. “On the supply side, the prospect of production gains is still being prioritized as a bearish item as the virtually uninterrupted increase in rig counts during the past eight months cannot be denied. But we are still looking at months, not weeks, before this up-trend in the rigs translates to actual production hikes,” said Jim Ritterbusch of Ritterbusch and Associates.
It is Ritterbusch’s contention that “in the meantime, the newly developed year-over-year supply deficit should begin to provide sustainable price support as the market becomes cognizant of the likelihood that this supply shortfall will remain intact well into the summer period.”
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