Still trying to make heads or tails on what the long-term repercussions from Hurricane Rita will be, November natural gas futures stayed in a fairly tight range Monday before settling at $14.017, up 9.6 cents from Friday.
Trading within a 26-cent range on Monday, the prompt month hit its high for the day of $14.18 in morning trade before funneling lower. Later in the afternoon, November natural gas bottomed out at $13.92, before inching higher to settle. The Minerals Management Service’s (MMS) shut-ins report at 2 p.m. EDT did little to affect the market. The MMS reported that shut-in Gulf of Mexico gas production on Monday stood at 7.495 Bcf/d, or 74.95% of normal. That was down from 7.94 Bcf/d, or 79.4% on Friday (see related story).
Hurricane and storm activity still appear to be first and foremost on the minds of traders and analysts. The industry on Monday was monitoring Tropical Storm Stan, which was swirling in the southern Gulf of Mexico on course for landfall in central or southern Mexico.
“Tropical Storm Stan will miss the U.S., but could still rile the markets by disrupting production and shipments from Mexico,” said Tim Evans, an analyst with IFR Energy Services. “Normally this is only a matter of a day or two, but the market remains sensitive to these matters, as well as the general idea that the hurricane season is not yet over.”
Not over by a long shot, according to Colorado State University forecasters William M. Gray and Philip J. Klotzbach, who said Monday that October will continue the trend of above-average activity that has already been witnessed in the preceding four months of the hurricane season (see related story). Their October-only forecast calls for three named storms, two hurricanes, one major hurricane and net tropical cyclone (NTC) activity of 30, which is well above the mean October-only average value of 18.
Questions as to the futures market’s next move remain plentiful. “Natural gas could be forming a top here, but there may be another false break to the downside or two before a reversal is established,” Evans said. “We are on the sidelines in November natural gas with a sell stop at $13.60 to open a 50% short exposure. A buy stop at $14.05 will limit our risk once we sell.”
With natural gas prices as high as they are, a looming question is what will be the response by consumers when faced with high home heating bills this winter. The conventional thinking is that consumers will pay whatever it takes to keep warm, but that may require further analysis.
“While many talk about inelastic natural gas demand due to the loss of industrial demand, this is not true,” contended Kyle Cooper of Citigroup. He said that a one degree change in the national average thermostat will result in approximately 200 Bcf less demand during the entire winter. “I consider this a very real possibility,” he said.
Forces could be in place for lower prices. “If for instance a draw of say 75 Bcf [from storage] occurs early in November, but the model indicates that 100 Bcf should have been withdrawn, consider buying put spreads,” Cooper said. “I do not think $14 gas will last forever, but now is not the time to be short. Quite simply, a snowfall early in the season and a subsequent large draw and this market will roar higher.”
Funds and managed accounts may not be buying into high natural gas prices either. The Commodity Futures Trading Commission reported Friday that noncommercials held a net (futures only) short position of 18,296 contracts as of Sept. 27. This is an increase from the 7,281 net short contracts held just a week earlier. The large net short position of the noncommercials is more than offset by 37,542 net long (futures only) in the “non-reportable positions” often attributed to small speculators.
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