Influenced by yet another day of economic concerns and unsupportive weather forecasts, February natural gas futures continued to explore lower price levels on Wednesday, reaching a low of $7.585 before closing out the session at $7.621, down 4.9 cents from Tuesday. While the decline was a far cry from Tuesday’s 32.3-cent massacre, traders are still hard-pressed to locate any supportive fundamentals.
Despite the interest rate cut made on Tuesday by the Federal Reserve, Wall Street plunged on Wednesday before putting in a stunning rally to close up on the day. Even with the rally, U.S. recession fears reached a fever pitch. The petroleum complex also took another hit on the day. With February crude expiring lower on Tuesday, March crude fared no better on Wednesday, dropping $2.22 to settle at $86.99/bbl.
“There’s no doubt that the economy trouble is affecting natural gas futures,” said Steve Blair, a broker with Rafferty Technical Research in New York. “Natural gas is still truly a domestic market, so there are so many things that go on in the world geopolitically and economically that don’t have much of an effect on it. This situation with the economy, however, hits just the right spot. While I don’t think the equity market woes are having a huge play in natural gas futures moving lower, it certainly is not helping to support prices.”
Blair noted that the real market-mover for natural gas is the weather…or the lack thereof. “Things could be so much different if the storage picture was not as healthy as it is. With only small blips of real cold, the fact that we have such a large amount of gas still in storage makes it hard for this market to sustain the rally it had up to near $8.500,” he said. “The storage cushion we have gives traders a little bit of room to operate, especially when forecasts are calling for above-normal temperatures for the eastern third of the country for the entire month of February.”
Blair noted that there are some pretty interesting support levels just beneath the prompt-month contract. “We have minor support at $7.600, but major support doesn’t come in until around $7.490, with even larger support arriving between $7.290 and $7.360.” As for the bulls’ case, Blair said he doesn’t really see much “that could get this market rocketing to the upside barring a complete reversal in the weather forecast.”
Going forward, traders will be watching oil and equity markets along with the weather. “Short of a major shift in the weather forecasts, we will look for this market to seek significant guidance from the oil complex and, hence, the stock markets going forward,” said Jim Ritterbusch of Ritterbusch and Associates. He added that in spite of a large noncommercial net short position in the market, “there are still a number of funds holding longs that will be vulnerable to broad-based margin-related liquidation should the economic picture deteriorate further,” he said in a note to clients.
Eastern energy markets are forecast to warm in the six- to 10-day period. “Warmth continues to dominate the East through the period [Wednesday],” said Matt Rogers in MDA EarthSat’s energy forecast. “There is a concern that high pressure wedged through the Northeast could briefly delay the onset of warming, but there is good agreement on temperatures quickly turning warmer by day seven.”
Turning attention to the country’s storage situation, traders are bracing for what will likely be back-to-back 150 Bcf-plus withdrawals for the weeks ended Jan. 18 and Jan. 25. While a withdrawal near 150 Bcf in Thursday morning’s report would dwarf last week’s 59 Bcf pull, it would be right in line with last year’s 166 Bcf draw and the five-year average pull of 161 Bcf.
According to a Reuters survey of 19 industry players, the average withdrawal expectation for the week ended Jan. 18 is 160 Bcf. Golden, CO-based Bentek Energy said its flow model indicates a withdrawal of 154 Bcf, which would bring stocks 9.7% below the five-year high (last year) and 7.4% above the five-year average. The prediction includes an 89 Bcf withdrawal from the East region, a 38 Bcf pull from the Producing region and a 27 Bcf reduction from the West region.
First Enercast Financial is predicting a withdrawal of 145 Bcf for the week ended Jan. 18 but expects a much larger number in the report next week. “Severe cold across much of the country this week led our storage model to predict a near-200 Bcf draw to be reported next week,” the analysis firm said in a research note. “It may likely mark our high point for natural gas demand this winter season as the Midwest has been particularly cold this week. The newly opened leg of the Rockies Express has helped alleviate supply constraints in this region, allowing spot prices to remain more constant.”
Beyond next week, First Enercast Financial said mild temperatures should lead to small withdrawals and lower prices. “Following next week, we are left with a returning pattern of cooler West with a warmer than average Midwest and East,” the firm said. “This…should put us back into a string of lower-than-normal draws from storage to start February. This mild forecast along with the decline in crude oil prices is a perfect cocktail for sinking natural gas prices.”
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