Natural gas futures followed big brother crude’s lead lower for a second consecutive session, which had at least one veteran broker questioning the safety of the natural gas $3.155 low for the move recorded back on April 27. August natural gas futures shaved 5.8 cents during Tuesday’s regular session to close at $3.429.
While it’s no secret that natural gas currently has lousy fundamentals, most market watchers have attributed the most recent slide in values to plummeting crude futures prices. In just over a week’s time, August crude has shaved 12%, or $8.56, of its value from its $71.49/bbl close on June 29 to its $62.93/bbl close Tuesday. Tuesday’s regular session decline accounted for $1.12 of the loss. Since their $4.105 close on June 26, August natural gas futures have dropped 17%, or 67.6 cents.
“The natural gas market does not look happy at all,” said a Washington, DC-based broker. “After we made that $3.155 low in late April, we had the tremendous bounce up to $4.575 in early May before falling apart once again. Since then it looked like we were going to bounce out of here, but clearly the downturn in the economy and the lack of degree days outside of Texas have killed the market.
“One of the issues is we have so much natural gas and almost no demand. If we keep injecting like we have been, we’ll see 3.7 Tcf by the end of the injection season. That is an astounding number, which I’m not even sure we can get to from a physical point of view. As you fill your storage caverns, it gets harder and harder to put more gas in because there is a lot of back pressure to deal with. We may run into trouble later this injection season as a result.”
The broker noted that the breaking of support at $3.660 was a key moment for the market. “When we got down below approximately $3.660, we broke out of our recent triangle formation, which opened up the $3.155 low for retesting,” he told NGI. “If we get through that price level, we’re targeting numbers like $2.750 and $2.500. I don’t think the $3.155 low will hold up here due to just how weak fundamentals are. On top of everything else, we just aren’t seeing real heat in most of the important regions. Barring a real threat from a hurricane, what’s out there to trigger a rally? If we break down below $3, it will be the first time we’ve seen that kind of price level since August 2002.”
Some traders interpreted Monday’s 12.8-cent loss in the August contract as a sign of things to come. “We viewed Monday’s breakdown into new contract-low territory at the front of the curve as an extremely bearish development that should keep the longs on the defensive through the balance of this week and possibly beyond,” said Jim Ritterbusch of Ritterbusch and Associates. His interpretation of recent selling focuses on a widespread liquidation of commodities as asset classes, but “we feel that a large portion of the past week’s selling has [also] been driven by an evaporation of weather risk premium.”
Weather risk premium may be hard to come by. MDA EarthSat in its six- to 10-day outlook sees hot weather confined to the Southwest. “An intense upper ridge over the Midwest to start the period will retrogress towards the Southwest during the first few days of the period,” the forecaster said. It expects that this should push highs in both Phoenix and Las Vegas to their highest points this year by day seven, and the ridge will also keep Texas hot, with readings in both Dallas and Houston repeatedly pushing to near 100. It added that the Southeast will be on the periphery of the ridge, resulting in mild, wet weather. Meanwhile, areas from the Upper Midwest to the Northeast will trend cooler as the period progresses with a trough arriving. Ridging over the north Atlantic will hold this trough in the region.
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