Hurricane Dean’s westerly Gulf of Mexico-sparing course continued to beat the natural gas futures market lower for a second consecutive session as traders appeared ready to resume the downtrend that was interrupted two weeks ago by storm hype. The September contract put in a $5.770 low Tuesday before closing at $5.817, down 22.3 cents on the day.
While sparing U.S. interests, Dean killed at least 12 people across the Caribbean and brushed Jamaica and the Cayman Islands before becoming a powerful Category 5 hurricane with winds exceeding 155 mph on Monday evening. On Tuesday, the storm slammed the Yucatan Peninsula and threatened the heart of Mexico’s offshore energy infrastructure (see related story).
The $5.770 low eclipsed last month’s prompt-month low by a penny and was the lowest a front-month contract has reached in nearly eight months. The last time futures traded lower was back on Dec. 27, 2006, when the prompt month reached a low of $5.740. The $5.817 close Tuesday was a 10-month prompt-month low for a close.
“The word is natural gas is having a sale,” joked a Washington, DC-based broker. “The market looks like crap here as it breaks below $6. The run-up to $7.180 last week was clearly hurricane speculation. It really looks like we were in a downtrend prior to the storms, we rallied on that news and now it appears we are resuming our previously scheduled program of a downtrend.”
Even as futures plummet, some within the industry are discussing the possible ramifications of potentially long-term production shut-ins offshore Mexico. The country’s national oil and natural gas exploration and production company, Petroleos Mexicanos (Pemex), was not taking any chances as Dean approached head on. The company said it had evacuated more than 14,000 offshore workers and shut in 407 wells accounting for 2.7 million b/d of oil and 2.6 Bcf/d of natural gas production. Dean was expected to pound the heart of Pemex’s oil and gas production base as it crossed the prolific Campeche Sound.
If Pemex was off-line for any amount of time, U.S. exports to Mexico could return some firmness to both the natural gas and crude oil markets. “There has been quite a lot of talk about the supply situation in Mexico, but I think we will have to wait and see what the facts are,” the broker added. “The questions are whether there will be any damage to Pemex’s infrastructure, and whether there will be any demand loss in the country resulting from the storm. We will have to wait for reports.”
Despite the possibility of damages to Mexican production, the broker noted that “the interesting thing” is that the energy markets just don’t seem to be worried about that possibility yet. “Maybe it is a situation of dealing with it when it comes because with crude breaking under $70/bbl, nobody seems to be particularly concerned right now. One thing is for certain: if you had bought on that premise in the gas or oil market over the last two days, it would not have been a good trade.”
Looking at support lines for natural gas, the broker said she was eyeing $5.750 as support. “If that breaks, I think you could make a case for another leg down. Beyond that, $5.500 comes in. Below that, there is not much in the way for another dollar, so $5.500 really needs to hold for the bulls.”
Some top traders, however, suggest that it’s just a matter of time before prices rise again on tropical weather concerns. “We are viewing Monday’s huge price plunge in nearby futures of approximately 14% as an overreaction to Hurricane Dean’s southerly shift in direction,” said Jim Ritterbusch of Ritterbusch and Associates. “As is the case in the oil [market], storm premium accumulates gradually but evaporates quickly and we feel that the next big price move in this market will be back to the upside once the need for premium accumulation arises again.”
AccuWeather.com Chief Long-Range Forecaster Joe Bastardi said Tropical Storm Erin and Hurricane Dean were just the beginning of the 2007 Atlantic storm season, noting that the “real” season only began on Aug. 15 (see related story).
AccuWeather.com also reports the emergence of another tropical wave. A tropical wave that is along 60 and 61W, south of 25N bears watching, said Ken Clark, AccuWeather meteorologist. He added that an area of blossoming convection exists along the northern end of the wave between 20 and 25N. “Some computer model information suggests that the northern part of this wave might become an organized tropical system in the southwestern Atlantic in a couple of days,” he said.
Currently, Ritterbusch is waiting for volatility to subside but longer term is looking to enter the long side of the market. “We will be looking to approach the long side of the January contract at sub-$8.00 levels. We would continue to emphasize the advanced stage of this summer’s price decline and a large short position on the part of the large speculators as latent bullish considerations.”
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