With bulls unable to latch on to any real supportive fundamentals other than some pockets of hot temperatures in Texas, the South and the West, August natural gas futures continued plumbing the downside on Tuesday. The front-month contract put in a low of $3.798 in morning trade before closing the regular session at $3.835, down 10.9 cents from Monday’s finish.
Market watchers note that futures bulls don’t have too many pegs on which to hang their hats. Some bulls continue to hold out hope for some sustained summer heat or for storm threats in the Gulf of Mexico, while bears claim that the market would be trading even lower if it weren’t for the undue influence of index funds, such as the United States Natural Gas Fund (UNG) (see Daily GPI, June 29).
After a potential tropical disturbance threat dissipated over the weekend, the August contract has been scouting lower for support. Over the first two regular sessions of the week the contract has dropped 27 cents. Despite the decline, August futures are still trading comfortably within the $3.500-4.500 range that the July contract hollowed out.
Hencorp Becstone Futures broker Ed Kennedy said after studying the fundamentals, he’s not at all surprised by the recent weakness. “This is a story about demand….Where is it? It is still a bit hot in the South, but the northern cities from Detroit to Chicago to Boston are all very mild right now,” the Miami-based broker told NGI. “There is just no air conditioning load to speak of and there is no warm-up forecast. In fact, I am headed to Long Island next week and I told my wife to pack a sweater for the evenings.”
Kennedy noted that the only real demand out there is in the form of storage injections, but even that is negligible. “At these prices the utilities have all locked in their storage purchases. We could see another big injection [this Thursday], but at a certain point full is full. Is it at 3.2 Tcf, 3.3 Tcf or 3.4 Tcf? It all depends on how they count the base gas.”
Kennedy said he only sees one “game-changer” out there that could break prices out to the upside in a meaningful way. “Sure, some prolonged hot weather could help firm prices a little, but the only thing that can really turn this market around at this point is a hurricane in the right place.”
United Energy broker Walter Zimmerman said the August contract’s behavior over its first few days as the front-month contract has not been a surprise. “As expected, the spot contract rollover to August was a failure into key resistance, keeping the triangle congestion intact,” he said. “The triangle support line cuts [Wednesday] from the $3.670 area.”
In addition to tropical weather activity, Steve Blair, a broker with Rafferty Technical Research in New York, said power generation demand from “finally getting some summer weather,” and influence from funds like UNG, could push prices higher.
“My thoughts about UNG are very similar to the ones I had about the United States Oil fund last year,” Blair told NGI. “You have to remember these are index funds and we are beginning to learn more about their impacts. Look at what the U.S. Senate Permanent Subcommittee on Investigations found last week with regards to index funds and the wheat futures market. Now that these index funds are impacting some of this country’s heartland markets like wheat, all of a sudden government officials are really taking notice and getting fired up. I’m happy that people are finally seeing the total picture, which is that these index funds are artificially inflating the price of these commodities to the point where it is affecting the whole chain — from producer on down to consumer.”
In the report Sen. Carl Levin (D-MI), chairman of the subcommittee, and Sen. Tom Coburn (R-OK), acting ranking minority member, claim that commodity index traders, in the aggregate, have made such large purchases on the Chicago wheat futures market that they “have pushed up futures prices, disrupted the normal relationship between futures prices and cash prices for wheat, and caused farmers, grain elevators, grain processors, consumers and others to experience significant unwarranted costs and price risks” (see Daily GPI, June 25).
Blair said now that the problem is identified, regulators need to find a solution. “The regulators have been allowing index funds to assume hedge fund-type status, which allows them to have expandable positions like a true hedger would have,” he said. “While I don’t think this situation is responsible for the recent economic problems of the United States, I think to some degree the problems are being exacerbated by the artificial inflation created by the speculation of the index funds.”
Cooling requirements are not expected to be a supportive market factor. The National Weather Service (NWS) forecasts below-normal cooling demand for major energy markets. For the week ending July 4, NWS says New England should experience 26 cooling degree days (CDD), or four fewer than normal. New York, New Jersey and Pennsylvania should see 34 CDD, or 11 fewer than normal, and the Midwest from Ohio to Wisconsin is anticipated to have just 31 CDD, or 17 fewer than its seasonal tally. The recording of CDD started Jan.1, and already the Northeast and Midwest are behind schedule. So far New England has seen only 30 CDD, or 27 fewer than normal. New York, New Jersey and Pennsylvania are at 99 CDD, or 23 fewer than seasonal norms, and the Midwest has accumulated 171 CDD, or eight fewer than normal.
Market analysts see near-term weather as a bearish signal. “The fundamental outlook remains uninspiring as an extension of relatively mild temperatures across key consuming regions through next week is forcing enough cut in CDD projections to force upward revisions within future weekly EIA [Energy Information Administration] storage reports,” said Jim Ritterbusch of Ritterbusch and Associates.
Going into Tuesday’s trading the analyst said he saw prices slipping as much as another 20-25 cents, but added that he “will continue to await additional price declines to below the $3.750 area per August futures as a longer-term buying opportunity.”
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