After ratcheting tentatively higher through the morning hours, natural gas futures sifted lower Friday afternoon as information on the extent of damage to production assets in the Gulf of Mexico was slow in coming. With that November came to rest at $3.739 Friday, up 1.5 cents for the session but down 30.2 cents in its first full week as prompt contract at the New York Mercantile Exchange. At just 77,372, estimated volume was evidence of the market’s uncertainty.
Traders dumped November futures contracts to the tune of a 43.6-cent loss on Thursday upon learning that Lili had degenerated to a 100 mph category 2 hurricane prior to landfall. In the doing that, however, market watchers failed to recognize that Lili was still a very destructive storm with maximum sustained winds of 150 mph while she was over offshore natural gas assets in the Gulf of Mexico. According to preliminary damage reports available late Friday, at least three rigs and a platform were lost or severely damaged last Thursday when category 4 Hurricane Lili ripped through the Gulf of Mexico (see related story). And while four rigs make up less than 1% of the Gulf of Mexico fleet according to Baker Hughes, that figure is almost certainly going to increase this week.
For a glimpse of what could happen if the damage from Lili is significant, one must go back 10 years and take a look at the natural gas market in the aftermath of Hurricane Andrew — a category 5. After battering South Florida with 160 mph winds in late August of 1992, Andrew churned through the Gulf of Mexico leaving a wide swath of devastation in its path. All told Andrew knocked out an estimated 2.5 to 2.75 Bcf/d of production out for no less than several weeks. It took months for all the supply to return.
Andrew’s impact on the then nascent natural gas futures market is not to be understated. Driven by short physical supply, the October 1992 contract increased 50% to $2.79 during the month of September of that year. And although a $2.79 futures price does not raise many eyebrows in this day and age of $3.00 and $4.00-plus values, it represented a large increase over the $1 gas from February of 1992 (see related story from NGI’s Andrew Archives at https://intelligencepress.com/features/andrew/).
However, should the damage from Lili turn out to be minimal, natural gas futures have the ability to move lower, says Tom Saal of Commercial Brokerage Corp. in Miami. “On a weekly chart, we have a textbook [downside] reversal After making a new high this week, we closed below the two prior weeks’ settles. This is not constructive.”
Also a concern for traders is the proximity of the November contract to its 40-day moving average. Because non-commercial fund traders have a track record of buying the prompt futures contract when it rises above its 40-day moving average and selling it when it drops beneath it, technical traders will be on watch this week. On Friday, November’s 40-day moving average was calculated to be $3.738, just a tick below the contract’s closing price.
Looking ahead to this Thursday’s storage announcement, Kyle Cooper of Salomon Smith Barney looks for a 40 Bcf build. If realized, a refill of that magnitude would be bullish as it would fall short of last year’s 73 Bcf injection as well as the five-year average addition of 65 Bcf. Last week the Energy Information Administration announced a 47 Bcf refill, which was slightly higher than expectations centered on 35-45 Bcf. Storage currently stands at 3,038 Bcf, not far from the estimated full level of about 3,200 Bcf. That’s full according to the old American Gas Association table; EIA points to an alternate calculation of 4,021 Bcf as full (see Daily GPI, Oct. 4).
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