Some observers were expecting a mountainous move in natural gas futures Tuesday as Alan Greenspan told Congress that the nation has a long-term gas supply problem. What they got instead was a minuscule 1.6-cent hiccup from a market that had digested the news long ago. July futures ended the day at $6.330 with a high of $6.355 and a low of $6.23. August also gained 1.6 cents to $6.42, and September added 2 cents to $6.424.
“He didn’t tell us anything new,” said Ed Kennedy at Commercial Brokerage Corp. in Miami. “He told us what everyone already knows, that you can’t just keep putting more wells in the same fields. Decline rates are soaring. You have to open up new fields. The short-term solution is more LNG.
“We had some short covering because of the speech,” Kennedy conceded, noting that prices might have fallen otherwise. “There was a lot of attention paid to it. The range is still $6.22-6.50. We nearly touched $6.22 again and it held. It may test it again tomorrow. I think it depends on what cash does.”
Cash prices tumbled about 5-20 cents on average across the nation Tuesday, and there’s very little on the horizon to boost demand. Relatively high temperatures continued in the South Tuesday but the North remained mild. The six- to 10-day forecast by the National Weather Service shows that pattern may actually reverse itself somewhat with above normal temperatures forecast for the Midwest and below normal temperatures seen in the Southeast, Gulf Coast and Southwest. But there’s little indication that there will be a net change in demand.
“I still see some downside market potential,” said Tim Evans of IFR Pegasus. “A lot is going to depend on what sort of weather we get into at the end of the month when July is about to expire. I think the cash market is really going to be the more important arbiter of what share value is right now.
“I don’t know that $6.22 is the floor. The range for the July contract is still $6 to $6.50, which sort of says that above $6.22 we may be a little overvalued but below it we may be cheap. It may be that $6.22 is a pivot level or equilibrium price.”
The lack of weather and the uncertainty over how to react to large storage injections in the face of low working gas levels in storage have been the major factors contributing to the extreme daily price volatility on Nymex, Evans noted. “That’s why we’re getting the volatility in some of these sessions where you have 30 cents up one day and down 30 cents the next or 30-cent ranges without much of a net daily change. It’s not that there’s much volume behind those moves. Those who are willing to risk their necks in this market just keep after it. We have not had more than 85,000 contracts traded in a session since May 28. On Monday, we traded 60,149 contracts, which got spread out over 20 cents. That’s certainly not much.”
Evans also said he doesn’t believe there is enough “speculative length” in the market to lead to a severe bout of long liquidation that could send prices significantly lower. “People have been driven away by the volatility and don’t want to take risks in this market.”
Another large storage injection, however, could finally provide the bearish incentive to pressure prices to go down at least to test psychological support at $6. The last two bearish storage reports pushed prices just low enough to attract market buyers, and prices then rebounded.
Citigroup analyst Kyle Cooper said he’s forecasting a 101-111 Bcf injection this week, which would be bearish according to all comparisons. It would compare to an 88 Bcf injection during the same week last year, a three-year average increase of 88 Bcf and a five-year average of 87 Bcf. However, working gas levels remain 29% below the five-year average. In order to reach 3 Tcf by Nov. 1, the industry has to inject 11.7 Bcf/d, or 81.9 Bcf/week, for the rest of the injection season.
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