After bouncing back and forth in small increments, it was only fitting that May natural gas futures would keep to the program on Friday by gaining only 1.9 cents to close at $3.801, which was 6.4 cents higher than their close in the previous week.
The only real fireworks during the week were seen on Thursday following a natural gas storage report that not only revealed that inventories were unchanged, but also included a correction and reclassification that ultimately made the report read more like a 9 Bcf injection. Following the 10:30 a.m. EDT report Thursday, futures traded in a 25-cent range — which included a steep drop and a surge higher — all in the first minute (see Daily GPI, April 3).
Commenting on the current May contract’s premium to April’s expiration price, Tom Saal, a broker with Hencorp Becstone Futures LC in Miami, said the hike in values sounds about right.
“I think we’ve been due a rally. April futures expired at $3.631 and the May contract is up about 20 cents from that,” he told NGI. “I don’t think that is really anything to write home about. I think as we transition to the natural gas storage injection cycle, the new incremental demand for putting gas underground is spurring a little bit of a rally. However, the storage buying is not receiving any support from the current weather situation. We are seeing shoulder/springtime weather, so that is not really a big driver here.”
Saal said he thinks the near-term action will see futures move slightly higher. “I think we could start to edge higher. We’ve pretty much absorbed about as much bearish news as we can. All of the negative factors are known,” the broker commented. “The economy is still weak and we still have a lot of gas. The transition to the storage injection season normally sees a little pop in price because people are buying gas and putting it into the ground. By any recent historical standards, we are currently at pretty low prices. I believe we could see a buoying of prices in the near term.”
Looking further out, Saal said the market is anticipating the impact from reduced production levels but is unsure on the timing. “I think it’ll be a matter of months before we actually see reduced production levels. The decline rate of existing production is going to start to show up in the injection numbers later in the summer. However, we deal in the ‘futures’ market, so the impact on prices could be seen sooner than that as traders attempt to make moves ahead of the event.”
Traders got a dose of unfavorable economic news with the Friday morning release of March employment data by the Labor Department. Natural gas traders are keenly aware that any resurgence in industrial demand for gas will require an improving economy, and the employment data was not what the doctor ordered. Expectations were for a decline of 650,000 and the actual figure came in at a decline of 663,000, greater than February’s 651,000. The unemployment rate was expected to hold at February’s level of 8.1%, and the actual figure was 8.5%. The Labor Department said “job losses were large and widespread across the majority of industry sectors.”
Some of the top traders aren’t so sure that any broad economic strength will have much impact on the natural gas market, at least not immediately.
“We would note that unlike most of the commodity space, a weakening dollar and improved economic outlook simply don’t pack the punch that the financial developments provide to other markets,” said Jim Ritterbusch of Ritterbusch and Associates. He pointed out that currency weakness doesn’t translate to strength in the natural gas market because it is largely a North American market and “industrial demand for natural gas associates highly with manufacturing activity as sectors of the economy that tend to lag rather than lead a country out of a recession. As a consequence, we don’t anticipate much assistance from the demand side of the balances for several more months.”
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