Traders kept the streak of gains alive on Wednesday as the August natural gas futures contract added 8.8 cents to close at $3.793 on expectations that the industry on Thursday morning will see its smallest storage injection since mid-April.
Wednesday marked the fifth consecutive day of higher closes. Over the period the August contract has added 51 cents, 38.5 cents of which was amassed last Thursday alone. Some traders were impressed by the market’s recent show of strength despite continued lackluster fundamentals.
“I am encouraged that the market has been able to hold on to last Thursday’s gains. It is pretty remarkable considering there has been no bullish news whatsoever,” said Julio Sera, a broker with Hencorp Becstone Futures LC in Miami. “We have mild weather conditions in the major gas usage regions and no threats of hurricanes on the horizon. I think the market might be looking at the belief that we will have a smaller storage injection in Thursday’s report than we have had in a long time. This could be a reflection of the lower rig counts finally coming into play.”
Stepping away from the fundamentals, Sera noted that the “enormous X factor” is the position of the funds. “We are coming up on August expiration next week, so there will likely be some moving and shaking involved,” he said. “We’ll probably see some book-squaring ahead of the termination.”
Turning attention to Thursday’s natural gas storage report for the week ending July 17, Sera said he is expecting a 65 Bcf build. A Reuters survey of 25 industry players produced a range of build expectations from 61 Bcf to 82 Bcf with an average injection expectation of 68 Bcf. The number revealed Thursday morning at 10:30 a.m. EDT will be compared to last year’s 87 Bcf build for the similar week and the five-year average injection of 62 Bcf.
According to longer-term analysis, the bearish case has been absorbed by the market, and prices are now shedding the arguments of ample storage, low industrial demand and mild weather in favor of more forward-looking factors. Analysts say last Thursday’s gain of 38.5 cents on the heels of an expected Energy Information Administration inventory report, a bullish winter weather outlook, a positive report from Goldman Sachs and the much ballyhooed U.S. Natural Gas Fund rollover marked the spot at which the April low of $3.155 held its ground.
“The low of $3.155/MMBtu (4-27-09) will be remembered as the major low at the end of the decline from $13.694, [but] it was last week’s low at $3.225 and the subsequent fight above $3.250 that will have changed the landscape in this market in ways we cannot yet see,” contends Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm. It is his observation that during last week’s “battle the old fundamentals spent their last bit of influence trying to press quotes lower. Poor industrial demand and ample underground storage numbers will be with us into the future; we just don’t expect them to have the same amount of gravitational pull on prices any more.”
Beutel hints that eventually a cold winter will drive prices higher. “The extremely temperate weather in the North weighs in on the bearish side now, and any sudden change in temperatures toward the hotter side could tip the balance toward the bulls. That might be thinking short-term, though; if this pattern of colder-than-usual temperatures persists into November, we will have six months of cold to boost prices,” he said.
Others aren’t so sure the tide is about to turn. Phil Flynn of Alaron says to sell September natural gas at $3.900 with a stop at $4.300.
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