October natural gas futures exploded higher on Thursday despite the news from the Energy Information Administration (EIA) that a fairly robust 69 Bcf was injected into underground natural gas storage for the week ending Sept. 4. The prompt-month contract reached a high of $3.278 before closing Thursday’s regular session at $3.256, up 42.7 cents from Wednesday’s close.
The 69 Bcf build bested historical figures for the week, but some industry veterans had been expecting an addition in the low 70s Bcf. Just prior to the 10:30 a.m. EDT release of the report, October futures were trading at $2.740, but once the number was revealed the prompt-month contract bounced immediately. Ten minutes after the report’s release futures were trading at $2.895.
“Thursday’s move had nothing to do with the storage report,” said Tom Saal, a broker with Hencorp Becstone Futures in Miami. “The time was coming for a round of short-covering from the funds, and my initial reaction is that was who was doing the buying. The Commitments of Traders report has shown that noncommercial traders are holding a near record amount of short positions. The way you take a profit on a short position is by buying it back, so I think that is what we are seeing. All of the bearish news that has been circulating over the last number of months may have finally reached its peak and run its course. Everything negative has been revealed and the market got pretty low as a result, but the down side was probably nearing its limit.”
As for whether the day’s move firmly established last week’s $2.409 as the low for the down move, Saal urged patience. “One day’s move does not a reversal make,” he said. “If we get another big move up on Friday then there might be more to say on the topic.”
Ed Kennedy, who works with Saal, was surprised by the day’s giant move. “For the life of me I don’t know why we are rallying with a build of 69 Bcf,” said Kennedy. “I think the average for all the surveys was a build of 71 Bcf, so I don’t see what the big deal is. I’m not sure this reaction is a reaction at all. It’s not the report. I think we are getting a round of short-covering. I don’t think prices can go too much higher in this current environment. Futures will likely test the low from last week because I just don’t know what is going to prop the cash market up here in the near term. We need a spike in demand or a disruption in supply. As of right now, I don’t see either happening right now. Hurricane Fred Flintstone in the Atlantic can yabba-dabba-do all he wants to, but as of right now he doesn’t look like he is going to impact us.”
AccuWeather.com Senior Meteorologist John Kocet said Thursday afternoon that Fred will remain at hurricane intensity into Friday, but he does not give the storm much hope after that. “Wind shear and somewhat cooler sea surface temperatures will cause the storm to weaken rapidly over the weekend,” Kocet said. “By early next week, Fred will be nothing more than a tropical depression drifting slowly westward across the central Atlantic. Later next week there is a small chance that the remnant low could try to get organized again upon reaching a more favorable environment in the western Atlantic.”
Heading into the storage report, most industry estimates appeared to be for a build in the high 60s Bcf to low 70s Bcf. A Reuters survey of 23 industry players produced a range of build expectations from 59 Bcf to 100 Bcf with the average expectation coming in at 73 Bcf, while Bentek Energy hit the nail on the head with its 69 Bcf estimate. The research firm said it expects record inventories with stocks to end the season above 3.9 Tcf, assuming injection rates for the rest of the season are at the five-year average.
Kennedy said storage is going to be filled early, so where is the extra gas going to go from there. “It is not physically possible to have more than 3.9 Tcf in storage. If storage is full, there are going to have to be shut-ins,” he said. “We are below the cost of production anyway. Some of the independents I don’t think have any other choice. However, in this political climate I doubt you’ll see any of the majors shutting in for fear of the claims that they are trying to drive prices higher.”
The actual 69 Bcf build cleared last year’s 63 Bcf addition for the similar week and the five-year average injection of 67 Bcf.
As of Sept. 4, working gas in storage stood at 3,392 Bcf, according to EIA estimates. Stocks are 495 Bcf higher than last year at this time and 503 Bcf above the five-year average of 2,889 Bcf. For the week the East region injected 55 Bcf while the Producing and West regions added 13 Bcf and 1 Bcf, respectively.
Looking ahead, Kennedy said a chilly winter could bring the supply-demand equation into better balance. “The forecast for the fall and winter is for below normal temperatures,” he said. “In fact, the Canadian model is pointing toward temperatures that are 1 to 3 degrees Celsius below normal. That would be a very cold winter capable of taking some of this excess gas out of the market in a hurry. The only problem is it is a long-range forecast, so let’s see how things look once we get a little closer to the season.”
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