With Hurricane Dean following a more westerly path than first expected, natural gas futures traders were ringing the sales register early and often in Sunday’s overnight Globex session and again during Monday’s regular trading session, peeling almost $1 worth of hurricane premium off the prompt-month contract. September futures reached a low of $6.035 on Monday before closing at $6.040, down a whopping 97 cents from Friday’s close.
While precautionary production shut-ins and evacuations were taking place in the Gulf of Mexico (see related story), the U.S. energy industry appeared to be breathing a collective sigh of relief as if it had dodged a bullet this time. That sigh of relief translated into deflating natural gas futures prices.
Hurricane Dean, which is threatening to become a Category 5 hurricane with winds in excess of 155 mph, continues to drive short-term price action in the energy markets, but this time the pressure is for lower prices. Dean’s new more westerly course is expected to take it over the Yucatan Peninsula and then across the Bay of Campeche, reducing the risk of damage to U.S. oil and gas infrastructure in the Gulf and on the coast.
“The natural gas market is rapidly unwinding its hurricane premium, to the extent it could even be said to have had one, given that its primary trend has been lower, not higher,” said Tim Evans, an analyst with Citigroup in New York. “By sticking to its westerly course, Dean has let the funds off the hook for now, allowing them to breathe easier. Prices will have to take some time to regroup now after this sharp decline.”
Jay Levine, a broker with enerjay LLC, noted that it was “really no secret” that the natural gas market, along with the rest of the energy complex, had firmed up recently with the increased threats of storm damage and hurricanes. However, as soon as Dean suggested its path wasn’t geared to the Gulf, natural gas futures trading “throws itself into reverse (starting with a vicious gap opening) and a one-day drop the likes of which we haven’t seen in a long, long time, making for fire-sale prices. Fire-sale profits? Well, that depends,” Levine said.
“Hurricanes, like the markets themselves, are capricious by nature and (since existing storage isn’t an issue) the removal of any threat probably isn’t going to go over well — a gross understatement when you consider today’s half-cent less than a full $1 drop,” Levine added. “And I thought 50 cents was exaggerated. Proof that it’s not that easy shaking the (short-term) trend off, not when the fundamentals continue to support lower prices (and/or not higher prices) — not that the complex is cheap — and today’s ‘bomb’ is simply a by-product of the most recent developments of Hurricane Dean and I suspect not the last we’ll see of this or any hurricane.”
The broker added that timing is everything as the potential for prices to drop, much less for hurricanes to develop, is and always has been there. However, he warned that he wouldn’t be getting “overly bearish” here even as the complex struggles with ample supply and lackluster demand.
Traders are now able to assess natural gas’ short-term value without the premium attributed to hurricane activity. Spot natural gas has been trading in a broad range from $5.754 on July 25 to as high as $7.192 reached in overnight trading Aug. 15. With September now trading closer to $6, the further erosion of storm premium may well be forthcoming.
“The house of cards falls,” said a New York floor trader early Monday morning. He added that he was looking for $6.240 to $6.270 to hold, but allowed that a further price decline could occur.
Other traders are looking for a connection with what may be a rebounding equity market. “Oil and gas will see some relief selling but may find a bit of support from the rebounding stock market. Asia is rejoicing in the fact that the U.S. cut the discount rate last week and that enthusiasm may at some point support oil [and by extension natural gas],” said Phil Flynn of Alaron.
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