A smaller than expected natural gas storage injection teamed with continued crude futures strength to spring July natural gas futures above $4 temporarily on Thursday. After recording a high of $4.067 just after 1 p.m. EDT, the prompt-month contract ended up closing the day’s regular session up 22.5 cents from Wednesday’s finish at $3.933, while July crude futures topped out north of $73/bbl before coming to rest at $72.68/bbl, up $1.35 from Wednesday.
The Energy Information Administration (EIA) reported Thursday morning that 106 Bcf was injected into underground natural gas storage for the week ending June 5, which immediately triggered futures values higher as much of the industry had been expecting a build of 109 to 110 Bcf.
After trading as low as $3.663 in Thursday morning trade, July natural gas futures had ticked upward to $3.750 just prior to the 10:30 a.m. EDT report. Immediately following the release of data, the front-month contract pushed to a high of $3.860 before retracing to $3.784 by 11 a.m., up 7.6 cents from Wednesday’s regular session close.
“We’ve been trading at sub-$4 levels now for the last six days, so I think it was time for a change. While the storage number was somewhat smaller than the market was expecting, what I think we really saw on Thursday was that the gas market can’t continue to detach itself from the rising equity and oil prices,” said Gene McGillian, a broker at Tradition Energy. “Once oil prices climbed above the $72.50/bbl level I think the sentiment spilled over into natural gas…pushing it above $4. There is a lot of talk in the market about the gas to oil ratio being out of whack with gas looking pretty undervalued. With crude prices trading near eight-month highs on Thursday, I think some short-covering and new longs came in to push the gas market higher.”
While the show of strength was interesting, McGillian said the fact that natural gas failed to hold on to a majority of the gains on the day stood out to him. “The market wasn’t able to hold on to the rally as it slipped back below $4. The pattern where the market has the ability to rally but is unable to hold its gains seems to be continuing,” he said. “The decline in the afternoon is a tribute to fundamentals, where natural gas continues to struggle to find bullish signals. We’ve had two weeks in a row where our storage levels are above the five-year max and we still don’t see any long heat waves coming up in the next two to three weeks. We have ample supplies, not much seasonal demand and no industrial demand to speak of. Those factors are enough to keep gas prices at bay.”
Questions continue to surface about the large futures market positions in natural gas that have been taken by the United States Natural Gas Fund LP (UNG), an exchange-traded fund that is described as a pure play on the price of natural gas in the front-month futures contract. There were reports in mid-May that the fund held as much as 80% of the June contract, although other analysts disagreed, saying that couldn’t possibly be true (see Daily GPI, June 4; May 15).
“There has been a lot of support in the market coming from the establishment of the UNG position in natural gas,” McGillian said. “Their total positions climbed to I believe over 90,000 contracts on ICE and Nymex. They’ve basically built a considerable part of that position over the past four to six weeks. I think you are starting to see the market reflect this. Instead of the real bearish fundamentals kind of keeping gas down near $3, it keeps bouncing up because it has some support coming in from that play.
At present market technicians are hard pressed to determine natural gas’ direction from their study of price data. “Back in late April natural gas came down, held, and ricocheted higher from critical support at about $3.155,” said Walter Zimmerman of United Energy. “There was an early leg higher, but since then there has not been decisive price action, and it’s been doing an excellent job of not making up it’s mind. At this point there is no compelling [technical] case for the market to move either way.”
He pointed out that since April the market is forming a triangle pattern of lower highs and higher lows and that is a sign of confusion, uncertainty, lack of direction, lack of leadership, and traders don’t know what to do with it. “That’s the message of the price action.”
Calling the storage injection “supportive relative to expectations,” Tim Evans, an analyst with Citi Futures Perspective, noted that the report really is still bearish. “The 106 Bcf in net injections was on the low side of expectations and may be feeding a short-term rally in prices,” he said. “However, we note this is still a bearish figure relative to the 91 Bcf five-year average, with the year-on-five-year storage surplus stepping up to 438 Bcf, a new high and the highest level since January 2007.”
While the 106 Bcf build fell short of many expectations, it was significantly larger than last year’s 84 Bcf injection for the week. Ahead of the report, a Reuters survey of 25 industry players produced a range of injection expectations from 104 Bcf to 118 Bcf with an average build estimate of 109 Bcf. Bentek Energy’s flow model also produced a 109 Bcf expectation.
Evans — who had been calling for a 110 Bcf build — noted that the storage estimate miss on the downside could finally be reflecting a decline in U.S. production, but not necessarily. “A week of light LNG [liquefied natural gas] deliveries would be just as effective in limiting storage injections, but would not necessarily mean a drop in longer term supply,” he noted.
According to the EIA, working gas in storage stood at 2,443 Bcf as of June 5. Stocks are now 568 Bcf higher than last year at this time. For the week, the East region injected 67 Bcf and the Producing and West regions chipped in 23 Bcf and 16 Bcf, respectively.
Â©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2023 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |