Sparked by Thursday’s smaller-than-expected natural gas storage build and backed by Friday’s news that the number of U.S. rigs searching for gas declined for the first time in 17 weeks, May natural gas futures rallied to end the week.
The prompt-month contract reached a high of $4.322 before finishing Friday’s regular session at $4.257, up 12.9 cents from Thursday’s finish and 21.8 cents higher than the previous week’s close.
News that a less-than-expected 73 Bcf was injected into storage for the week ending April 16 combined with word from Baker Hughes that the number of rigs actively searching for natural gas in the United States declined by 17 for the week added 30.2 cents to May futures during the last two days of the week.
Despite the supportive news, some industry veterans are not ready to jump on the bulls’ bandwagon.
“We basically finished the week at the upper edge of the six-week trading range, but we’ve know that the market has been vulnerable to bouts of short-covering,” said Gene McGillian, a broker at Tradition Energy. “On Friday we saw a drop in gas rigs for the first time in 17 weeks, which spurred the afternoon futures rally above $4.300. I think we’re forming a nice base between $3.800 and $4 and that some of the news that came out during the week put some pressure on the short side of the market. That said, I don’t think the underlying fundamentals point to a sustained rally from here, but given the shortness of the market, you can’t rule anything out.”
McGillian told NGI that in the intermediate term the $3.810 low from April 1 will likely stand as a bottom, but with bidweek right around the corner anything could happen. “Last month, we saw basically a 20-cent sell-off as the market went through its expiration cycle because during the shoulder season there really isn’t any prompt demand for gas.”
Addressing the “bullish” storage injection and gas rig news, McGillian warned that both items deserve a closer look. “Some people are taking Friday’s rig news as maybe low prices are starting to curtail drilling activity, but I think we’ll have to wait till next week to see if that is really true. As for storage, while Thursday’s injection wasn’t exactly what people were expecting, it still was well above both last year’s build and the five-year average build. Expectations are for that to happen again next week as well. So I don’t think we have a sea change in market sentiment, I just believe natural gas is exposed to short-covering on an ongoing basis here.”
Some top traders see little in the way of fundamental reasons for the market to trade higher or lower. “We continue to have difficulty building a strong bearish or bullish case for this market as we concede to bearish supply factors that are likely being offset by subsurface demand improvement,” said Jim Ritterbusch of Ritterbusch and Associates.
Ritterbusch looks for demand improvement in upcoming weeks to prompt storage additions short of expectations and said “connecting the dots between the equity rally of the past year and natural gas industrial demand improvement remains challenging. Additional non-weather-related demand improvement will be a slow process and is unlikely to prove sufficient to sustain price rallies,” he said.
Friday’s 8:30 a.m. EDT release of March durable goods orders by the Commerce Department was not very good news for those counting on a stronger economy to lift industrial demand for natural gas. Expectations were running for an increase of 0.4%, not quite as strong as February’s revised 0.9% gain. The actual figure came in at a disappointing 1.3% decline.
However, March data on the sale of new homes showed promise for bulls as the number soared to an annual rate of 411,000. Consensus expectations were for an annual rate of 330,000, which was more than February’s disappointing 308,000 starts. The February-to-March percentage gain was the largest seen since April 1963, according to the Commerce Department.
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