Capping off a wild week that started Monday with a 28.4-cent futures drop to sub-$6 levels, August natural gas futures decided to take somewhat of a breather Friday, closing up 4.1 cents at $5.887. On Thursday, the prompt month reached its low for the week by trading off to $5.805.
Despite maintaining a mostly low-key profile Friday, August futures did take a stab at getting back over the $6 level in morning trading, only to top out at $5.99 before heading lower.
Trading on Friday was “dead in the water,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “We probably got some short-covering, but the bullish train is leaving the station. If you get another 100+ Bcf [storage] injection this week…what are [the bulls] going to be talking about? Nothing.
“It’s summertime. Do you realize how behind normal temperature-wise we are? It has been downright cool.” Looking to the next level of support on the downside, Kennedy said he would keep his eyes on the $5.50-5.60 area.
Tim Evans of IFR Energy Services said that while futures tried the upside overnight Thursday and early in the open outcry trade on Friday, it “didn’t get very far,” reinforcing the increasingly bearish sentiment.
Although there was some heat around the country Friday, and a number of nuclear power plants were down and the crude futures market was up, Evans said natural gas still had trouble holding gains due to the current storage situation.
“The main problem is the bearish DOE storage trend, with smaller-than-average withdrawals and larger-than-average builds in 16 of the past 20 weeks,” he said. “Larger-than-expected builds in the past two reports have prompted some talk suggesting that the relatively strong pace of drilling activity may be yielding some added production. On an overall basis, we think the fundamentals will remain soft pending some support from either more widespread and intense heat or some storm activity in the Gulf of Mexico.”
Evans said he sees longer-term support at $5.68-5.72 and then $5.48-5.52 as possible targets. “Weekly uptrend support off the January 2002 bottom, which steps up to $5.465 for the week ahead, is also in that vicinity and the market may want to tease through that level to test for a reaction.”
The Energy Information Administration’s storage report for the week ended July 9 revealed a bearish build of 108 Bcf, decimating both the 95 Bcf build from last year and the 77 Bcf five-year average. The surplus over the five-year average jumped to 54 Bcf from 24 Bcf the week before, while the comparison of current stocks to storage levels at the same time last year increased to a surplus of 251 Bcf from the prior week’s 238 Bcf level.
UBS analyst Ron Barone said that based on current storage balances, his calculations suggest that the industry will require an injection pace of 8.7 Bcf/d (versus 9.1 Bcf/d in the prior week) to get supplies to a solid comfort level of 3,150 Bcf by Nov. 1. “We view this as relatively bearish when compared with the 11 Bcf/d actual injection rate last year, and neutral when compared to the 8.7 Bcf/d actual 10-year average,” Barone said in a research note. “Assuming normal weather and the 8.7 Bcf/d 10-year historical going forward injection rate from current levels, supplies would approximate 3,145 Bcf by Nov. 1, 2004 (versus 3,155 Bcf at that time in 2003, 3,145 Bcf in 2002, 3,152 Bcf in 2001 and the overall 10-year average of 3,023 Bcf).”
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