Proving that resistance up at $7.500 is still very much intact, November natural gas futures on Friday put in a significant retreat. After breaching but failing to settle above $7.500 during the three previous regular trading sessions, the prompt-month contract Friday put in a $7.035 low before finishing the week at $7.041, down 33.3 cents from Thursday but 6.7 cents higher than the previous week’s close.
On Friday it appeared that weak fundamentals began to finally offset the recently explosive oil complex. Even though November crude dropped 87 cents on the day, it still finished the session at a lofty $88.60/bbl
Just how much support can the skyrocketing prices of crude and products continue to offer the natural gas market? At issue is to what extent can markets seemingly related become disconnected and for how long. No. 2 heating oil can be used as a substitute for natural gas, typically in commercial applications where the capital investment has been made to allow fuel switching. November heating oil futures on Friday closed at $2.3306/gallon, or approximately $16.877/MMBtu, a whopping $9.836 premium over November natural gas. Crude futures are also sky-high on a comparison basis. Friday’s November crude close translates roughly to $14.767/MMBtu, a $7.726 premium over natural gas futures.
Kyle Cooper of IAF Advisors points out that from a fundamental perspective oil has already “blown past all the fundamental historical relationships to natural gas, and things could get even more out of alignment than they already are.”
Cooper added that it wasn’t uncommon for markets to get out of alignment. “Six weeks ago Rocky Mountain gas was 9 cents; not 90 cents, but just 9 cents, thus the basis was over $6,” he said. “Clearly, markets can disjoint, but it’s going to be tough.”
Nine cents might seem rich to some Rocky Mountain producers. NGI survey data show that on Sept. 17 gas traded as low as a penny on CIG and at Cheyenne Hub. Prices at those points have since rebounded, averaging $3.64 and $3.73, respectively, on Thursday.
Will natural gas prices succumb to the bearish fundamentals of plump supplies and what appears to be a warmer-than-normal winter forecast by the National Weather Service (NWS)? Cooper is circumspect. “If the Turks are fighting the Iraqis and it’s an incredibly mild winter, crude could be at $150 and natural gas $5, but it’s going to be tough,” he said.
Others were purely looking at the bearish natural gas fundamentals as the reason for Friday’s pullback. “The natural gas market is seeing a wave of selling of its own on a combination of disappointment that Thursday’s lower-than-expected 39 Bcf net injection to storage for last week failed to translate into sustained price strength,” said Tim Evans, an analyst with Citigroup in New York. “The absence of current storm threats to production from the Gulf of Mexico and the passing of the hurricane season without material disruption are also weighing on prices.”
The tropics have been quiet and some within the energy industry have already written off the 2007 Atlantic hurricane season. As of Friday afternoon, the National Hurricane Center said no storm development was expected for the north Atlantic Ocean, the Caribbean Sea or the Gulf of Mexico over the weekend.
On the temperature front, it appears that colder-than-normal temperatures will engulf much of the country Oct. 25-29. According to the NWS Climate Prediction Center, Alaska, the Northeast and the tip of Florida are the only locations that will record above-normal temperatures during the period. The rest of the East and Mid-Atlantic, along with California, Nevada, Utah and Arizona will see normal temperatures while the rest of the country is expected to experience below-normal conditions.
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