Shrugging off a 9.1-cent loss Thursday related to profit-taking, the June natural gas futures contract climbed right back into things Friday, closing up 7.5 cents on the day to settle at $6.294. Friday capped a wild week that saw a 36.9-cent breakout gain on Monday, vaulting the prompt month well over the psychological $6 mark.
“Some of the gas marketers are doing a little bit of business and I think they are starting to realize that $6 is sort of where we are,” a Washington, DC-based broker said. “I think we had strength today on the weather,” he added, noting that most forecasts are looking for warmer than normal temperatures over most of the United States.
“In addition, when crude touches $40/bbl — as the June futures contract did Friday — it is going to be supportive of natural as well,” he said. “While not higher than the price achieved in the first Iraq war, the $40 high exceeds the $39.99 price that was notched just ahead of Operation Iraqi Freedom — the second Iraq conflict.
“Natural gas has not gotten in any way, shape or form into a runaway stage here,” the trader said. “It is still holding up at this level between $6.20 and $6.36. I think that even if futures breaks down a little bit, it won’t be anything too substantial because we are already a good chunk into May and the hot weather is going to start being the talk. The $6 mark looks supportive, both of the charts and psychologically.”
The trader said he was not quite ready to call $6 a new floor. “If we are still at this point in a month and a half, then I might be ready to make that point because we would clearly be in a higher demand season,” he said. “While I wouldn’t say that $6 is the floor yet, I would say that the futures market is currently comfortable over $6 for the moment. It’s not getting any reason to sell off from anything external.”
Addressing the weather situation, UBS’ Ronald Barone said it looks like the U.S. might be headed for a “summer sizzler” this year. “Fueled by excessively high near-month crude prices and continued calls for hot summer conditions, natural gas futures have remained on an overall northbound climb,” he said.
Barone said cooling demand should continue to pick up over the near term due to warmer than normal projections. “Following [last] week’s hot conditions along the West Coast (offset somewhat by cooler than normal weather in the Northeastern third of the U.S.), the National Weather Service’s latest 6-10 day outlook calls for mostly normal to above normal temperatures throughout the country, with below normal readings expected in the Northwest and Upper Plains regions,” Barone said.
The Energy Information Administration (EIA) announced Thursday that 72 Bcf was injected into underground storage for the week ended April 30. The report compared to a 65 Bcf five-year average build and an 82 Bcf build for the same week last year. The report caught few off guard as the number was in line with historical averages as well as the industry consensus, which was looking for a 70-76 Bcf build.
“Based on current storage balances, our calculations suggest that the industry will require an injection pace of 10.5 Bcf/d (versus 10.4 Bcf/d in the prior week) to get supplies to a very solid comfort level of 3,150 Bcf by Nov. 1, 2004,” Barone said. “We view this as relatively bearish when compared with the 12.6 Bcf/d actual injection rate last year, but relatively bullish when compared with the 9.9 Bcf/d actual 10-year average.”
The EIA reported that working gas in storage now stands at 1,227 Bcf, or about 391 Bcf higher than last year’s 836 Bcf. With each recent report, storage has eaten away at its deficit compared to the five-year average. With the injection last week, storage went from 34 Bcf below to 27 Bcf below the five-year average of 1,254 Bcf.
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