While mirroring Friday’s slim trading range, April natural gas futures traded at a significantly lower level on Monday. After trading down in Sunday’s Access session, April natural gas opened on Monday at $6.610, put in a high of $6.620 soon after, and set its sights lower for the remainder of the day. The prompt-month contract pushed as low as $6.470 before rebounding later in the afternoon to settle at $6.547, down 24.3 cents from Friday.
Monday’s settle was a nine-month low for front-month natural gas. On May 31, 2005, the July 2005 natural gas futures contract closed at $6.379.
With futures continuing to come off the $15.780 high back in December, the question is how low can the market go? According to one Washington, DC-based broker, “$6 is not out of the question” given current fundamentals.
“Everybody out there is pulling back and saying they will play for lower prices,” he said. “The real question is when will people look at the ‘carry’ out there and say, ‘I will buy the front month and sell the back and store it.’ The problem is with the amount of gas in storage; finding a place to put gas is not the easiest task in the world these days. Maybe that limits some of the desire to do that.”
The broker noted that the carry between now and January currently sits at $3.825. “That fact has certainly not escaped the notice of plenty of people,” he said. “However, with that carry widening…it is a continually bearish sign. The questions are how low is low enough; and when does all the demand that was priced out by the run-up to $15 come back in? Is most of that demand gone for good or simply temporarily gone?” (see related story).
As for the on-again, off-again relationship with crude futures, the broker said weakness in crude Monday could have played into the drop in natural gas. April crude sank $1.26 to close at $62.41/bbl.
“It was odd that crude was down Monday,” the broker said. “The Nigerian militants appear to be ratcheting things up and Iran continues to say that it is going to do what it wants to do, despite the international community’s wishes. While you would think that would add fresh juice into the geopolitical equation, none of that seemed to matter Monday.”
IFR Energy Services analyst Tim Evans said he continues to see natural gas futures limping lower in the short term. “The colder temperatures in the western U.S. are more of an offset to eastern warmth, but prices have once again failed to hold a prior low, confirming that for all of its short-term oversold condition, it remains too weak for much of an upward correction,” he said. “There’s still no floor here. The bearish fundamentals aren’t fresh, though, so we’d expect the market to grind lower rather than plunge.”
Debate swirls concerning last week’s stout withdrawal from inventory. The 171 Bcf draw was way ahead of the temperature-based regressions typically used by analysts, and it raises the question of the return of industrial demand ravaged by the Hurricanes Katrina/Rita-driven price spikes. Kyle Cooper of Citigroup believes that at this point it is indeterminate whether the 171 Bcf draw was the result of gas being forced out of storage due to contractual or operational reasons or if some of the “destructed” demand is returning. “I think one of the things going on is that you have some forced gas coming out, but that can’t go on forever. If this happens for a couple of weeks, you may have something going on. It (would begin) to say that the fundamentals are working.”
Others aren’t so sure that the large draw is the result of storage operators foisting gas onto the market. A Texas marketer said the majority of the increased demand appears to be real burning of incremental gas. “I don’t subscribe to a forced withdrawal. My theory is we’ve hit the industrial floor.” He cited demand from gas-intensive nitrogen fertilizer plants that are now profitable ahead of the spring planting season.
Terra Industries announced late last month that it planned to resume nitrogen production March 1 at its plants in Yazoo City, MS, and Billingham, Teesside, UK (see Daily GPI, Feb. 28). Terra cited lower natural gas prices and the approach of the spring planting season as the reasons for the restart of production. Another factor hinting at the return of industrial demand is the relatively nominal use of residual fuel. This may be a sign that lower gas prices are spurring substitution, others said.
Weather patterns may still give the edge to the bears. The National Weather Service in its most recent six-to-10 day forecast shows widely divergent temperature regimes for the East and West. Along a “fault” line that extends from northern Michigan to central Texas the more heavily populated Midwest and East are expected to see warmer than normal temperatures, but states from the Great Plains to California are anticipated to be below normal readings.
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