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Futures Show No Signs of Recovery, October Drops Another 12.5 Cents
Natural gas futures prices showed no signs of recovery Wednesday as the near-month contract tumbled 12.5 cents to end the day at $5.449 and the winter months again fell even harder than the prompt month, indicating steady selling pressure in light of high storage levels and diminishing hurricane concerns. The winter strip (November-March) fell 21.9 cents to $8.783.
“The last real low-risk entry to the short side of this market occurred in the last week of August, and now it feels a little bit like the horses left the barn,” said Citigroup futures analyst Tim Evans. He noted that on Aug. 25 less than three short weeks ago the near-month contract reached a high of $7.520. Since then near-month futures have dropped every single day except two, reaching a daily low on Wednesday of only $5.425.
A big reason has been the failure of the hurricane season to produce anything that could menace the Gulf of Mexico production area. Now there seems to be an established pattern in the Atlantic that is sending storms harmlessly east of the coast and out into the northern Atlantic. Hurricanes Florence and Gordon headed that way. It’s still to early to predict the route of Tropical Depression Eight, but it appears to be headed that way as well.
“The hurricane risk to the Gulf is still not zero,” Evans noted, “and late in the season we can see storms that flare up locally because the Gulf of Mexico is at its warmest for the year, and likewise the Caribbean is quite warm. We’ve had some pretty remarkable late season storms originate in that part of the world. We’re not entirely out of the woods yet.”
However, the market bears were tossed yet another bone Wednesday by the National Weather Service. In an unscheduled announcement, the Climate Prediction Center announced the return of El Nino to the equatorial Pacific Ocean. Gas futures broker Tom Saal of Commercial Brokerage is fond of saying that El Nino is Spanish for “low gas prices.”
The CPC said Pacific Ocean temperatures “increased remarkably” in the last two weeks. “Currently weak El Nino conditions exist, but there is a potential for this event to strengthen into a moderate event by winter,” said Vernon Kousky, the National Oceanic and Atmospheric Administration’s (NOAA) lead El Nino forecaster. NOAA said the development of a weak El Nino helps explain why this Atlantic hurricane season has been less active than was previously predicted. El Nino typically acts to suppress hurricane activity by increasing the vertical wind shear over the Caribbean Sea region. However, NOAA said at this time, the impact of El Nino on the Atlantic hurricane season is still small.
“We are still in the peak months of the hurricane season, and conditions remain generally conducive for hurricane formation,” said Gerry Bell, NOAA’s lead seasonal hurricane forecaster.”
Nevertheless, NOAA said typical El Nino effects are likely to be seen this winter, including warmer-than-average temperatures over western and central Canada and the western and northern United States, wetter than average conditions over the Gulf Coast and Florida and drier conditions in the Ohio Valley and Pacific Northwest.
The winter strip already has taken a beating, and in light of the new forecast “probably deservedly so,” said Evans.
“The most frequently asked question that I’ve had in the last three weeks has been, ‘Why are those spreads so wide and why can’t I just take delivery of October futures and deliver it against a January or February futures? Are carrying costs that high in natural gas?'” Evans said. “I have to explain to them that you need a physical place to store that gas and if you don’t already have that booked you aren’t going to get it.
“But that situation actually does have bearish implications because we can’t go from glut to shortage between October and January especially with this warm winter forecast.” He said hurricane fears, growing winter demand and deliverability concerns were the primary factors that drove the fall-winter spread to record highs. Those concerns are quickly fading now. “There’s just been a flow of selling” in the winter strip.
According to Walter Zimmerman of United Energy, natural gas now is in jeopardy of breaching major technical support levels. “Every single component of the energy futures complex has fallen to within range of critical support for the bullish case for a continued long-term uptrend,” he said. Spot natural gas needs to remain at or above $5.345 in order for there to be any chance to work higher.
Zimmerman said the $5.345 level is critical because it represents not only a key retracement point of the advance from the $5.319 low established in overnight trading Sept. 11 to the $5.860 high reached in Tuesday’s trading, but also is an important retracement level of the long-term advance from $1.020 in early 1992 to the recent $15.780 high of December 2005 in the aftermath of Katrina and Rita destruction.
Other key support points in the petroleum futures complex are $62.00-62.35 in crude oil, $1.5570 in unleaded gasoline and $1.7573 in No. 2 oil. Zimmerman contends that should any member of this complex fail to “ricochet higher” from a successful test of these general areas by the end of this week, then “we will have our strongest evidence yet that the previous highs were multi-year-time-cycle highs and that the trend is down for a multi-year-long correction of the advance from the lows back in 1998-1999.”
Government statistics on storage inventories certainly aren’t going to stand in the way. Distillate stocks are at their highest level since October 1999. Natural gas stocks are at record highs and likely to remain that way entering the winter heating season. The latest forecasts from Bentek Energy for the weekly natural gas storage report on Thursday calls for a 90 Bcf injection, resulting in 3,066 Bcf of working gas in storage, 11.8% more than the five-year average and 6.2% over the five-year high with about eight weeks left in the injection season. Global Insight is expecting a 89 Bcf injection. For the nation, cooling degree days last week averaged 11% below normal.
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