Looking almost like a carbon copy of price action on Tuesday, December natural gas on Wednesday bottomed out at $11.510 and peaked at $11.930, before settling at $11.669, down 12.4 cents on the day.
On Tuesday, the prompt month put in a low of $11.500 and a high of $11.980, then ended up settling at $11.793, down 8 cents for the day.
As the calendar days in 2005 tick away, natural gas traders continue to focus on the storage situation and weather forecasts for the winter. The Energy Information Administration (EIA) releases storage data for the week ended Nov. 4 on Thursday morning.
“Trading on Wednesday really seemed to mimic Tuesday,” said Brad Florer, a broker with ICAP Energy. “We danced around settlement on both sides, but I am not sure anyone knows what to do. We had that nice key reversal on Monday with the 45.8-cent jump, so maybe people are waiting to see if that generates some buying,” he said, noting that “it hasn’t so far.
“It has not been a good week to be directional. It really is a stomachache for both sides right here,” he said. “I think with the key reversal and the fact that winter is coming, whether we can see it right now or not, I am wondering just how much downside room there is. I think that is what is holding this thing up right now. Once we get a decent cold forecast, we will see what kind of strength bulls will bring to the party at that point. Until we see the market’s reaction to cold, the downside may have a difficult shot here. In the meantime, nobody’s ready to jump in and start buying it yet either.”
Looking at Thursday morning’s natural gas storage report for the week ended Nov. 4, Florer said that despite build projections in the low 40s, there might not be much of a bearish reaction beyond the initial knee-jerk. “I am not sure how much the last couple of injections really affect the market,” he said. “I am sure there will be an initial reaction, but I don’t think the report will spark any lasting momentum or direction-setting. We already know that we are going to start the heating season basically full.”
Florer said the key to prices and storage adequacy debate really revolves around the type of temperatures that winter 2005-06 brings. “It all boils down to how cold winter is going to be. One of our analysts here has been saying ‘tell me how cold winter is going to be and I’ll tell you where gas prices are going.’ I really think that is the key. Sure we are warm right now, but how long will that carry through?”
Crude futures also fell on Wednesday, putting the front month even further below the $60/bbl mark. December crude settled at $58.93/bbl, down 78 cents on the session. Continued weakness in the petroleum futures complex leads some to believe that natural gas could still run lower.
IFR Energy Services analyst Tim Evans noted Wednesday that natural gas is getting weighed down by the weaker sentiment in petroleum and worries over a bearish EIA storage report. “A break of Tuesday’s $11.50 low should trigger a further drop,” he said. Evans said he is looking for a 40 to 50 Bcf injection.
Noting that a Bloomberg survey of 15 analysts is calling for an average injection of 47 Bcf, Citigroup’s Kyle Cooper expects a build in working gas inventories of 41 to 51 Bcf. He said “a build in our range would be considered bearish on a temperature-adjusted basis.”
Wednesday afternoon’s ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, predicted a 42 Bcf injection for the week. The number revealed by the EIA Thursday morning will be compared to last year’s 35 Bcf injection and the five-year average build of 17 Bcf.
How many more injections into storage the market sees this year revolves around temperatures, which so far have been moderate. Weather expectations continue to shape the natural gas futures market. On Monday, a report of forecasted colder weather launched the prompt month contract 84 cents higher during the last half of the day’s trading and December futures settled at $11.873, up 45.8 cents for the day.
In the weather report, which was credited by some to have spiked Monday’s market, Tom Skilling, chief meteorologist at WGN-TV in Chicago suggested on their website that “a cold front may hit in two weeks.” The forecast shows a Nov. 23 pattern developing that sends bitterly cold temperatures plunging south into the Ohio Valley. Skilling’s forecast can be seen at WGNTV.com.
Some market experts were skeptical of the extreme cold forecast. “He must have a crystal ball, because no one else out here sees it,” said a Midwest broker.
Longer range weather forecasts are often fraught with uncertainty, but the National Weather Service in its most recent eight-to-14-day forecast shows below normal temperatures in Alaska and along a majority of the East Coast, with the rest of the country in normal to above normal temp territory.
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