October natural gas futures continued to work lower on Wednesday as the Energy Information Administration (EIA) reported that it has lowered its 2010 gas price forecast by 15 cents due to recently downward revised growth estimates for economic activity through 2011. The prompt-month contract Wednesday reached a low of $3.795 before closing at $3.814, down 3.8 cents from Tuesday’s finish.
According to the EIA in its new Short-Term Energy Outlook (see related story), Henry Hub spot prices now are expected to average $4.54/MMBtu, which is 60 cents/MMBtu higher than in 2009 but 15 cents lower than the agency had forecast in July.
Citi Futures Perspective noted that the natural gas market was mostly quiet Wednesday following Friday’s “mini-spike” and Tuesday’s retracement, adding that traders were likely waiting for their next cue from Thursday morning’s storage report for the week ending Sept. 3.
Evans said he is expecting the EIA to report a 57 Bcf build, which would be smaller than both the 62 Bcf five-year average and the date-adjusted 68 Bcf build last year for the week. “While this would be moderately supportive, there’s been a consistent ‘sell the news’ reaction to these reports and so we can’t rule out a downside test after this one,” he said. “How the market takes it, though, may show whether natural gas prices have finally found a floor.”
Heading into the 10:30 a.m. EDT report, most industry estimates appear to be for a build in the mid 50s Bcf. A Reuters survey of 22 industry players produced a build range of 45 Bcf to 66 Bcf with an average injection expectation of 57 Bcf. Bentek Energy’s flow model projects a 56 Bcf injection, which would bring inventory levels to 3,161 Bcf. The research firm expects a 38 Bcf build in the East Region, a 13 Bcf addition in the Producing Region and a 5 Bcf addition in the West Region.
In its weekly storage note, Bentek noted that the EIA recently updated its peak working capacity of underground gas storage for the Lower 48 states to 4,049 Bcf, up 4.1% compared with 3,889 Bcf in April 2009 (see Daily GPI, Sept. 7). Bentek noted that the revision is in-line with its own estimates.
“All-time high inventories reached last year were the result of higher production, lower demand and a favorable pricing environment,” Bentek said. “Since last October the market has added 60 Bcf of storage capacity and production has grown again this year. But record heat and cooling demand this year have slowed down injections. Additionally, narrow summer-winter spreads have provided little incentive to put gas into storage, keeping injections behind last year’s pace by about 10 Bcf/week. However, with demand projected to decrease significantly for the remainder of this month, Bentek expects injections to ramp up and outpace last year’s injections for this same period, putting season-ending inventories near last year’s level.”
Some analysts suggest that the current poor supply-demand factors of the natural gas industry may eventually lead to an opportunity for producers and physical market longs.
“The fundamentals of the gas market remain negative, there is more than adequate supplies and demand remains soft. But because the fundamentals have been so negative for so long we would not be surprised to see some type of oversold, short-covering rally at this time,” said Mike DeVooght, president of DEVO Capital. He added that from a risk management position he will keep holding his current collars but should prices make a lunge higher, he “will use any significant rally as an opportunity to add to our short positions.”
DeVooght currently advises speculative and trading accounts to hold onto $4.50 October calls purchased at 38 to 45 cents and end-users to stand aside. Producers should continue to hold on to the remainder of a 12-month $5.50 put option offset with the sale of a $7.50 call that was initiated in December of last year.
Near-term weather does not seem to be much of an inspiration to either bulls or bears. Forecaster MDA EarthSat in its six- to 10-day outlook shows a broad band of normal temperatures bordered on the north by New England, Iowa and Idaho, and on the south by Arizona, Arkansas and Georgia.
In its Wednesday morning forecast it said, “The forecast has trended a bit cooler again across the northern tier of the U.S., in response to better agreement on a cool area of surface high pressure. After a seasonal to warmer-than-normal start, belows [normal temperatures] will quickly move into the Upper Midwest and remain in place for the balance of the period.” It added that temperatures in the Northeast would also trend lower after a warm start, and the cool air mass was the result of a combination of meteorological factors and “is well supported among the models. Most guidance still supports weak ridging across the South as well, which should keep this region a bit above normal.”
Looking at the tropics, the ninth tropical storm of the 2010 Atlantic season, Igor, formed in the Atlantic, just south of the Cape Verde Islands on Wednesday. Igor is forecast by AccuWeather.com meteorologists to become the next hurricane, as “the train of systems from Africa” remains active.
The forecasting firm noted that Igor could continue to plow westward toward the Antilles into next week, or could be picked up and turned northward by a trough of low pressure expected to drop in off the East Coast of the U.S.
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