With the heat wave still in effect in a number of U.S. regions and conditions in the tropics becoming more friendly for hurricane development, natural gas futures traders on Friday extended Thursday’s rally. The September contract recorded a high of $6.950 before closing out the day at $6.820, up 23.4 cents from Thursday’s close and 73 cents higher than the previous Friday’s finish.
“We had one of our major resistance levels at $6.845. The penetration but failure to close above could mean we might be done here,” warned Steve Blair, a broker with Rafferty Technical Research in New York. “Above that, $7 is also major resistance. I am a little surprised that we are up here, but there are a couple of factors to look at.
“We are now truly getting into summer, which means sustained heat and greater chances of seeing hurricane activity,” Blair added. “The heat is helping the market show a little bit of strength, and I think the funds — while still very short the natural gas futures market — have been covering some of their shorts over the last couple of days due to the calendar. We are now almost in the middle of August, so now is the time to talk about hurricanes, not back in June. We are entering the peak of the season. The last thing you would want to be is short in a big way in the natural gas futures market and walk in the next morning to find something going on in the tropics, which sparks a 50-cent market rally in the first 10 minutes of trading. The funds simply could be lightening their loads here because they don’t want to get caught.”
Caught indeed. While it is still too early to tell, multiple forecasting firms are tracking a low-pressure system in the western Caribbean that could turn into something more sinister over the next week or two. “It’s only a matter of time, folks. Look how much heat energy is stored in the ocean right now, especially across the western Atlantic, Gulf and Caribbean,” said John Kocet, meteorologist with AccuWeather.com. “In order for a tropical storm to crank up into a hurricane, sea surface temperatures must be at least 80 degrees. When the ocean water is even warmer than that, like it is now, there is potential for a major hurricane. All that is lacking right now is something to light the fuse, and there are signs that may happen within the next six to 10 days.”
He added that there is “a definite hot zone in the tropics” that should be monitored in the days ahead. “This low-pressure system will be moving over some of the warmest water on the planet, which means it will have no shortage of fuel,” Kocet said. “The development of any tropical storm needs cooperation from the prevailing wind, which does look to be in agreement at this time.”
Thursday morning’s release of inventory figures caught traders by surprise. “We were looking for a 67 [Bcf] build, and the average estimate was about a 52 Bcf build,” said a New York floor trader. Instead, the Energy Information Administration (EIA) said injections for the week ended Aug. 3 tallied a somewhat slimmer 42 Bcf, and once the figure was released it was off to the races. The trader noted that when September traded over $6.570, new buying entered the market and the close over $6.570 gave the market momentum to test higher price levels Friday.
“Nothing has changed significantly from a fundamental standpoint. There has been a slight adjustment to the 11- to 15-day forecast calling for somewhat warmer temperatures. The price spike [Thursday] was a reaction to the injection number,” he said.
Addressing the storage injection, Blair said that while the number was 10 Bcf below most expectations, other comparisons favored the bears. “It’s all in whose eyes you see it through,” he said, adding that the 42 Bcf injection changes appearance when compared to last year’s 7 Bcf withdrawal and a five-year average build of 45 Bcf. “I don’t think the whole move Thursday was on the number, especially when you look at the currently comfortable inventory levels.”
Fundamentals followers of the natural gas market might want to consider the likelihood of a surprise to this week’s injection figures as well. The National Weather Service (NWS) forecasts an even greater accumulation of cooling degree days (CDD) in eastern and Midwest energy markets for the week ended Aug. 11 than it did for the week ended Aug. 4. For the week ended Aug. 11, NWS predicts a total of 166 CDD, or 59 more than normal, for the heavily populated states of New York, New Jersey, Pennsylvania, Ohio, Indiana, Michigan, Illinois and Wisconsin. For the week ended Aug. 4, the NWS reported actual levels of CDD for these states of 158, or 43 more than normal.
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