Bumping Hurricane Rita to a Category Four hurricane on Wednesday morning and then to a Category Five Wednesday afternoon proved that there is still plenty of room to the upside for natural gas futures to explore. After setting a new all-time record high of $13.24 in the overnight Access trading session, October natural gas futures on Wednesday ended up settling at $12.594, up 10.2 cents from Tuesday, but 6.9 cents lower than the all-time high prompt-month settle of $12.663, which was set on Monday.
With shut-ins rising and onshore and offshore evacuations ongoing (see related stories), the prompt month reached a regular session high Wednesday of $13.15, before backing lower over the remainder of the session.
“The natural gas futures market is holding its breath,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “If the center of Rita comes in just below Galveston, all hell is going to break loose because that puts all of the big refineries, Houston and the Ship Channel on the northern eyewall of the storm. I think the market is pricing in the worst case scenario with catastrophic damage.
“You have to remember there is approximately 2.3 Bcf/d in production off of that particular coast in Texas,” he said. “In addition, there is about 20-23% of the nation’s refining capacity in that area as well. That section of the Western Gulf also has all of the old rigs, which are highly susceptible to these storms. It could be very serious, or it could be nothing. If we see anything less than the worst case scenario, then we are way overpriced up here.”
As for backing off the highs in the afternoon, Kennedy didn’t lend much credit to the move. “I didn’t take much from that because the trade [producers] are basically not in this market,” he said. “What’s it worth? Nobody knows. Approximately 80-90% of Wednesday’s trade was locals picking each other’s pockets. Nobody else was playing.”
Kennedy said that by late afternoon Eastern time on Thursday the country should have a better idea on where Rita is going. As for Thursday morning’s storage report, Kennedy said he didn’t think it matters much as attention will be firmly on the storm.
IFR Energy Services’ Tim Evans said that if you believe last week’s natural gas storage report of an 89 Bcf build, then there is a problem further downstream. “We are not seeing the shut-ins in the Gulf translate into a storage shortfall,” the analyst said. “I think we have a shot at another 80-90 Bcf injection this time around for the week ended Sept. 16. If you’re looking at week-to-week changes, it is possible.
“It is a real interesting potential dichotomy between the emotional reaction to these storms and the actual impact on supply,” Evans added. “Yes, we are widely convinced that these storms ought to be bullish, but as we have seen with Katrina, one to two weeks later it is not having the impact on supply that we would have expected. This says to me that we are seeing some production increases from other regions.
“The Baker Hughes rig count has been extraordinarily high for a long time now, which suggests there should be some additional supply floating around here somewhere,” Evans said. “It is clear that there is some of that coming into the marketplace. On the other side of the coin, there has been a lot of demand destruction. There is still not a lot of electricity in New Orleans and the surrounding area from the direct impact of Katrina. In addition, the price impact has scared people as well.”
Other analysts are clearly bullish. “We feel that the natural gas market has shifted into a new and higher trading range by virtue of Hurricane Rita,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that the current anticipation of the high-demand period for natural gas, the ongoing dynamic of an expansion in the year-over-year deficit and the fact that the funds have been unable to extricate themselves from a net short position all augur in favor of continued price strength going forward.
Technicians are also enthusiastic. “My estimate of support is $10.65 for natural gas, but the market will not see it,” said a trader with Coquest in Dallas. He contended that the technical problem is that the market hasn’t fallen and has instead reached a level of true support and then rallied higher.
Turning attention to the storage situation, last week’s 89 Bcf injection report has market experts — including Evans with his 80-90 Bcf build projection — thinking big for the week ended Sept. 16.
Citigroup’s Kyle Cooper said his final estimation for the Energy Information Administration’s (EIA) storage report looks for a build between 69 and 79 Bcf. “It certainly appears that demand destruction is also occurring,” Cooper said. “However, our confidence remains rather low after last week’s shockingly large injection. As mentioned, some of the demand may not be able to return until the supply does. The supply/demand balance is not nearly as tight as many forecast.”
Cooper noted that depending on what Rita does, this season may result in the loss of 400 Bcf of supply. However, he pointed out that if 300 Bcf of demand is lost, the net effect is much less.
“Each week will obviously be closely analyzed for that balance,” Cooper said. “I am not that concerned with absolute demand levels or supply levels. I am incredibly concerned about the difference between the two.”
The number released by the EIA at 10:30 a.m. EDT on Thursday will be compared to last year’s 72 Bcf injection and the five-year average build of 80 Bcf. The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 69.18 Bcf injection.
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