Traders on Tuesday were taking stock of the current natural gas futures market following Monday’s 39-cent bump (see Daily GPI, Sept. 11), which was fueled largely by storm talk in the tropics and U.S. supply concerns following terrorist attacks on Mexico’s natural gas and oil pipeline infrastructure (see Daily GPI, Sept. 11). In quiet action Tuesday, the October contract traded between $5.820 and $5.960 before closing out the session at $5.934, up 4.3 cents on the day.

Some of the continued strength in natural gas futures could have been borrowed from crude futures, which settled at an all time record high. Despite word that OPEC plans to increase output, the October contract reached a high of $78.30 Tuesday before settling at $78.23/bbl, beating the previous record close of $78.21/bbl set on July 31.

Some traders noted that while the Mexico pipe explosions would likely increase Mexico gas imports from the U.S. marginally, the real impact of the attacks is that they put a spotlight on just how vulnerable the supply-demand equation can be. “Natural gas ‘benefited’ [Monday] from explosions in Mexico…highlighting what we’ve always known — that being the real and perceived risks associated with energy infrastructure (read: supply) by and large add fear premiums to a complex, which is by and large already fundamentally overvalued — according to some,” said Jay Levine, a broker with enerjay LLC.

Others were of the opinion that a number of factors are coming together to put upward pressure on natural gas futures prices. Citigroup analyst Tim Evans said tropical wave 91L located in the middle of the Atlantic, teamed with pipeline explosions in Mexico, look like a “valid excuse” for a renewed attempt at testing the upside in natural gas futures. However, he added that it will “take some time for the market to prove that this week’s rally attempt is more robust that the similar try a week ago.”

Noting that the pipe explosions down south could “siphon excess U.S. supply to make up for the shortfall,” Evans said detailed data on the Mexican pipe capacities has been elusive, but he doubts the “potential diversion” of U.S. supply would amount to as much as 500 MMcf/d. “If that’s the appropriate ballpark, then it would only amount to 0.8% relative to average U.S. demand of 60 Bcf/d,” Evans said. “Any addition to U.S. demand is supportive, but this would be a small influence compared with storm threats that would bring 15% of U.S. supply into play.”

In addition to the Mexico and storm situations, the analyst added that the last couple of weeks of storage reports have revealed below-average injections, which could tighten up the supply/demand equation a little entering this winter. “With a declining 233 Bcf year-on-five-year average storage surplus and at least one tropical system with a chance of running into the Gulf of Mexico, the bears are under renewed pressure to cover their shorts,” he said. “We think this has potential to run prices into the $6.400-6.700 area or possibly higher on that short-covering, possibly even without a bona fide hurricane threat to supply.”

Following Monday’s meteoric advance, long-term traders saw little change in market supply/demand factors and little justification in altering a bearish market outlook, and floor traders were skeptical as well. They noted that holders of short positions got rattled with the news of the Mexican pipeline explosions. “Traders aren’t really talking of it having an effect on U.S. supplies, and Monday was a technical rally after-the-fact of the pipeline story. Stop-loss orders were going off all the way from $5.750 to the high of the day at $5.920,” said a New York floor trader.

“We remain reluctant to follow this advance in view of bearish fundamentals that don’t appear vulnerable to a significant change anytime soon. Although [Monday’s] dramatic price rebound appeared impressive, it is still not enough to convince us that the lows have been placed in this market,” said Jim Ritterbusch of Ritterbusch and Associates.

Ritterbusch says to watch tropical weather. “We would reiterate a view that the storm factor will be the primary price determinant as this month proceeds and without a meaningful hurricane swing into the U.S. Gulf coast region, nearby futures prices would appear more appropriately priced at around $5 rather than $6.”

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