Keeping the week’s streak of lower closes intact, August natural gas futures — still faced with abysmal fundamentals — pushed lower on Wednesday to close at $3.795, down 4 cents on the day and 31 cents on the week.
Natural gas bulls can’t seem to catch a break. While Thursday’s storage report is expected to reveal a much smaller build than in previous weeks, the weather forecast for the first half of July looks pretty mild, which could lead to the speedy return of triple-digit injections down the road.
“Of all the energy markets, natural gas is probably under the spell of the worst fundamentals,” said Gene McGillian, a broker at Tradition Energy. “We have more than 2.6 Tcf in storage already, which is the earliest time on record that we’ve had this much gas. We did not see any sort of unexpected cooling demand show up in late spring, and even during this early summer it has not been that hot. There have been some short periods of heat, but the extended forecast is for normal to below-normal temperatures for the first three weeks of July. Adding to the bearish case is the fact that we have yet to see any supply cutbacks associated with the steep reduction of natural gas rigs. Until we get either an unexpected sustained heat wave across the eastern half of the country or a hurricane or two, this natural gas market is free to drift lower.”
Free to drift lower within certain limits, McGillian added. “The one thing that is apparent in the last six weeks is that the gas market is exposed to a lot of short pressure because the market seems to be biased that way. That stuff so far has not materialized from fundamental factors. Until we have a bit of a change in the current dire fundamental picture, I think the market is really going to have trouble sustaining any of its rallies. We seem to be range-bound between $3.500 and $4.500.”
Commenting on the current hot topic, the broker said she believes the United States Natural Gas Fund (UNG) has impacted the price direction, but not to the degree that many believe. “Over the last eight weeks, the UNG guys have basically put on a record position for themselves. There are indications that as they doubled their position in the different kind of contracts up close to 100,000, the market might have received a little more support than you would ordinarily see this time of year. That said, I don’t really think it has influenced the market that much. As we go into the middle of the injection season with the hurricane season and the fall coming up and being as short as the market already is, I just don’t know how much lower we can go.”
Turning attention to Thursday’s natural gas storage report for the week ending June 26, McGillian said he is looking for an injection of 75 Bcf. “This would be the second sub-100 Bcf injection after a long string of triple-digit builds, so I think that is telling us something,” he said. “I believe it is reflective of the recent heat we’ve been seeing that basically stretches from Texas up to almost the Canadian border. If we see an injection around 75 Bcf, the market might see a short-covering boost, but because of the mild weather forecasts going forward, we might see one or two smallish builds, but that’s it.”
Citi Futures analyst Tim Evans said he is looking for an 85 Bcf injection Thursday morning, which would be spot on the five-year average and 1 Bcf less than last year’s build for the week. Bentek Energy’s flow model indicates an injection of 75 Bcf, which would actually reduce the overhang to last year and the five-year average for the first time in a number of weeks. The research and analysis firm said a 75 Bcf build would bring stocks to 4.3% above the five-year high and 29.4% above the five-year average. Bentek expects a 58 Bcf build in the East region with additions of 10 Bcf and 7 Bcf in the West and Producing regions, respectively.
“This week’s build is expected to be the first storage number in four months to be below the five-year average; during a week where all-time record temperatures were broken throughout the nation’s midsection,” Bentek said in its weekly storage outlook. “The East and West were spared the extreme heat and both builds are expected to be right in line with the five-year average.”
Market technicians see the market in a trendless funk but concede that time may be on the bulls’ side. “The exact midpoint of $3.155-4.575 [recent trading range] is $3.865…” said analysts at United Energy. “The stalemate continues.” They see two possibilities for natural gas: frustrated shorts are tired of a trendless market and liquidate positions, forcing a short-covering rally, or deflationary pressures push natural gas to new lows. “Technically, the longer we sit the more favorable the bullish model.”
Bulls may have time on their side, but they will have to look beyond near-term tropical weather conditions to find support for their case. AccuWeather.com is monitoring three tropical waves in the Atlantic. “The Atlantic Basin remains relatively quiet. Three tropical waves are being monitored but there appears to be little or no support for development for at least the next couple of days,” said meteorologist Dan Kottlowski. He said the firm was tracking tropical waves along 28W, along 54W and along 92W. “All three waves are moving west at about six degrees longitude per day and are mostly south of 20N.”
A prominent meteorologist is looking for near-term cool conditions in the Midwest and Northeast followed by summer heat. “While I do think a significant period of heat and humidity will venture into the Midwest, [Great] Lakes and Northeast for a while later this month, our preseason exhortations of cool centered over the Lakes is showing its mettle again,” said AccuWeather.com meteorologist Joe Bastardi.
According to Bastardi, early July is looking a lot like early June with an uncommonly cool air mass opening over the Great Lakes. “But just like late in May and early June a major upturn of the SOI [Southern Oscillation Index, a pressure differential in the southern ocean] has occurred, and that should mean summer tries to advance again mid and late month, and the theory is it gets into the interior Northeast (for example, Philadelphia and even New York City) this time for more than just a day or two at or above normal,” he said.
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