For the second Wednesday in a row, natural gas prices were hitwith a wave of selling seconds after the release of fresh storagenews. However, whereas the market closed on its daily lows lastWednesday, it finished on its highs yesterday as bargain huntinglifted the November contract almost 15 cents above its $5.15 lowWednesday.
The major cold front that is expected to drop low temperaturesinto the 30s as far south as Texas and Louisiana over the weekendwas seen as the impetus for the late price rise.
According to the American Gas Association, 78 Bcf was added tounderground storage facilities last week, bringing total workinggas in storage to 2,480 Bcf or 75% full. Prior to the release ofthe report, traders had been looking for a 60-70 Bcf addition,which would have fallen closer to last year’s 62 Bcf build. Notsince the Fourth of July week when 97 Bcf was stuffed into theground, has the market recorded such a large refill. And other thanback-to-back 78 Bcf injections in early June, last week’s storagetally is unmatched this injection season.
After learning of the hefty storage injection, traders werequick to point to the economic incentive to put gas into the groundthat existed last week. “The [prompt cash vs. Nov. futures] spreadmade sense last week. If you were a storage player and had themeans, it was advisable to inject,” a trader said. The averagespread between NGI’s daily Henry Hub spot price and Nymex Novemberfutures last week was 10 cents, more than enough to cover moststorage operators cost of carry.
Another trader echoed that sentiment and looks for therelatively large injections to continue through October. “In aneffort to avoid carrying charges, at-risk storage buyers in theproducing region picked up October contracts back in March andApril with the intention of taking them to delivery. Because ofthat, they are now long physical gas and more than happy to put itin the ground in an effort to play catch up.”
Moreover, he believes that the East consuming region willcontinue to account for a lion’s share of the weekly injectiontotal. “While they are injecting in the producing region foreconomic reasons, they are injecting in the east for contractualreasons. For at least the first couple weeks of October, I expectto see little change from the 45-55 Bcf injection that the East hascontributed for several months now. Storage operators have ratchetprovisions, which dictate how much gas must be put into the groundand until those are met, people must continue to inject.”
Looking at AGA historical data, he may have a point. Last year,the East consuming region saw a steady flow of about 45 Bcf intothe ground each week from June through September leading to a 90%full level the week ending Oct. 1. After reaching 90% full,however, the injections slowed appreciably last year. And while theEast has been able to inject about 50 Bcf each week during the sameJune through September period in 2000, it is only 82% full, whichmakes it possible for the market to continue to funnel gas into theground at the same 50 Bcf rate. For a market that is concerned withyear-on-year comparisons, this phenomenon could lead to a couplemore Wednesday afternoon price dips. Ironically, this week lastyear, the market injected 31 Bcf in the East and only 49 Bcf total.
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