If the assessment of a leading industry observer is correct, natural gas prices have fallen to the point where the potential for upside price movement is sufficiently greater than the risk of further declines.
Such a risk reward ratio makes purchases of natural gas attractive. “There was a good sized rally in August which ran further than it should have. The last 20 cent advance was not necessarily due to the previous week’s injection number, but short covering by funds. The market was run up too high and now is giving it back,” said Jim Ritterbusch of Ritterbusch and Asssociates.
“Prices could continue to work lower, but I don’t see sub $3.00 numbers for natural gas futures anytime soon. The industry is in a downcycle now, and we’ve come off about 30 cents from recent highs, but I see prices holding above $3.06 to $3.10 in that area. The underlying fundamentals are strong enough that one storage report isn’t going to knock the market that much lower.
“Recently the market saw a weak trend of sub-normal or below expectations injections in the storage numbers and assumed that structurally there was a market shift going on. The market thought that industrial demand was finally taking hold and the production reductions were beginning to show up in the (injection) numbers.
Traders wanted an extension of that trend and when they didn’t get it last week, they pitched their long positions,” Ritterbusch said. “Everyone knows what supplies are and what the expected inventory level is on Nov. 1. The unknowns are what the underlying demand trends are, and I think they are strong enough to give a rally into this winter. At that point the weather becomes a key variable.
“It may not be Nov. 1, but give or take a couple of weeks I look for beginning storage inventories of 3.1 to 3.2 TCF.” From a conventional investment analysis, holding natural gas contracts looks appealing. “If you look at the pivotal January contract which is where most of the demand is going to be, I expect to see prices of $4.50 and better.
“A January quote of $4.50 would assume a normal winter, but if you wanted to assume a colder winter by 10% then you are looking at $5.00 gas. On the downside I don’t see much more than 20 cents lower for January. In this business those are some of the good long term risk reward ratios that are attractive. I expect to be a buyer in the next few days,” he said.
Other analysts see little help in demand from downed nuclear capacity and are forecasting somewhat lower prices in the short term. “The reductions in nuclear capacity for refueling and maintenance take place every year and increase the demand for natural gas on a seasonal basis,” said Frank Bracken, analyst with Jeffries and Co.
“That’s just a helping hand. Most of the recent rally was short covering and some warm temperatures. We still think the basic supply demand fundamentals look great. But they only look great when superimposed on next year when there is not the overhang to get through.
“Our forecast is for $2.75 for September and October. We are super constructive long term and pretty cautious short term. There won’t be much help available from nuclear units going down to increase gas demand and lessen the storage surplus. The reductions in nuclear capacity will be helpful, but the fact remains that it’s late in the game and there is just not much that can be done,” Bracken said.
“The industry has done a great job of working off the surplus, but can’t get it completely worked off. Our forecast is for $3.50 for the front end of the curve for Q1 of 2003, assuming a winter that would be average for the 1990’s, which means that it has 7% fewer heating degree days than a winter over the 40 year norms. A normal one would be $4 to $5 gas.” (Republished with permission from Bill Burson, https://gastrader.net)
©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |