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July Expires Sub-$7 as August Takes Prompt Position
Despite its on again/off again relationship with petroleum futures, July natural gas accepted some peer pressure Tuesday as it dropped lower on its expiration. After notching a low of $6.900, July expired at $6.976, down 16.2 cents on the day.
Taking over as prompt month on Wednesday, August natural gas settled 13 cents lower at $7.073. While the drop in natural gas was significant, the petroleum futures complex recorded large losses on the day. One day after settling at $60.54/bbl, August crude settled $2.34 lower at $58.20. Likewise, July heating oil declined 5.57 cents to close at $1.6204/gallon.
While some market watchers believe the most recent natural gas decline speaks to the larger bearish case, others advise that the market might not want to unpack its bags quite yet at this lower level because there could soon be a rally. Commenting on the $7.80 to $6.90 plunge over the course of a week, IFR Energy Services’ Tim Evans noted that there has certainly been a big swing.
“It is kind of a curious situation that the natural gas futures market finds itself in,” he said. “Clearly, a lot of the small speculative trader types who were on the long side of the market have been the losers here. The natural gas futures market has been heading south here even though crude futures made new highs through Monday and the natural gas storage outlook and weather forecasts still look more supportive than otherwise.
“What this suggests to me is that we have flushed out a lot of these weaker longs (smaller non-reportable noncommercial traders) in conjunction with the contract expiration,” Evans said. “We’ve beat up on the little guys, which sent them scrambling to liquidate their long positions, but the fundamentals haven’t really weakened here and we are likely to continue to see storage surplus declines for the next two weeks. The cooling degree day accumulations for this week are the highest yet. If we continue to get hot weather and another tropical storm gets tossed our way, we could conceivably go beat up on the larger fund short positions next.
“While falling crude oil could conceivably continue to weigh on sentiment in natural gas, it takes away a little bit of the camouflage that natural gas has been using to hide its storage surplus as a bearish factor. However, natural gas is still real cheap relative to heating oil.”
Taking the closes from the prompt months Tuesday, Evans said conversion into MMBtus would put heating oil at $11.68.
Refco analyst Marshall Steves said things have turned a little more to the downside. “The market seems to be paying more attention to fundamentals, which have turned more bearish,” he said. “There is still above average working gas in storage and somewhat moderating temperatures. We are backing off earlier 90 degree readings in the East.”
Prior to trading on Tuesday, Steves said, “In the near term, I expect the market to see a $6 handle, but you also have to remember that the heart of hurricane season, August and September are just around the corner. July temperatures will be important. The East Coast had a slightly warmer than expected June, and the analog years — that a number of forecasters are using — don’t show a lot of heat in the East and Midwest in July and August.” Thus historically if there is an early warm June, it is not typically followed by a warmer than normal July and August. “It’s unusual to be warm all through the summer,” he said.
Other forecasters suggest that a warm July and August may not be such a long shot. Weather 2000, a New York weather forecasting and consulting firm, points out that a hot June which saw Chicago reaching 90 or warmer for seven consecutive days was missed by computer models in May.
“Recall, in late May most computer models and short-term forecasters were anticipating a mild, uneventful June,” Weather 2000 said. It suggested being wary of mild forecasts for the holiday weekend.
The National Weather Service in its latest six-to-10 day forecast for the July 3 to July 7 period shows not only a bulls-eye of above normal temperatures centered over Las Vegas, NV, but also a broad swath of above normal temperatures across the center of the country bounded by a line from central Arizona to northern Minnesota and also by a line from Austin, TX to Boston.
Weather 2000 contends that the same computer models that missed the June heat are likely to miss further warm episodes. “Computer models will continue to underestimate the impact surface conditions have on the resulting weather and temperatures,” the forecasting firm said. “The nationwide heat in June 2005 has impressively been generated almost exclusively by the central and eastern thirds of the U.S., and once we enter July, the western third will get in on the heat act as well.”
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