Despite all of the other noise surrounding natural gas futures, the October contract still responded in a big way to Thursday morning’s Energy Information Administration (EIA) storage report, which revealed that an astounding 102 Bcf was injected into underground storage for the week ended Aug. 22. In its first regular session action as front-month, the October contract plummeted 55.8 cents to close at $8.050.
Even with Tropical Storm Gustav’s path likely targeting oil and gas infrastructure in the Gulf of Mexico, not to mention the two to three other systems that are forming behind it (see related story), traders were unable to ignore such a large injection this late in the summer. After trading at $8.530 just prior to the 10:35 a.m. EDT report, the newly minted front-month contract plummeted to a low of $8.001 just a few minutes later.
Commercial Brokerage Corp.’s Ed Kennedy noted that while the large injection resulted in a significant drop in futures prices, the lower values likely won’t stick around if the weather picture in the tropics has anything to say about it.
“We now have Tropical Storm Hanna and two more systems behind that. Hanna on Tuesday is expected to be off of the East Coast of Florida at about the latitude of Miami. Where is it going to go after that is the question,” he said. “If it goes over southern Florida, then we could potentially be looking at a one-two punch like Hurricanes Katrina and Rita. Gustav is going to be a Category Three or Four hurricane right through the heart of the rigs in the Gulf and into Louisiana.”
Sidestepping the doom and gloom for a moment, Kennedy noted that Gulf infrastructure could be better suited this time around. “Rita and Katrina may have done everyone a favor by getting rid of a lot of older, weaker rigs, but the thing we will have to pay attention to is Gustav’s speed. If it moves slowly as a Category Three or Four, then watch out because we are going to build up some big seas.
“The scary part is that behind Hanna there are two more storm systems, so it looks like we need to buckle our seatbelts,” he said. “The theme song for trading here for the next week or so is ‘I love a parade.'”
Looking at a trading strategy to deal with the uncertainty of the storm’s nature, Kennedy said it is certainly a tricky situation. “I’d like to buy calls, but they have exploded the implied volatility, so I would probably be using call spreads to protect against the storm’s havoc and take some of the cost of the implied volatility out.”
Going into the storage report, a Reuters survey of 22 industry players had produced a range of build estimates from 78 Bcf to 93 Bcf with the average injection estimate of 84 Bcf. The actual 102 Bcf build was much larger than last year’s 38 Bcf injection for the week and the five-year average build of 57 Bcf.
As of Aug. 22, working gas in storage stood at 2,757 Bcf, according to EIA estimates. Stocks are 200 Bcf less than last year at this time and 71 Bcf above the five-year average of 2,686 Bcf.
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