The question of “How hot is it?” was answered on Thursday morning as the Energy Information Administration (EIA) reported that only 42 Bcf made it into underground storage for the week ended Aug. 3. The bullish number helped launch September natural gas futures more than 30 cents higher in morning trade. The contract ended up closing at $6.586, up 36.6 cents on the day.
After trading at $6.345 prior to the 10:30 a.m. EDT report, the prompt-month recorded a $6.650 trade in the minutes before 11 a.m. That price level proved to be the day’s high as the September contract bounced between $6.490 and $6.600 for the remainder of the regular session before coming to a close.
The widespread heat, which began in earnest last week, was expected to make an appearance in the storage injection numbers in the form of reduced additions. A Reuters survey of 23 industry players produced a range of injection expectations from 40-65 Bcf with an average estimate of a 52 Bcf build. According to the EIA, on a date-adjusted basis last year’s report for the week revealed a 7 Bcf withdrawal, while the five-year average is a build of 45 Bcf.
“By the end of the injection season, storage will be full. I really don’t pay a whole lot of attention specifically to this inventory situation, but you do have to keep note of it,” said Ed Kennedy, of Commercial Brokerage Corp. in Miami. “It is the big picture that matters. The key to developing a sound trading strategy is to look at all the angles. You have to pay attention to fundamentals and technicals. The more technical systems you use, the more credible a buy/sell signal becomes.
“Right now, we have record heat and there’s a wave that is running the gauntlet through the Caribbean right now. If it can get through the shear in the mid-Caribbean, watch out because the sea surface temperatures in the western Caribbean are 90 degrees-plus. Sometimes the fullbacks do get through the linebackers, which raises the cost of medical insurance for the safeties. If the disturbance can get into the western Caribbean, we could have something to talk about.”
Kennedy said if he was short in the market right now, he would be “getting out of Dodge” soon. “I know they are a little bit on the pricey side, but I would be using an options strategy here for September and October,” he said. “Options are a great way to define your risk. I’d be taking protection now by purchasing a $7 call for October.”
Kennedy and his colleague Tom Saal will be taking time off from active natural gas futures trading to host their popular Managing Natural Gas Futures Workshop October 3-4 at Nymex. For more information, visit: https://workshops.gasmart.com/hedging.
According to EIA data, working gas in storage was 2,882 Bcf as of Aug. 3. Stocks are 117 Bcf higher than last year at this time and 407 Bcf above the five-year average of 2,475 Bcf. The East region deposited 33 Bcf into underground storage while the West and Producing regions chipped in 5 Bcf and 4 Bcf, respectively.
Currently, storage supplies stand at a plump 2,882 Bcf and injections of just 47.5 Bcf per week for the next 13 weeks of the injection season will put winter supplies at 3,500 Bcf, surpassing the record 3,452 Bcf tallied at the end of October 2006. Market bears fondly remember the low price spot futures reached — $4.05 — in late September 2006.
Bearish overall storage statistics aside, medium-term temperature forecasts augur well for the bulls. “Some of the warmest temps of the season look to continue to occur in the major metro areas of the northeast U.S. and Midwest in the next week to 10 days,” said meteorologist John Dee. He predicted that temperatures in the upper 80s to mid 90s combined with high humidity levels will “create some of the highest demand for cooling energy seen all season. The warm temps look to occur with only minor interruptions for the next week to 10 days.” It’s not just the Northeast and Midwest. “Above-average temps also look to hang on across much of the rest of the country for the next week to 10 days, with the only consistently below-average temps found in areas right along the Gulf Coast as well as into some sections of Arizona and New Mexico.”
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