October natural gas rose moderately Tuesday as uneventful options trading expired and analysts wondered how much longer drilling can continue under current conditions. October gained 4.5 cents to $3.827 and November rose 3.0 cents to $3.875. November crude oil streaked higher $4.21 to $84.45/bbl in a fit of euro-centric optimism.
“Trading is very quiet, and a lot of the funds aren’t trading the market,” said Ed Kennedy, vice president of Hencorp Futures in Miami.
The time may be right for bulls to strike. “How much below the cost of production do you think you can go and how long do you think it will stay there? The cost of gas in the Marcellus is around $6.50, and you are below the cost of production in conventional wells as well. That should put a dent in gas drilling,” he said.
“One of the problems in the Marcellus is capex [capital expenditure] is 175% [of last year] and they’ve got that to cover along with expenses, and I think they are drilling just to break even. I know of a couple of companies waiting in the bushes for a bunch of the gas drillers to go bankrupt. Not the large ones, but the small to medium-sized drillers.”
Natural gas trading stood out from other markets with its nominal trading range and disinterest in surging oil and equity markets. With oil up sharply and the Dow Jones Industrial Average posting triple-digit gains, natural gas options expiration took place in a virtual sea of tranquility. “As usual, the natural gas market finds itself standing apart from the rest of the commodity world, with no particular appetite for risk evident here,” said Tim Evans, analyst with Citi Futures Perspective in New York.
“We continue to look for the market to turn a seasonal corner and move back to the upside, but for the moment the lack of tropical storm activity in the Gulf of Mexico and the relatively moderate seasonal temperatures still look as though they will translate into above-average storage injections, with ongoing near-term downside price risk.”
Temperatures may be seasonal, but at least one forecaster is calling for the country’s mid-section to experience early fall warmth. “Above- and much-above-normal temperatures are forecast over the middle of the country. Anomalies as warm as 10-15 degrees above normal are anticipated over the northern Plains,” said WSI Corp. of Andover, MA, in its six- to 10-day outlook. “Below-normal readings are now forecast along both coasts.
“Temperatures may trend colder in the West and warmer in the East than currently forecast. American models, particularly the 00z [midnight Greenwich Mean Time] operational model, depict a more progressive pattern and are faster to bring ridging and warmer weather to the eastern U.S. next week.”
Top traders base their near-term bullish outlook largely on market composition with little regard to fundamental supply-demand considerations. “This market has managed to extend [Monday’s] significant rally on what appears to be short-covering ahead of option and futures expiration during the next couple of sessions. An unexpectedly stout physical trade continues to support the spread curve, a pattern that appears to be accommodated by further rolling of fund shorts out of October futures and into the winter premiums,” said Jim Ritterbusch of Ritterbusch and Associates.
“But while we still view this curve strength as a bullish portent, we remain reluctant to suggest a sustainable price advance capable of maintaining nearby pricing much above the $4 mark, even with this week’s rollover into the higher-price November contract. We would reiterate that our near-term bullish view of this market is predicated mainly on the assumption that the large speculators are fully positioned on the short side and that they will be accepting profits on even minor bullish headlines,” he said in a morning note.
Tropical activity is stirring again. Close to home the National Hurricane Center (NHC) reported at 5 p.m. EDT that Ophelia had reemerged as a tropical depression. The storm was 175 miles east-southeast of the Leeward Islands, was holding winds of 30 mph and was moving to the west-northwest at 5 mph.
Tropical Storm Philippe was moving to the west-northwest at 7 mph and was holding winds of 40 mph. It was 795 miles west of the Cape Verde Islands. NHC projects both systems to pursue a more northwesterly to north course away from the U.S. mainland.
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