With all eyes on the significant storage surplus, summer temperatures for the nation and the potential for hurricanes in the Atlantic, the natural gas futures market is at a crossroads, as evidenced by the prompt month’s recent directionally challenged trading pattern. After gapping lower at the open Monday, July natural gas reached both the day’s high of $6.600 and its low of $6.410 in morning trading and spent the rest of the session bouncing between the two before settling at $6.463, down 16 cents on the day.
“Right now we are in a technical market. Natural gas didn’t show enough strength based on crude being up over a $1 on Monday morning,” said Jay Levine of enerjay LLC. “That was the first sign that it was going to be a struggle of a day. July natural gas traded down to what I felt was the first support area of the mid-to-low $6.40s, and it held perfectly.”
Levine added that crude is playing a big part in the direction of natural gas right now. “I think crude is in an important area. It looks like it is trying to hold above $72.50/bbl and begin a new bull length,” he said. “However, I felt that the first time it was up at $73 and change, July crude would experience some difficulty, which is why I earmarked natural gas to head a little lower on the day. …[W]hat crude does around this $72.50/bbl area will have a lot to do with what natural gas does next.”
After putting in a high of $73.40/bbl in Monday trade, July crude ended up closing at $72.60/bbl, up a mere 27 cents on the day.
“Natural gas futures is still going through a long-term base-forming period and now that we are officially in the hurricane season, we have to wait for the next move,” Levine added. “July natural gas is currently in a wait-and-see pattern. It is waiting to see if and when hurricanes come up, when and where heat impacts the country, and what exactly crude decides to do. At some point the natural gas futures market is going to take control and go in the direction it wants. My guess is that the risk-reward is still pointing higher, even though the fundamentals are horrendous.”
Unexpected heat in western markets should give energy bulls a boost. AccuWeather reports that June is typically the beginning of hot weather for this region, but not this hot. “Many locations will surpass the 100-degree mark for the sixth straight day, while readings in a few locations soar into the 110s,” the forecasting firm said. “Phoenix, AZ, for example, [was to] top out at 110 degrees Monday, which is 10 degrees above normal, and nighttime lows are not much better. After averaging a daily high of 111 degrees so far this month, the overnight lows have averaged a warm 80 degrees.
“It only gets worse in Death Valley, CA, where the high temperature has averaged 115 degrees so far this month and [was expected] to meet that high once again Monday.” One caveat is that the major energy markets along the California coast should remain cool. The onshore flow off the cool Pacific Ocean will keep temperatures in the upper 60s to low 70s, AccuWeather noted.
The warming trend in the West may continue. Weather Derivatives of Belton, MO said that cooling demand will average 30% above normal in the Southwest and 13% higher than normal in the southern Plains through June.
Eastern markets are forecast to be below normal. The National Weather Service forecasts that for the week ended June 10, the industrialized states of Ohio, Indiana, Illinois, Michigan and Wisconsin are expected to see only 15 cooling degree days (CDD), or 11 below normal. The Mid-Atlantic region, consisting of New York, New Jersey and Pennsylvania, is forecast to relax under just 3 CDD, or 15 below normal.
Traders are wary of increased weather-driven volatility. Mike DeVooght of DEVO Capital, a Colorado trading and consulting firm, said that “on a trading basis, we will continue to hold current positions. It’s that time of the year when the volatility starts to pick up, depending upon the latest storm and temperature news.” He advised end-users to stand aside and producers to hold 30-50% of winter production earlier hedged at $13.95.
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