Due in part to some late book-squaring and a return to the reality of current fundamentals, November natural gas futures went off the board with a bang and not a whimper on Wednesday as the contract dropped 26.8 cents to terminate at $4.289. December futures declined by 21.6 cents to close at $5.066.
The up-and-down turbulence of the natural gas market over the last month could cause the most fearless trader to reach for an airsickness bag, but the significant drop of the last week was seen as mostly “corrective” as market participants took stock of their positions and the market’s fundamentals, which include an all-time record level of gas in storage.
“The market has been pretty difficult to call for the last month. We rallied up to a multi-month high above $5.30, but then prices started to turn and now it seems like nothing can stop the fall,” said Gene McGillian, a broker at Tradition Energy. “The November contract went off the board Wednesday at basically the lowest price of its run as the prompt month. I know a lot of the day’s slide was probably book-squaring ahead of the roll, but I also think it fell because there is not a solid consensus on what the temperatures are going to look like in November and December. The lack of support from that probably helped lead to the turnaround we’ve seen in the last couple of days.”
McGillian said the timing of November’s expiration was very interesting. “The expiration just happened to coincide with the turnaround in the financial markets, which started the last couple of days. I find that to be telling,” he told NGI. “Once the expiration is behind us, if we don’t start to see the dollar turn south again and the equity markets begin to rally, the gas market is going to basically have trouble reaching higher prices until we start to see the real onset of sustained cold weather.”
Taking a peek at Thursday morning’s natural gas storage report for the week ending Oct. 23, McGillian said he is looking for the Energy Information Administration (EIA) to reveal an injection of 25 Bcf. “We are a little bit on the low end of expectations based on the fact that storage levels are so full that there is not a lot of room to jam more gas in,” he said. “This might be why the November contract went off so weak because a lot of the gas that is being produced right now is being forced on to the spot market due to capacity issues.”
Bentek Energy, which is calling for a 27 Bcf build for the week, was quick to point out just how tight the nation’s storage capacity is. “A 27 Bcf injection will bring inventory levels to 3,761 Bcf, which is 97% of EIA’s estimated peak capacity of 3,889 Bcf,” the research firm said in its weekly storage note. “A 21 Bcf injection in the East Region will result in all regions at new record inventory levels.”
The number revealed in the 10:30 a.m. EDT report will be compared to last year’s 49 Bcf build for the week and the five-year average addition of 43 Bcf.
Bentek noted that a 21 Bcf build in the East will — according to the EIA — bring that region to 95% of its estimated peak capacity and 91% of its design capacity, while no change in inventory estimated in the Producing Region will leave the area 15 Bcf below peak capacity of 1,202 Bcf. Bentek’s 6 Bcf injection expectation for the West Region will result in inventory levels 3 Bcf above the EIA’s estimated peak capacity for the region.
Near-term weather forecasts up to about five days call for generally above-normal temperatures in key eastern energy markets, but the six- to 10-day outlook favors colder-than-normal temperatures for the same areas. AccuWeather.com forecasts that in the six- to 10-day period a broad swath of the eastern United States extending north and east of an arc from northwest Ohio to northeast Alabama to eastern South Carolina will have below-normal temperatures. The Great Plains and central Florida are expected to have above-normal temperatures.
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