For the most part physical gas Wednesday traded a couple of pennies on either side of unchanged. Average prices were flat, but Northeast points were soft, and Southern California prices took a hit following forecasts of cooler weather. Futures traders were pleased with the day’s nearly double-digit advance, and at the close May had risen 9.3 cents to $2.068 and June had gained 10.7 cents to $2.170. June crude oil added 57 cents to $104.12/bbl.
Traders at eastern market locations noted impressive strength in more deferred contracts and strips. “We’ve seen some bidweek gas go through, but there has been a lot of interest in the back end of the board,” said an eastern market trader. “All the winter terms have gotten a lot stronger. The November 2012-March 2013 and the November 2013-March 2014 all look as though they have hit bottom and are not going down.”
“[Transco] Z6 for November 2012 -March 2013 had been stuck in a $1.88 range [over Nymex], and it is $1.92 [bid] at $1.96[offered]. [Tetco] M-3 was trading in the 59 to 60 cent range and its trading at 62 cents [bid] at 64 cents [offered]. Calendar 2014 [Algonquin] was staying flat to calendar 2013. There is strength in those deferreds.
“Even though there has been strength in the market, I don’t think there are a lot of traders who have shorts on and everyone who is long doesn’t want to sell just yet. If it’s a hot summer Algonquin for May and June could scream higher,” the trader said.
Next-day prices were generally soft at eastern points. Quotes on Algonquin were down about a nickel and parcels on Iroquois slipped a couple of pennies. Gas on Tennessee Zone 6 200 L fell close also dropped afew cents. Transco Zone 6 NY added a penny.
With gas buyers deep into bidweek, the constant question of how much gas to lockup at index versus the daily spot market has gas buyers working their spreadsheets. “I think we are buying about half our requirements at index, which is less than we normally do,” said a Great Lakes buyer. “For several months we have done better on the cash market, but you just don’t know going forward if that is going to continue.”
Quotes at Great Lakes points were steady to slightly higher. Michcon was flat, as was gas on Consumers. Gas into the Chicago Citygate added a couple of pennies.
Next-day prices at Southern California points dropped as forecasts called for cooling. AccuWeather.com predicted the high in Los Angeles Wednesday of 81 would drop to 67 by Thursday.
Deliveries to SoCal Citygate and SoCal border plunged 8 cents apiece, while PG&E Citygate was lower by a few cents and deliveries to Malin fell by a nearly a nickel.
Futures traders were encouraged by the day’s advance. Tom Saal in his work with Market Profile identified Wednesday as a “neutral day” and in the parlance of Market Profile a neutral day is characterized by trading in both directions outside the first hour of trading. “A neutral day with a settlement at the high end of the day’s range means we are going higher tomorrow,” he said.
Industry estimates for Thursday’s Energy Information Administration report at 10:30 a.m. EDT show that gas injections for the week could tally at or less than the five-year average, a relatively rare occurrence in recent months. Last year 35 Bcf was injected and the five-year average is 47 Bcf.
IAF Advisors of Houston is predicting a build of 41 Bcf and a Reuters poll of 25 analysts showed an average 47 Bcf with a sample range of a 33 Bcf injection to a 65 Bcf build. Industry consultant Bentek Energy forecasts an increase of 38 Bcf.
Top analysts saw earlier market weakness resulting from uncertainty surrounding the Thursday storage report and physical gas trading well below the curve.
“The selling [Tuesday] may have also related to Thursday’s DOE storage report, for which estimates seem to be varying widely,” said Tim Evans of Citi Futures Perspective. “We’ve seen some forecasts for 35-45 Bcf in net injections, which would rate as supportive compared with the 47 Bcf five-year average build for our date, but our model translates below-average degree day accumulations into above-average storage injections of 69 Bcf for the period. In our model, the more supportive below-average injections won’t arrive until the following weeks. We also find the larger build estimate as consistent with some of the cash market quotes at discounts to the nearby futures and well below the forward curve.”
In the bigger picture Evans, like many analysts, doesn’t know what to make of the failure of a lower rig count to translate to lower production. “…[B]ecause of the transition from traditional vertical drilling to more productive horizontal drilling in tight shale formations, it’s not clear how many rigs are needed to maintain production. Additional oil production will also tend to pull some associated natural gas output along with it, slowing the rate of natural decline in overall gas supply.”
Market technicians see an uphill battle for any market advance. “With the 14-bar intraday RSI [relative strength indicator] moving from oversold on Friday to overbought by the end of trading Monday, we were not surprised to see natgas give back some of the recent gains,” said Brian LaRose, analyst with United-ICAP. “The question now: [is a] relief rally for an oversold condition complete or [is there] genuine bottoming action? As we noted previously, to even suggest this advance could be sustainable, $2.579 must first be exceeded,” he said in comments to clients.
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