Near-month gas futures tumbled 21.4 cents on St. Patrick’s Day in weak trading to end the week at $7.053, up about 33 cents from where the week started but with a clear indication that the recent rally has lost significant steam.
Several market experts argued Friday that without some bullish weather news or substantial help from the petroleum complex, the overwhelming weight of the gas storage surplus likely will push gas futures lower, possibly much lower.
It’s common for there to be Friday profit-taking after a Monday-through-Thursday rally. The market gapped higher to start the week and then opened the regular session Monday at $6.90 and made a steady climb. The week’s rally left near-month futures with a nice gain, but for many it just wasn’t that convincing.
“It was a weak end to the week, but I was never really on board as far as it being a bull run or anything,” said ICAP broker Brad Florer. “I just haven’t seen any real evidence of buying. It seemed like mostly short-covering this week rather than buyers coming and putting a bottom in. I’m still bearish and I’m looking for it to continue to be a difficult upside move and probably roll over.”
Tim Evans, futures market analyst with IFR Energy, agreed. “Today’s drop does point us back to the downside, so I think without bullish developments we are probably headed for a number like $6.85 if not the $6.45 floor from March 10.”
But Evans said there still could be a vigorous move in either market direction because futures open interest currently is near record levels. “There are a lot of bets on the table. It’s a question of who gives up first,” he said.
The price action in the petroleum complex didn’t help the bulls on Friday. May crude was down 90 cents and April was down 81 cents to $62.77. “That doesn’t compel natural gas to move lower, but tends to undercut the sentiment in that market,” Evans said.
“I think there is still more downside potential here than upside risk,” he added. “A couple of the things that could undermine the support is that we have only days left to the official winter…and there is potential here for crude and heating oil to absolutely plummet.” Evans noted that both those markets are trying to hold year-on-year price gains in spite of having lots of inventory. Distillate inventories are 18% higher than a year ago. Crude stocks are 11.6% higher than a year ago and at their highest level since April 1999.
Natural gas also is still not fundamentally cheap relative to its own inventory situation. There’s a hefty storage surplus and yet still a significant premium to the five-year average price. The five-year average prices is around $5.65/MMBtu, while natural gas is sitting above $7. Meanwhile, working gas levels in storage are 64% (688 Bcf) above the five-year average.
“I’d feel more comfortable with something in the lower $5s or even into the $4s,” said Evans. “The hurricane outages are not enough to support this market. We still have an excess. It wasn’t comfortable for customers to have a $15 in front of the price in December and it’s not going to be so comfortable for producers when we see the bottom fall out of this thing and see a number like $4.
“But we’ve seen this before,” he noted. “This market hit an all-time high of $10.10 in December of 2000, but by September of 2001 it was under $2. You can try and say it’s different this time, but I don’t know that it is.”
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