November natural gas advanced Tuesday as players sensed some angst developing in traders who last week sold short and are now being forced to cover since their market objectives are not being realized. At the close November had risen 7.5 cents to $3.616 and December added 2.3 cents to $3.859. November crude oil added 40 cents to $85.81/bbl.
“We’re not getting the follow-through to last week’s price decline so you are getting a little covering of short positions,” said a New York floor trader. He added that for the moment prices were caught in something of a no-man’s land and said, “I don’t think we’ll see a return of buyers until [prices move above] $3.73, so we are caught in a tight little range. If the market fails again, traders will pressure it lower.”
Veteran analysts see the market at — if not close to — a seasonal low. “Seasonally, you have probably reached the low for the natural gas market,” said Bill O’Grady, vice president at Confluence Investment Management in St. Louis. “There was a favorable summer, and as soon as the temperatures moderated a bit prices eased off, and I have been surprised at how weak prices have gotten.
“One of the concerns with the natural gas market is if you do see a recession develop, you will lose some industrial demand. On a seasonal basis, you are nearing the end of the shoulder period, and inventories are about normal. The market is similar to before 1999; 30-cent moves are [now] a big deal.
“What has happened is you have shifted the supply situation. It is not just what you can pull out of the ground today but what you can pull out in the future and at what price. It isn’t going to take much of an increase in price to see a significant lift in supply; at least that is the perception.
“From 1999 to 2007 it didn’t matter how high prices went; you weren’t going to get much supply response. Now it’s not the case at all. It isn’t just what you have available today, it’s what you have available in the near future and at what price.”
Sub-$4 gas is definitely having an impact. “I’ve been hearing the argument that $3.50 gas is uneconomical for shale gas wells, and what is needed is substantial liquids to make those wells viable. Usually it comes within the framework of ‘my competitor needs to get out of the business because he can’t make it, but my wells can overcome these hurdles,'” O’Grady said.
“We talk to [producing] companies and I don’t think any of them are doing well. The prices aren’t really high enough for them to do great, but none seem to be folding up their tents. I don’t know if they are raising capital, but what they need is a new demand source, either more transportation demand, or a lot more power baseload going to gas. What has changed is the slope of the supply curve. What happens as demand goes up, you see much more modest increases in prices.”
In the short term analysts see recent market strength in part derived from fund short-covering and a reluctance to pursue additional selling. “We feel that this week’s modest price advance is more related to lack of selling than to fresh buying. As indicated in the latest COT [Commitments of Traders] guidance, the large specs appear to be using fresh lows as an opportunity to accept profits out of large short holdings rather than add to existing bearish positions,” said Jim Ritterbusch of Ritterbusch and Associates. “A continuance of this pattern would allow the market to advance on even minimal shifts in the weather views. Within such an environment, about the only driver of fresh lows that we see in this market through the balance of this week would be a bearish shocker out of Thursday’s storage report.”
Weather forecasters are seeing a modest incursion of cool air into the East offset by above-normal temperatures in California. Commodity Weather Group of Bethesda, MD, in its 11- to 15-day forecast calls for below-normal temperatures east of a line from South Carolina to Quebec.
“The heat spike in SoCal starts [Wednesday] and ends on Thursday with a 96-97 [degree] range favored now; 90s are expected in Las Vegas with around 100 in Phoenix,” the forecaster said in its morning outlook. “Otherwise, the big story today is the cooler trends for the Midwest, East and South in the six- to 15-day window. A cool push moves into the Midwest in the middle of the six- to 10-day and then shifts eastward for late period into the early 11- to 15-day. At its peak, it should cool the Midwest and East Coast down to highs in the 50s to low 60s with lows mainly in the 40s. This should provide above-normal early season heating demand, but no major chill is expected,” said Matt Rogers, president of the firm.
The National Weather Service is predicting below-normal accumulations of heating degree days (HDD). For the week ended Oct. 15 New England is expected to see just 35 HDD, or 62 fewer than the norm; and the Mid-Atlantic is anticipated to have 20 HDD, or 61 fewer than its norm. The Midwest from Ohio to Wisconsin is forecast to have 35 HDD, or 50 fewer than its norm.
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