September natural gas rose Tuesday despite projections showing moderating temperatures and higher inventory injections. At the close September natural gas had risen 5.9 cents to $3.994 but failed to settle above important resistance at $4, and October had added 5.8 cents to $4.015. September crude oil plunged $2.01 to $79.30/bbl.
In spite of the day’s rise, analysts sense a bearish tone to the market, in large part induced by moderating temperatures at northern and eastern points. “In terms of fundamentals, the breaking of the warm Midwest-Northeast pattern experienced in July is clearly bearish, even compared to last week’s update on August fundamentals,” said Key Laurent, analyst with Societe Generale in New York.
Laurent notes that the milder temperatures prompted an increase in the firm’s estimates for storage injections. “For example, the coming report [Thursday], now expected at 33 Bcf injection, was forecast at 21 Bcf the prior week amid a hot weather forecast. Also, the following report for week ending Aug. 11, which was forecast last week at 23 Bcf by our weather-induced supply and demand model, is actually likely to end up above 50 Bcf. As of Tuesday morning, storage facility monitoring suggested that 42 Bcf of gas had already been injected so far this EIA week.”
John Sodergreen, publisher of Energy Metro Desk, said a survey of 16 industry players shows a somewhat higher injection. He came up with a median 37 Bcf injection for the week ended Aug. 5. This is exactly the same as the five-year average and just a hair greater than last year’s 36 Bcf build. If the last four weeks’ experience is any guide, though, the actual figure will come in significantly higher, he said.
Whether funds and managed accounts were looking at weather reports regarding their latest market moves is difficult to say, but data from the Commodity Futures Trading Commission showed recently that managed money was piling on the short side of the market well before spot September futures broke below $4. In its Commitments of Traders Report for the five trading days ended Aug. 2, managed money favored the short side of the market by a margin greater than 12:1.
At IntercontinentalExchange holders of long futures and options (2,500 MMBtu per contract) reduced their holdings by 16,137 to 484,048 and short positions fell by 4,384 to 139,933. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 6,595 to 141,080, but short futures and options contracts jumped by a whopping 34,053 to 244,880. When adjusted for contract size long positions at both exchanges rose by 2,560 but short contracts soared by 32,957.
For the five trading days ended Aug. 2, September futures fell 17.6 cents to $4.155.
Consistent with others noting a moderating temperature trend in key Midwest and eastern markets, Commodity Weather Group of Bethesda, MD, in its six- to 10-day forecast limits above-normal temperatures to a vast expanse from the Southeast as far west as Wyoming and Nevada. “While the Midwest and East see more heat relief for the balance of this week and the first half of next week, the South-Central U.S. continues a constant pattern of very hot weather,” said Matt Rogers, president of the firm.
“This hot ridging pattern should begin to rebuild both east and west as we head toward the late six- to 10-day into the 11- to 15-day. The models continue to be in good agreement on the hotter 11-15 vs. six-10 day story in many locations. But they disagree on details, particularly intensity. Based on past performance, we continue to favor the hotter end of the range overall.”
Weather watchers have been scanning the Atlantic for signs of tropical disturbances that may impact Gulf of Mexico production, but analysts caution that Gulf storms won’t have the impact as in years past. “As U.S. Gulf gas production drops and onshore shale production increases, the impact of tropical weather on gas production should lessen over time,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. “This is not to say that the tropical weather will not impact price, but just not at the rate we had seen in the past. September and October are the months when there is the most activity, so we will continue to keep a close eye on any developments.
“The tropics continue to be quiet, but various models still attempt to develop a weak eastern Atlantic storm. The second half of August should get more active. A factor to continue to note is that on years when the summer gas market is weak, oftentimes the month of September is not kind. There have been numerous years that major lows are made in September for the October trade month.”
The generally rangebound nature of the market still offers opportunities, however. “We will continue to use rallies into the mid to high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profits on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls and cover our short puts if we trade back above $4.60-4.70 or sell puts if we break below $4.15 (we sold puts late last week). If we break below $3.85, we will roll our short $4.00 puts to $3.85,” DeVooght explained in a recent note to clients.
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