The most significant futures event during the relatively quiet holiday week was the continuing rise in gas futures on Thursday despite an unexpected 20 Bcf storage injection reported by the Energy Information Administration. After the May futures contract posted less than a one-cent change for both Monday and Tuesday, the contract found upward momentum on Wednesday and Thursday, settling up a little more than 6 cents each day.
The EIA reported the first net storage injection of the year on Thursday for the week ending April 2. The bearish report initially prompted an 8-cent drop but then futures suddenly rebounded 14 cents four minutes later to reach a Thursday morning high of $5.980. After falling to $5.850 following that rally, the May contract used the rest of the day to climb to a $5.941 close, up 6.9 cents on the day.
“Contrary to what happened right at the release with that little rally, the storage report is bearish,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “We are starting the injection season with a Tcf in the ground, 400 Bcf more than last year. But don’t grow hooves and horns here, because I’ve got a feeling you’re going to wind up being a steer.”
Kennedy said that following the report, buying came in on all of the energy commodities from two “houses that handle trade” people. “They were buying crude, nat gas and gasoline. The locals got short on the report and I think correctly so.” Kennedy said all of the energy buying “sort of froze everybody in the headlights” for a second.
At midday Thursday, Kennedy said, “Crude is obviously still up 78 cents a barrel and that’s fine, but nat gas has no right to be here.”
While some market-watchers were puzzled by the gas futures upswing despite a sizeable storage build, a number of analysts looked to crude’s continued strength for answers. Still reeling from the unstable Middle East and the EIA’s crude inventory report on Wednesday that revealed a 2.1 million-barrel decline for the week ending April 2, Nymex May crude logged a second day of sizeable gains, settling 99 cents up to close at $37.14 a barrel Thursday.
“You’ve got crude now healthily back over $37. I think the crude news certainly did swamp the natural [gas] to some degree,” a Washington-based broker said. He added that some of the crude buying Thursday had to be “insurance policy buying” due to the deteriorating Iraq situation. “It’s not going good,” he said. “The news out of Iraq all day long just went from bad to worse. That can’t be settling to people or the price of oil.”
The broker said he believes that $6 is firmly in the target sights again for natural gas. “Even though that is only 6 cents away, it is a pretty significant level to get through and I imagine there are a lot of plays around the $6 options as well.”
The 20 Bcf gas storage build leaves 1,034 Bcf of working gas, which is within the five-year historical range. Stocks are 346 Bcf higher than last year at this time and 63 Bcf below the five-year average of 1,097 Bcf. The strong injection was led by the Producing region, which put 15 Bcf in storage last week. The Producing region now stands 12 Bcf above the region’s five-year average of 383 Bcf. The EIA added that stocks in the West region were 26 Bcf below the five-year average after a net addition of 2 Bcf. In the East region, stocks were 48 Bcf below the five-year average following a net injection of 3 Bcf.
Last year’s storage report for the same week revealed a draw of 8 Bcf from underground storage, while the EIA’s five-year average for the week shows a withdrawal of 14.8 Bcf. Kyle Cooper of Citigroup was looking for a build between 4 and 14 Bcf for the week, while Lehman Brothers’ Thomas Driscoll expected a storage injection of 25 Bcf.
Prior to the storage release, Cooper said, “Our outlook remains slightly bearish based solely on the current price level. Quite simply, prices basis the front month futures contract have never been higher in early April. Do we believe prices should be at historical averages? No. However, the three-year average price is $4.639. The five-year average price is $3.797. Are prices over $1 higher than the three-year average and over $2 higher than the five-year average justified?”
Cooper said he believes that the current futures price level could be considered a little extreme. “The most simplistic question in our mind is why are prices today higher than last year? Temperature adjusted storage changes have clearly been more bullish than last year,” he said. “But as mentioned many times, they must be. If storage injections replicated last year, inventories would rise to over 3,500 Bcf by Oct. 31.”
Regarding the large injection, Driscoll noted that last week’s weather was 24% warmer than the 30-year norm. “Over the last five weeks, withdrawals have averaged 5 Bcf per week stronger than expected,” he said. “If we were to see a repeat of last year’s refill pattern, when storage injections totaled 2,470 Bcf and cooling requirements were near normal, storage could theoretically exit the refill season (Oct. 31) near 3.5 Tcf.”
He added that storage injections for the week ended April 2 came in at a rate of 2.9 Bcf/d, versus a 1.1 Bcf/d withdrawal rate last year for the week and a five-year average withdrawal for the week of 0.2 Bcf/d.
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