One day after breaking under the $6 mark for the first time, July natural gas futures traded above the important psychological level all day Thursday with the help of a somewhat bullish 77 Bcf storage injection report from the Energy Information Administration (EIA). The prompt month traded within a $6.010-6.200 range on the day before settling at $6.191, up 21.7 cents on the day.
Coming in slightly bullish but as no great surprise Thursday morning, the 77 Bcf weekly storage injection reported by the EIA for the week ended June 2 paled in comparison to the 102 Bcf injection during the same week last year and the five-year average injection of 105 Bcf.
After gapping 7.6 cents higher in Nymex’s overnight Access session to open Thursday’s regular session at $6.050, July natural gas futures hit a morning high of $6.150 immediately following the EIA’s 10:30 a.m. EDT storage report. The prompt month put in the day’s $6.200 high just before closing.
“It was kind of a classic pattern in the natural gas futures market,” said Tim Evans, an analyst with Citigroup. “We poked around under that $6.02 on July, but we didn’t really draw any follow-through selling. That helped set the hook for a short-term swing higher. The low storage injection helped solidify the short-term claim to higher prices. By not seeing a larger build, I think it implies that there might be some restraint by producers who decided that if they don’t have customers to buy the gas then it doesn’t make sense to produce it.”
Evans pointed out that despite the small build, storage levels are not anywhere close to creating a tight market. “Some of the year-on-year comparisons are likely to turn bearish when we see storage data for this week. We have a significant drop in projected cooling degree days, which could translate into a bearish injection.”
Weather was at the heart of the lower than normal injection report Thursday. Data from the National Weather Service (NWS) shows that for the week ended June 3, the populous states of New York, New Jersey and Pennsylvania tallied 40 cooling degree days (CDD), or 28 more than normal. The industrialized Midwest states of Ohio, Indiana, Illinois, Michigan and Wisconsin recorded 53 CDD, or 32 more than normal.
Next week’s injection report (for the period ending June 9) is likely to show greater than normal injections if NWS forecasts are correct. New York, New Jersey and Pennsylvania are expected to endure only 3 CDD, or 15 below normal, and the Midwest is forecast to receive just 15 CDD, or 11 less than normal.
According to meteorologist John Dee, temperatures across the eastern one-third to one-half of the country will “run below average for much of the next week to 10 days and keep the demand for cooling below average.” He added that above average temperatures will stay locked into the Southwest and South Central U.S. for the rest of this week and into the early part of next week at least, bringing high demand for cooling energy to areas like Arizona, New Mexico, Utah, Texas and Oklahoma. “There could also be a tropical feature in the Gulf by early next week,” he said.
A Washington, DC-based broker classified the 77 Bcf injection as bullish. “The number was slightly more bullish than was anticipated, and I think that is what you are seeing in prices,” he said. “The price of natural gas is holding up notwithstanding a very weak liquids market.”
July crude on Thursday pushed under $70/bbl on news that terrorist Abu Musab al-Zarqawi, al Qaeda’s leader in Iraq, was killed by the U.S. military. Despite venturing as low as $69.10/bbl, crude rallied back to close at $70.35/bbl, down only 47 cents on the day. July heating oil traded as low as $1.9550/gallon before settling at $1.9856/gallon, down almost a penny on the day.
The broker, who has been monitoring the price relationship between petroleum products and natural gas, said that while natural gas futures have been trading at a “tremendous discount” to heating oil (Gulf Coast No. 2 fuel oil, or distillate), the gap is beginning to close. “That differential really moved out in May, which is why we had been so bullish on natural gas,” he said. “On an MMBtu comparison, heating oil is currently [earlier Thursday] trading at around a $7.92/MMBtu premium to natural gas. At its height back in May, heating oil was trading at an $8.33/MMBtu premium to natural gas. Essentially, one thing that is holding up the natural gas price is the fact that it is so desirable from a price perspective compared to liquids.” On an MMBtu conversion basis, heating oil on Thursday closed at a $8.187 premium to July natural gas.
As for his prediction for the natural gas market, the broker said, “We think the market is not likely to go much below $6. We don’t see a wholesale collapse as a likely scenario. Maybe in October if we are still sitting on 3.5 Tcf in storage, then something could happen. However, we are starting to get some normal summer weather and some demand development, at least in the South.”
Prior to the storage report’s release, many in the industry had been looking for an injection in the high 70s Bcf to low 80s Bcf range. A Reuters survey of 19 industry players centered on an 84 Bcf injection, while the ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus build expectation of 78 Bcf. Golden, CO-based Bentek Energy was calling for a 78 Bcf injection.
Despite the small build, working gas in storage as of June 2 stood at a whopping 2,320 Bcf, according to EIA estimates. Over the last 12 years, the only year that comes even close to that level is 2002, when 2,042 Bcf was in storage as of the week ended June 7.
Stocks are 452 Bcf higher than last year at this time and 678 Bcf above the five-year average of 1,642 Bcf. The East region injected 44 Bcf, while the Producing and West regions chipped in 18 Bcf and 15 Bcf, respectively.
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