Coming in just under most projections, the 80 Bcf storage injection for the week ended May 26 pushed the July natural gas futures contract to a high of $6.725 in afternoon trading. However, the contract wasn’t able to hold onto a majority of its gains as it sloped lower late to close at $6.448, up 6.4 cents on the day.
Following the 10:30 a.m. EDT report, futures immediately jumped 13 cents higher to trade at $6.500 before moving to even higher levels in the afternoon on short-covering. Following the $6.725 trade, natural gas reached a low for the day of $6.350 just before settlement. Larger than expected crude inventory reports, which were also released Thursday morning, pushed July crude lower on the day. The contract closed at $70.34/bbl, down 95 cents on the day.
“The 80 Bcf injection was slightly smaller than the industry was expecting, but we are not going to run out of gas anytime soon,” said Tom Saal of Commercial Brokerage Corp. in Miami. “The number triggered some more short-covering. It really was a continuation of Wednesday’s short-covering rally. I don’t think there was any new length. The important thing here is whether or not futures can show some staying power up here. We really need to see that in order to give this move some credibility.”
A Washington, DC-based broker agreed that the market hasn’t proven anything yet. “We still haven’t seen natural gas make any kind of sustained advance,” the broker said. “It really seems to be feeling itself out around here. Will the market tone be able to change and can the early onset of summer temps allow us to start to erode this significant storage surplus, I think the jury may still be out on that one. I think it will come back in favor of being able to erode storage and bring in higher prices, but I don’t think the market is quite there yet.”
The broker added that this week could be the start of a sustained wave higher. “We might be in the beginning of that here,” he said. “Next, we might see the end-users saying ‘rats, I missed it, I should of taken it at $5.90 but I was playing for $5.70. I got too greedy, so I’ll buy it now at $6.50.'”
The broker said the market has really been dominated by the massive sell-off in the wake of the hurricane run-up last year. “That just sort of overrode a lot of the traditional seasonal patterns of the market,” he said. “We really have been going through this long skidding pattern while moving gradually lower. However, due to the nature of the market, this dynamic will eventually wear off because something new will come up. Whether that something is the hurricane season or hot weather, we don’t know.”
Analysts suggest that the market will start to focus on weather conditions at the expense of burdensome supplies as summer and the onset of the tropical weather season come into play. The fundamental bearish argument that prices will continue to work lower because of oppressive inventories needs adjustment, they contend. The conventional wisdom is that the only thing that could possibly change that scenario, is a hot summer, a damaging hurricane or a cutback in production, noted Phil Flynn of Alaron.
“Despite this bearishness, take a look at the real threat of extreme heat or the possibility of a devastating storm season just ahead. Production in the Gulf of Mexico is still not back to normal and lets face it, the early season heat wave we’ve had increases the chances for a heavy demand summer,” he suggested. He conceded that the market has bearish fundamentals but “we are in a weather market. The key question is what is more important: near record storage or the lack of production in the Gulf? Only Mother Nature knows for sure,” he said. Flynn suggests buying July natural gas at $6.16 with a stop-loss order at $6.05.
A Reuters survey of 19 industry players had been looking for an injection of 87 Bcf, while Golden, CO-based Bentek Energy expected an 84 Bcf injection. The ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus build of 86 Bcf. The 80 Bcf injection fell short of last year’s 87 Bcf build and the five-year average injection of 90 Bcf.
Despite the smallish injection, natural gas storage supplies continue to sit near record levels. As of May 26, working gas in storage stood at 2,243 Bcf, according to Energy Information Administration estimates, which is just short of the record tally of 2,273 Bcf set in May 1991. Stocks are 477 Bcf higher than the same time last year and 706 Bcf above the five-year average of 1,537 Bcf. The East region injected 50 Bcf for the week, while the West and Producing regions each injected 15 Bcf.
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