September natural gas advanced Thursday following the release of government inventory data showing a significantly smaller increase than what the market was expecting. The Energy Information Administration (EIA) reported a build of just 25 Bcf, about 11 Bcf less than industry estimates. September futures rose 10.5 cents to $4.108 and October gained 10.3 cents to $4.127. September crude oil jumped $2.83 to $85.72/bbl.
Prices reacted immediately to the report by trading as high as $4.143 moments after the figures were released; 35 minutes after the announcement September was at $4.089, up 9.5 cents from the previous close.
Traders see a sense of market equilibrium. “I’d like to think that natural gas under $4 was not comfortable and has popped higher because of heavy-duty electricity usage in the South. So it makes sense that with this historical heat, prices would not fall off a cliff,” said a California risk manager.
In spite of the stout rise, those with exposure to rising prices took little action. “My [end-user] accounts have not hedged for the winter. In fact, they bought some protective puts [Thursday] because they didn’t want any other hedge vehicles that they had previously purchased getting lower than current prices. We bought some December $4.40 put options with the idea that if it is a warm winter, then they wouldn’t have to worry about lower prices. They bought put options to protect against earlier call options declining. They are layering in a fence and neutralizing a hedge. No one is getting extra long,” he said.
“September natural gas is going to need the tropics [i.e., hurricanes] to help it out. You can’t really get too short here. Where are we going? $3? Not unless the economy is going to get worse.”
That help might be coming sooner than later. “It is possible that we will plow through at least three named systems by Aug. 25: Franklin, Gert and Harvey,” said AccuWeather.com senior meteorologist Alex Sosnowski on Wednesday (see related story).
“Some of our forecast tools suggest at least two tropical waves (Cape Verde systems) will have moderate development. The first disturbance may affect the Leeward Islands this weekend with drenching downpours and squalls. The second system may visit the same area during the second half of next week with similar conditions. Both of these systems, if they do develop, could come close to Bermuda waters several days after affecting the Lesser Antilles,” Sosnowski said.
Traders were looking for about an average increase in storage gas, according to pre-report surveys. The EIA injection figures were expected to show a build in line with the five-year average of 37 Bcf and last year’s 36 Bcf. Market bears fondly noted that following the release of the data for the last four weeks the market has trended lower. Last Thursday, for example, the September contract fell 14.9 cents to settle at $3.941 following a storage report showing an above-expectation 44 Bcf injection, but Thursday’s gains sent the bears scurrying for cover.
For the week ended Aug. 5, Kyle Cooper of IAF Advisors in Houston expected a 33 Bcf increase, and a Reuters survey of 25 analysts revealed an average 37 Bcf with a sample range of 31-48 Bcf. Industry consultant Bentek Energy, utilizing its statistically enhanced North American flow model, predicted a build of 36 Bcf.
Forecasting, however, can be a ruthless endeavor. “At the end of last week I was predicting a 25 Bcf injection for this week [week ended Aug. 5], but I moved my number up to 33 Bcf and now I am kicking myself,” said Cooper.
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