The expiring August contract settled unchanged, but more distant contracts eased although analysts viewing a deteriorating price regime remain optimistic and suggest that if prices should somehow surge pass $5 during the hurricane season or later in the fall, it would be a good time to initiate producer hedging. At the close August remained unchanged at $4.370 and September had fallen 1.3 cents to $4.318. September crude oil faltered $2.19 to $97.40/bbl.
“I think we will break out of this [low-volatility] malaise that we are in, I just don’t know when, “said an Oklahoma City banker. He added that supply could be tempered as more rigs move to the oil side. “Timing is the issue with all markets, but you have to wonder where is the market headed.
“I’ll be the first one to admit that I think for at least one month we could get to $5, and earlier in May you could have hedged the balance of the year at $5. Producers are not traders, but the smart ones see value, and if you get a chance at $5 you take it and don’t look back. I’ve been watching the 2012 strip pretty close and it was up to $5.25 to $5.30 earlier in the spring, but as time passes the strip just grinds down as contracts become the spot month.
“The calendar 2012 strip is starting to look like the 2011 in a way and 2013 is now $5.12 and back in the range where 2012 was. If we get an active hurricane season, we maybe have a shot where 2012 can get up to $5.15, and you have to ask [as a producer], ‘When do I take a little off the table?’
“Most producers didn’t want to go out two to three years when prices were $7 or $8 because they are on a one-year cycle, but sometimes you have to go out two to three years. Figures I have seen show that the amount of gas hedged for 2012 is less than 25% and that is shocking.”
He added that with that low a percentage, there was a vast reservoir of potential [sell] hedging, “but what is going to motivate people. $6 will, but the other side of the coin is what is going to drive this market higher? We hear things long term that are positive such as the conversion of cars to natural gas and more utilities that will have to switch to meet EPA standards.
“If this market gets anywhere close to $5, whether it’s during the hurricane season or later in the fall, you probably have to take some money off the table. If the underlying strip did get over $5, I would almost rather see producers do a $4.50-5.75 collar so you have a little upside along with some downside disaster protection.”
The warm weather price dynamic remains in play, and traders will get a chance to see how that translates to inventories with Thursday’s inventory report. Estimates fall below long-term averages but generally ahead of last year’s slim build. Last year 31 Bcf was injected and the five-year average stands at 49 Bcf.
The 10:30 a.m. EDT report by the Energy Information Administration is expected to show a build of 40 Bcf, according to a poll of 26 analysts by Reuters. The range on the survey was wide, from a low of 10 Bcf to a high of 58 Bcf. Peter Beutel, president of Cameron Hanover and publisher of Daily Oil Hedger, reported an early estimate of a 20 Bcf build, and Houston-based IAF Advisors is expecting an increase of 37 Bcf.
“Traders see hotter-than-normal temperatures forecast for the Midwest and the states surrounding Texas, but the East Coast will not be broiling again for sustained periods, although it is expected to get hotter by Friday,” said Beutel. “New England readings will be hotter still on Saturday, although they will be cooler along the Tennessee River Valley and around the Chesapeake. Many other areas will be hot on both days. But these are not expected to remain uniformly in place into August. The important part of the story is that the hot weather is not over and we are likely to get more of it sooner than later, even if it will not reach heat indices of 120 degrees in unfamiliar places.”
Tropical activity has picked up; a system has formed in the southern Gulf of Mexico.
The National Hurricane Center (NHC) at 5 p.m. EDT reported that Tropical Storm Don was located about 120 miles north of Cozumel, Mexico and headed to the west-northwest at 12 mph. It was holding winds of 40 mph, and early NHC projections showed it making landfall near Port LaVaca, TX late Friday or early Saturday.
Commodity Weather Group noted a Texas impact in a morning bulletin. “An eastward shift in the main ridge axis later this week opens the door to allow this disturbance to reach into Texas more than would otherwise be possible so far this summer,” said Matt Rogers, president of the firm. “The tracking range is anywhere from far South Texas to the Houston area by Friday or early Saturday. The steering currents look fast enough to keep this feature moving once it leaves the Yucatan peninsula. Regardless of the exact track, we could see rain offsets to East Texas heat by Friday and maybe cooling rain influences in interior Texas by Saturday.”
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