September natural gas futures ignored a slightly supportive inventory figure and fell in active trading Thursday on the New York Mercantile Exchange. The Energy Information Administration reported injections of 56 Bcf, slightly less than the 60 Bcf expected by a survey conducted by Reuters or the 61 Bcf revealed in a Bloomberg poll.
September futures staged a brief jump to the high of the day at $9.092 in electronic trading just after the number was released, but slipped to settle near the low of the day at $8.571, down 20.2 cents. October futures dropped 19.6 cents to $8.659. September crude oil rose $1.44 to $120.02.
“There was an initial rally, but no one had faith in it,” said a New York floor trader. He characterized the market as rangebound, and “unless the market can get under the DMZ [demilitarized zone] at $8.46 to $8.51, more downside is not likely. Otherwise the market will just work sideways to see what the next weather pattern does. It’s not ready to decay, and its not ready to rally,” he said.
He went on to say that it was a dicey proposition taking a short position as the most active portion of the hurricane season is approaching, yet the fundamentals are not suggestive of a long position. “We’re kind of stuck. We saw some selling in the more deferred strips. There’s a lack of willingness to come to the offers and that tells me that there is no faith in the rallies,” the trader said.
In spite of the modest increase in supplies, analysts see little difficulty reaching comfortable inventory levels prior to the onset of the heating season. “I’m looking for an ending inventory of 3.3 to 3.4 Tcf, but its all dependent on weather,” said Kyle Cooper of IAF Advisors in Houston.
He added that if there were no production-disrupting Gulf storms and if September and October were mild, “we could put in quite a bit and maybe get to 3.5 Bcf or even higher, but I think that is a stretch. I think 3.35 to 3.4 Tcf is a good medium [estimate] without extremes.”
With natural gas now down from its $13+ highs of July Cooper thought that at $9 natural gas “was somewhat balanced but natural gas has a tendency to not stay in one place for very long so I wouldn’t count on it being at $9 in October. Unless, of course, it went to $7 first or $11 first. Natural gas has a tendency to not stay in one place for very long,” he said.
Longer term the bulls may have some difficulty navigating abundant domestic supplies. “Production has taken off,” said Cooper. Even though higher domestic production may equate to less of a need for a robust beginning inventory, “it all comes down to distribution. I think it’s going to lead to big, big differences in basis differentials. The Rockies and Texas are producing all kinds of gas, and the Northeast needs it. What’s going to end up happening is some huge pricing discrepancies between certain areas.”
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