October natural gas trudged lower Friday as traders see widening differentials auguring further weakness. October fell 6.9 cents to $3.809 and November dropped 5.9 cents to $3.922. October crude oil shed $1.44 to $87.96/bbl.
Short-term traders saw the day’s weakness stemming from Thursday’s inventory report-derived decline. “I think after the [storage] number came out, traders started to lean on the market,” said a New York floor trader. He added that Friday’s decline was more of an effort of traders to push the market lower rather than a lack of bids.
“The October-November spread has moved from 7 to 12 cents recently, and that’s a sign of further weakness. I’m looking for the market to trade down to $3.68 next week,” he said.
If the market is going to weaken, it will have to work around warmer western temperatures on tap for this week. Commodity Weather Group in its six- to 10-day forecast shows above- to much-above-normal temperatures west of a broad arc extending from northern Wisconsin to East Texas. “In the West the forecast shifted cooler for coastal California, but the Western big picture is still hot-dominated overall,” said Matt Rogers, president of the firm. “We still run the risk of getting occasionally stronger offshore flow in California given this pattern type. In the East the pattern is a bit variable but with no sustained or severe extremes.”
Texas may get some much-needed rain. “The overnight guidance continues to support higher rain chances for central to eastern Texas this [past] weekend into [this] week. Many areas could pick up 0.75 inch to 1.25 inches with locally higher amounts by mid-week. Drier trends return in the six- to 15-day period with above-normal cooling demand again (but 100s not expected),” he said.
Analysts admit that the likelihood of robust gas storage injections such as Thursday’s stout 87 Bcf is high, but at the same time they see prices improving. “The market may now have increased confidence that the recent flow of above-average storage injections will continue,” said Tim Evans of Citi Futures Perspective in a Thursday evening note to clients.
“In our view, while the near-term storage trend may weigh on prices, much as it did on Thursday, we continue to think the downside will prove limited for prices and that the prospect of stronger winter demand for fuel will allow prices to rally back into a $4.50-5.00 range over the next month or two. While this view is clearly not the current market consensus, we note that nearby futures traded to as much as $4.61 as recently as July, and that they reached a peak of $4.98 in June and $4.63 last December on storage levels not all that different from today. In fact, the 140 Bcf year-on-year storage deficit would suggest somewhat more upside potential than a year ago rather than less.”
Others see a market with limited downside potential but aren’t exactly willing to commit to $5 natural gas just yet. “[W]e feel that this market is approaching the low side of what could prove to be about a 30-35 cent trading range through the balance of this month and into next. So as we leave open the possibility of some additional price slippage of some 5-8 cents off of [Thursday’s] settlement, we will be looking to shift from a near-term bearish stance to a longer-term bullish view,” said Jim Ritterbusch of Ritterbusch and Associates in a note to clients.
“This remains a market that declines easier than it advances, a typical characteristic of a bear market,” Ritterbusch said. “However, we are maintaining an opinion that the money managers will be reluctant to press the short side of this market at sub $4 levels. We also feel that even minor bullish weather headlines will be capable of spiking the market by as much as 5-8% within any given two-day time period as evidenced earlier [last] week.”
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