With the peak season for Atlantic hurricanes upon us as the calendar flips to August, natural gas futures kept the momentum to the upside rolling on Friday as the September contract added 9.6 cents to $4.923. The contract closed the week 36 cents higher than the previous week.
While noting that there was “no significant change in [the] supportive fundamental backdrop,” Citi Futures Perspective analyst Tim Evans said the heat remains on and the tropics are starting to show signs of life.
Evans said Friday’s updated temperature forecasts were “slightly warmer” than they were on Thursday, basically assuring that above-average air conditioning demand will continue into mid-August. “And while there has been no particular flaring of Atlantic basin storm activity, there are some tropical waves of interest and conditions are becoming more conducive to storm development as the summer progresses and sea surface temperatures continue to rise,” he said. “We continue to see more upside potential for natural gas than downside risk, as the declining storage surplus and rising seasonal hurricane risk continue to offer support.”
According to the National Oceanic and Atmospheric Administration, the Atlantic Basin “shows a very peaked season from August through October, with 78% of the tropical storm days, 87% of the minor (Saffir-Simpson Scale categories 1 and 2) hurricane days, and 96% of the major (Saffir-Simpson categories 3, 4 and 5) hurricane days occurring then.” NOAA added that “maximum activity” is in early to mid-September.
Heading into the weekend, the National Hurricane Center was following two areas of interest in the Atlantic. One tropical wave was over the southeast Caribbean moving to the west at 15 to 20 mph. Off the west coast of Africa a small area of disturbed weather was being monitored.
Some market watchers noted that the uncertainties of near-term weather are considered a more important price driver than the known quantity of storage. “While supply remains large historically with storage still about 240 Bcf above average, we will continue to note that the large supply is well known and, consequently, discounted,” said Jim Ritterbusch of Ritterbusch and Associates. “In contrast, the hot weather dynamic doesn’t appear fully discounted and is currently driving pricing. Until this warm weather pattern subsides, upside price risk will easily exceed downward price possibilities in our view.”
Analysts who follow seasonal trends in natural gas prices are trying to interpret recent price action. The jury is out as to where present price action falls within a normal seasonal framework, and the question is whether a typical summer decline is still in play or if the fall advance may have started. “If this year’s summer-to-fall decline is still in progress, natgas will turn lower from the $4.849-5.002 area,” calculates Brian LaRose, an analyst at United-ICAP. If that doesn’t happen, the minimum upside target from here “will be $5.617-5.674. If this year’s summer-to-fall advance has already begun, we suspect $5.002 and $5.617 will only provide minor resistance.”
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