Playing out as expected ahead of the four-day Independence Day holiday weekend, natural gas futures trading was sparse in Friday’s shortened session as a number of traders opted to start the weekend early. Trading within an ultra slim 9-cent range, August natural gas finished the week at $6.104, down 3.1 cents on the day and 31.2 cents lower than the previous Friday’s close.
While the low volume Friday came as no surprise, the fact that no one was shoring up his book or covering short positions ahead of the four-day weekend was a little bit perplexing. The August contract’s range Friday was $6.060 to $6.150. The trading session closed early at 1 p.m. EDT ahead of the Independence Day holiday weekend.
“We know the volume was low Friday. It was even low on Thursday,” said Tim Evans, an analyst with Citigroup. “It looks like people decided to extend the four-day holiday to five or six days. It almost looks like some of the market decided to leave the office for good during lunch time Thursday because the estimated trading volume was a little over 48,000 contracts, which on a storage number release-day is a pretty pitiful volume. Nobody is really trying to push the market around here. Most people are just letting it sit.”
The lack of activity Friday was a little surprising, Evans said. “Here we are ahead of a longer break than usual and there is the risk of shift in the weather one way or the other between now and Wednesday. You would think that might prompt traders to square their books and cut down on position size, whether that is buying or selling. Don’t be apathetic about the risk. I think we are basically taking for granted that there won’t be any storm development or any heat between now and next week. Those are pretty big assumptions. Weakness in the cash market may have contributed to the stability in futures.”
As for the futures market’s direction, Evans said he looks to the seasonal price pattern for cues. “Prices have a habit of making significant lows in the middle of July and then rallying, typically into October,” he said. To support this pattern, the analyst noted that a “constructive storage trend” has started to be established, with the year-on-five-year surplus reducing over past weeks. “That year-on-five-year surplus peaked back in May at 722 Bcf. As of right now, we are down to 611 Bcf. While that is still a big number, that is not an accidental improvement. I see no reason why that trend can’t continue. I think there has been an adjustment made on the supply side of the market to target a more reasonable November storage level.”
Despite the shortened session and the inaction in natural gas futures, petroleum futures traders mixed it up a bit on Friday. August crude closed 41 cents higher at $73.93/bbl, while the expiring July gasoline and July heating oil contracts went in the opposite direction, shedding 9.27 cents and 2.34 cents, respectively, to close out the week at $2.2021/gallon (gasoline) and $1.9642/gallon (heating oil).
The week saw the expiration of the July natural gas futures contract. July ended up going off of the board on Wednesday at $5.887, down 22 cents on the day. The $5.887 close was the lowest settle of a prompt month in 17 months. To find a lower front-month close you would have to look all of the way back to Jan. 5, 2005, when the February 2005 contract closed at $5.833.
Weather bulls were disappointed when Thursday’s 66 Bcf injection failed to confirm a weather driven increase in natural gas demand. The 66 Bcf was ahead of a Bloomberg survey showing an injection of 62 Bcf and the ICAP auction estimate of a 59 Bcf injection. All indications are that more heat will be necessary to significantly impact gas storage. “This just shows that you need extreme heat to see any type of substantial reductions in injection,” said Kyle Cooper of IAF Advisors in Houston.
Forecasted warm weather may give the bulls another chance. AccuWeather, in its latest six-to-10-day forecast, shows above normal temperatures across a vast section of the country. An area west of a broad arc extending from central Ohio to central Louisiana all the way to California, but excluding South Texas, eastern Arizona, and southwest New Mexico, is expected to endure above average temperatures.
Some within the industry continue to monitor a tropical wave in the Bay of Campeche in the southern Gulf of Mexico. The wave is flaring up showers and thunderstorms and is looking better organized, according to AccuWeather. “However, westerly winds aloft are too strong to allow for fast development or falling pressure. The wave is tracking to the west-northwest at 10-15 knots and will bring beneficial showers and thunderstorms to South Texas over the weekend. If this feature persists for a couple of days and becomes a depression, it could cause flooding rains over eastern Mexico,” the forecaster suggested.
Top traders see a buying opportunity. “I’m advising scaled-down buying when the August contract trades between $6.05 and $5.81,” said Ed Kennedy of Commercial Brokerage in Miami. He said for end users it was a good idea to lock in prices “before the hurricanes become a factor. Buying down to $5.81 will fit well with a lot of end users’ [profit and loss] statements.”
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