Near-month natural gas futures rallied all the way up to $7.180 Wednesday morning, but then lost footing and tumbled to a low of $6.750 by 1:30 p.m. EDT before ending the day down 13.3 cents at $6.875. Despite strong cash prices due to power generation load, the likelihood that Tropical Storm Debby won’t pose a threat to the U.S. appeared to take the wind out of the futures market’s sails during the regular trading session.
The front month took the biggest hit Wednesday, but October also slipped 12.9 cents to end at $7.006. November dropped 5.4 cents to $9.006, and December ended the day down 8.9 cents at $10.516. January, February and March remained well above $11.
While Debby appears to pose no threat to the U.S., analysts said a tropical wave approaching the Caribbean is more significant to the gas market (see related story). Strong early Access trading indicated that the market already was responding to the possibility Wednesday evening. The National Hurricane Center said the wave, which was located about 400 miles east of the Windward Islands and moving west at 20 mph as of 11:30 a.m. Wednesday, showed signs of organization and the potential to develop into a depression in the next day or so. However, The Weather Channel said the wave is “very far south and may have to fight off the influence of the South American landmass if it is to strengthen.”
While the market waits for a potential impact on supply from tropical weather in the Atlantic, the heat in the South, particularly Texas, continues to drive up demand from power generation. Many cash market prices were up more than 30 cents Wednesday because of power generation loads and in response to Tuesday’s futures run. But there also appeared to be some significant buying for storage. For example, in the Midwest where temperatures have cooled, cash was up 40 cents.
Bentek Energy said in its new U.S. Power — Gas Burn Report, that demand from power generation Wednesday rose to 30 Bcf, the first time it reached that plateau since Aug. 10.
“Burn rates continue to rise in SERC [which covers 16 states in the Southeast] and [ReliabilityFirst, which covers a dozen Mid-Atlantic states and the District of Columbia], while the West (WECC) and the Northeast (NPCC) remain steady,” Bentek said. “For the summer to date, gas burn is still 15% higher than last summer on average, with the largest consumption increase occurring in the West and [Southwest Power Pool].” Bentek said gas burns this week continue to rise and are expected to reach 197 Bcf, potentially resulting in a smaller storage injection in next week’s storage report than the injection to be reported this week.
Predictions for this week’s gas storage report range from about a 39 Bcf injection to a 70 Bcf injection, according to a Reuters survey of 21 industry players. The average expectation in the Reuters survey is 53 Bcf. Bentek Energy, which uses actual gas flow data on pipelines nationwide, is expecting a 62 Bcf build with injections of 37 Bcf in the East, 19 Bcf in the Producing region and 6 Bcf in the West.
The ICAP storage options auction settled on a 60 Bcf injection. Other predictions are as follows: Global Insight analyst Jim Osten, 54 Bcf injection; Tim Evans of Citigroup, 45 Bcf; consultant Ron Denhardt of Strategic Energy and Economic Research, 39 Bcf; and consultant Stephen Smith, 53 Bcf.
Last year, the injection for the week was 58 Bcf, and over the past five years, injections during the week have averaged 67 Bcf. The National Oceanic and Atmospheric Administration said there were 72 cooling degree days last week, which was six fewer than the prior week and four fewer than the same week last year, but six more than normal.
In the last storage report for the week ending Aug. 11, working gas levels rose 37 Bcf to 2,800 Bcf, which was 292 Bcf, or 12%, above levels at the same time last year and 349 Bcf, or 14%, above the five-year average.
A prominent futures analyst said Wednesday that many market players still seem to be sitting on the sidelines waiting for a big drop back below $6, but he doesn’t see that happening. “We just haven’t seen the futures market activity that we’d expect entering autumn,” he said. “End-users particularly should be locking in their purchase price for winter gas. We’ve had plenty of busy Augusts, but this hasn’t been one of them.”
He said that many buyers seem to still be preoccupied with the storage surplus. “I think people have still been looking at the storage surplus, but the heat has cut that down significantly, from 29% over the five-year average in June to 14% as of last week’s report. Moreover, we think with winter prices — December through March — all over $10, there has been some reluctance to be buyers of that. I think it’s a mistake not to lock in.
“The fact is the value of natural gas is substantially discounted from competitive liquid fuels. I think gas prices aren’t going to go materially lower. I think it will be very difficult to get a $5 handle on the market again, and if we do, it won’t last very long. And it may or may not bring winter down. That’s been another issue. The differential between spot and winter has widened. We’ve been caught in the $10-12 range on the winter strip for quite some time. I don’t know why cash is up today but I suspect it’s because people are concerned about the impact of the hurricane season. If it continues to be a weak season, we probably will test the lows down around $6.50 or maybe even a little lower, but I would view that as a gift.”
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