Futures Break Above $9 on Short-Covering, Petroleum Sympathy

Erasing any question about the market forming a top earlier this week, September natural gas futures on Wednesday afternoon soared to new levels. Taking a cue from the rampaging petroleum complex, the natural gas prompt month broke through the psychological $9 level to trade at a high of $9.09, and that was in the last two minutes of the regular session.

After the record setting day, September natural gas ended up settling at $9.071, up a whopping 42.2 cents on the day. A prompt month hasn't been as high as it was Wednesday since Nov. 1, 2004, when the December 2004 contract reached a high of $9.20.

"I'm not sure what is going on here," said Tom Saal of Commercial Brokerage Corp. in Miami. "It looks like massive short-covering. Once we broke out to the upside here, we were in new territory for this time of year. We have literally gone vertical off of that low back on July 25 of $7.185."

New price territory for this time of year, indeed, as the September natural gas futures contract on Aug. 10, 2004 settled at $5.791, a sizeable $3.28 lower than its 2005 counterpart.

Saal pointed out that Wednesday's prompt month settle was "the highest settlement in a long time." In fact, to find a close this high one has to look all of the way back to the infamous highs of Feb. 2003. On Feb. 26, March futures expired at $9.133. One day prior to that mark, March futures in the regular trading session climbed as high as $10.10 before settling at $9.577.

The influence on Wednesday likely came from the petroleum futures complex, which saw September crude record a $65/bbl high, a new record, before settling at $64.90, up $1.83 on the day. September heating oil and unleaded gasoline were also in rare air on Wednesday, with heating oil closing 6.22 cents higher at $1.8388/gallon and unleaded finishing the day up 7.39 cents at $1.8963/gallon.

A U.S. government report on Wednesday showed U.S. crude stockpiles rose last week by 2.8 million barrels, due to sizeable imports and slower refining activity due to outages. However, the report from the Energy Information Administration (EIA) also showed a 2.1 million barrel decline in gasoline stockpiles due to strong demand, recent refinery outages and slower domestic production.

"It was [Wednesday's] unleaded draw which caused the most trouble...those damn refineries again," said Jay Levine of Advest Inc., noting that crude showed much higher than expected builds versus expected draws.

Levine said the natural gas futures "topping" argument earlier in the week was missing one crucial ingredient, "a buying climax." The broker said "tops typically transpire only on a violent turn -- much more often than not. While a retreat from record high prices is due, it rarely occurs on-time and without blowing the eyes, minds, and wallets for those looking for a top. It's not watching a lackluster market trading a few cents higher or lower, it's a market trading in a frenzy and near panic-buying (or selling)." He noted that Wednesday's action falls under that sort of heading.

However, Levine warned that doesn't necessarily mean this is the top, "but it certainly provides one more reason to think we could be near or nearer one. Remember, even while I write about potential top and top-picking, I still have an upside target for front month natural sitting @ $9.60, and even that doesn't necessarily means it stops there, assuming it does indeed get there."

Levine said both the natural gas and crude futures markets are now closing not only near the day's highs, but also into what he would consider good resistance points. In prompt month natural gas, Levine said that's anywhere from $9.05 up to $9.15 including tonight and tomorrow, and in prompt month crude, that's anywhere from $64.75 up to $65.25.

For both Wednesday night and Thursday, Levine advised resting orders in natural gas at $8.56, $8.31 and $8.09 on the downside and $9.115, $9.45, $9.65 and $9.85 on the upside.

IFR Energy Services Tim Evans summed up Wednesday's energy trading session as "mindlessness over matter," noting, "The energy markets all spiked to new highs on Wednesday, with crude and heating oil completely undeterred by the build in inventories for last week," he said. "The strong close leaves these markets in position to climb further, although they are already at excessive values and well overbought."

Turning attention to Thursday morning's natural gas storage report for the week ended Aug. 5, most projections are looking for the EIA to reveal a build in the low 40 Bcf range. Evans is calling for an injection in between 40 to 50 Bcf, while Levine believes a 39 Bcf will be on target.

Citigroup's Kyle Cooper said he things the injection will be in the neighborhood of 31 to 41 Bcf. "A build in our range would be considered somewhat bullish on a temperature-adjusted basis while clearly quite bullish on an absolute basis," Cooper said. "Mother Nature will not remain a bull forever."

The ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 48.5 Bcf injection. Whatever number is revealed Thursday morning will be compared to last year's 74 Bcf build and the five-year average injection of 64 Bcf.

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