Futures Tumble as Weak Cash, Robust Storage Conquer Cold Weather

Intelligence Press

Disregarding the arrival of Arctic air in favor of focusing on the weakness in the cash market and near-record natural gas storage levels, traders on Thursday pushed November natural gas futures 36.8 cents lower to close at $5.782. Action on Thursday marked the contract's second consecutive 30+ cent loss.

Coming in between last year's 56 Bcf injection and the 65 Bcf five-year average build, the 62 Bcf injection reported by the Energy Information Administration for the week ended Oct. 6 reconfirmed that the country will enter the winter heating season with record or near-record supplies of natural gas. While the number came in within industry expectations, November natural gas futures dropped six cents after the report was released to $5.980 and traded at $5.900 as of 11 a.m. The contract had traded lower in the overnight session and was hovering around $6.040 prior to the storage report. After reaching a low on the day of $5.740, the prompt month inched higher to settle.

"The storage injection was in line with the estimates that matter, so this weakness in futures is more in response to the cash market's direction," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "The injection was right on the ICAP auction number, which is a reflection of the people who actually trade. I only pay attention to the traders because they actually have a position in this market."

Kennedy said he sees lower prices in the near-term. "We were heading lower because of the weaker cash[Thursday morning]. Before the opening [Thursday], the Henry Hub was at $5.20 versus the $5.65 it finished at Wednesday.

"Traders are now probing for support in November natural gas, but I don't think they have found it yet," Kennedy said Thursday morning. "I think it may be closer to $5.750. That is [where the utilities jumped in before] and the question is will they be there again. That remains to be seen. They will probe until they find support, which is why I think we will drift lower here."

The industry had been expecting an injection in the 60s Bcf. The 62 Bcf injection put working gas in storage at 3,389 Bcf, easily surpassing the weekly storage report record of 3,327 Bcf, which was recorded for the week ended Nov. 5, 2004. The EIA's weekly storage report records go back to December of 1993.

Delving deeper into EIA's monthly storage report records, stocks are just shy of the 3,467 Bcf in storage at the end of October 1990 and the all-time record posted at the end of November 1990 of 3,472 Bcf. In its October 2006 Short-Term Energy Outlook, the EIA predicts that end-of-October levels will reach 3,538 Bcf.

"With inventories as high as they are right now, I think the futures run-up we saw last week was mostly short-covering as well as fear about cold weather, which is now not supposed to be as cold as anticipated," said Rich Bruskoff, a New York-based futures technician. "With storage this high and people still unwinding their positions, I think the futures market is going to see another $1.00 to $1.50 on the downside, especially in the winter months. The November-December spread right now is $1.580, which is ridiculously wide. The November contract has no strength at this point and I think we will continue to see weakness in December, so the winter part of the board should continue to show significant weakness, especially March and April."

Focusing in on November natural gas, Bruskoff noted that the most recent Commitments of Traders report from the Commodity Futures Trading Commission shows that speculative traders are still long by 70,000 contracts, so he sees significant downside risk. "I can see November easily trading back down to its $5.350 low for the move," he said. "Once it gets down there, you have no support anywhere around."

The cold has already arrived in the Midwest and the East is expected to be next in line. Thursday morning the mercury stood at 34 degrees in Chicago and the high was expected to reach just 42 degrees. AccuWeather forecasted a high in Minneapolis Thursday of just 40 degrees, rising to 55 degrees four days later on Monday. The normal high for Minneapolis this time of year is 61 degrees.

"The coldest air of the season will cover much of the East and Midwest Friday into Saturday," said Accuweather meteorologist Brett Anderson. "Daytime temperatures will be close to 10 degrees below normal from the Ohio Valley into the interior Northeast. Many areas, especially north and west of the major Northeast cities, could see their first frost of the season Friday night." Anderson noted that the Southeast will likely feel the chill by Friday night with temperatures dropping into the 40s as far south as the Florida Panhandle. "Parts of the North Carolina Piedmont will drop into the upper 30s!" the meteorologist added.

Traders are weighing the ying and yang of weather and storage. "The natural gas market has been supported as of late by cold weather but failed to blast out above resistance and eventually retreated [Wednesday]," said Phil Flynn of Alaron in Chicago. He noted that the big overhang of a large supply is still the big elephant in the room. "Still the chart formation looks pretty interesting and if the market consolidates above $6.00 than we could be building a base for a run up above $7.00," he said.

A Reuters survey of 24 industry players had been calling for an average build of 66 Bcf, while the ICAP storage options auction on Wednesday indicated a 62.8 Bcf injection. Golden Co-based Bentek Energy said it expected a 60 Bcf injection.

Prior to this report, Bentek's inventory estimates showed five U.S. storage facilities at or above 100% and nine other facilities at 95-99% of capacity. "As anticipated in our reports over the past three weeks, a number of facilities are testing and exceeding their reported maximum inventory levels," Bentek said.

As of Oct. 6, working gas in storage stood at 3,389 Bcf. Stocks are an astounding 410 Bcf higher than the same time last year and 358 Bcf above the five-year average of 3,031 Bcf. The East Region injected 37 Bcf for the week, while the Producing and West regions chipped in 14 Bcf and 11 Bcf, respectively.

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