The biggest stockpile buildup in two months has hit US natural gas and prices aren’t tumbling. This proves two things: market bulls have dug in for a long, hard fight, betting that inventories will remain low when winter comes, and also believe the weather will be cold enough then to result in huge heating demand and extraordinary gas prices.
“Natural gas could spike this winter,” said Matthew Tuttle of Tuttle Tactical Management, a Stamford, Connecticut-asset manager overseeing $550 million in exchange-traded funds with exposure to energy securities, among others.
“Inventory levels have fallen 19.5 percent below average and, by the time winter starts, are set to be at their lowest in more than a decade.”
Tuttle is among fund managers and investors who see no immediate reason to sell down futures of natural gas traded on the Henry Hub of the New York Mercantile Exchange, as well as securities of US utilities and other companies involved in power generation.
Higher Stock Build Up For The First Time In Weeks
US government data on Thursday showed natural gas stocks grew by 70 billion cubic feet for the week ended August 24th as utilities injected more of the fuel into underground salt caverns than previously, after a moderation in summer heat led to less power usage for air-conditioning. It was the first time in eight weeks that the injection exceeded estimates of analysts, who had forecast a build of 64 bcf instead.
Also, the weekly build rate returned for the first time since the end of June to above the five-year average of 59 bcf, common for this time of year. In the past two months, that average had eluded the market as warmer-than-usual weather consumed most of the record volumes of gas flowing out of US shale oil fields.
Gas prices on the Henry Hub barely reacted to Thursday’s stockpile data. The front-month October contract slid just 0.3% to $2.886 per million British thermal units in the previous session, before rebounding to just below $2.90 per mmBtu in pre-Friday’s electronic trade.
Investing.com’s daily technicals has split calls on natural gas. A “Buy” is recommended for the October contract’s ability to trade above the 50, 100 and 200 Day Moving Averages of $2.860, $2.857 and $2.840 respectively. But a “Sell” is also called if the contract gets to the 15 Day and 20 Day Moving Averages of $2.912 and $2.925, respectively.
Prices Trapped In A Range
All said and done, the market is trapped between a low of $2.85 and high of $2.95 – a range it has been stuck at the past two months. The magic number remains $3 gas – a target market bulls have crossed but failed to hold as bears mustered enough momentum to pull prices back lower.
“I was bearish around the 2.95 level, as that had been touched on a dozen occasions only to sell off every single time,” Mike Seery of Seery Futures in Plainfield, Illinois, said in a note on natural gas this week.
But he believes “a break above the 3.00 level is in the cards, in the coming months”. Seery added:
“I will not take a short position as I think the downside is extremely limited, especially when you look at the entire energy sector, which is right near recent highs...Strong demand continues to fuel this market to the upside.”
Aside from natural gas, US crude oil also saw strong support this week, piercing $70 per barrel, a high last hit in mid-July.
Weather Supportive To Bulls
Dominick Chirichella, analyst at the DTN-owned Energy Management Institute in New York, said weather forecasts for the next eight to 14 days showed above normal temperatures growing again across most of the United States.
“I am maintaining my natgas view and bias at neutral to cautiously bullish as the market is now below its current range support level,” Chirichella said.
ADM Investor Services said near-term forecasts showed hotter-than-normal temperatures in the US Northeast, with highs reaching 96 degrees in Washington DC later this week.
“The extended forecast into the first week of September also has warmer temperatures,” ADMIS said, although it conceded that “the North American cooling season is clearly coming to an end”.
Daniel Myers, gas analyst at Gelber & Associates in Houston, said weather forecasters have had difficulty coming to a consensus on the duration and magnitude of above-normal warmth in September.
“It is likely that relatively strong demand will hamper the next couple of storage additions. Nevertheless, the most recent storage report reflects stronger supply that will cushion this impact and restrain prices.”
Money Managers Still Bullish Gas
So, what will it take for gas bulls to back down from the highs?
“More hefty stock injections each week to show we’re on our way to much higher winter inventories,” replied Myers. “Otherwise, the buying could continue.”
At last week’s count, money managers held the highest number of positive bets on natural gas in eight weeks, with net-long positions growing by 21,378 to reach 216,230 for the week ended Aug 21, data from the US Commodity Futures Trading Commission showed. The CFTC will update those numbers later on Friday.