NATURAL GAS LOOKING RIPE FOR ANOTHER RUN-UP TOWARD $4.80-$5
Source: Weatherbell Analytics
by Alan Lammey
There are lots of cliché-ish sayings in the energy futures industry, but two of my favorites are, ?Prices
don?t go up forever, but they also don?t go down forever, either.? Followed by, ?Traders are in the ?moving
business?, not the ?storage business?.? Both are fairly accurate statements ? but in this case, I believe
they?ll contribute to another move to the upside in August natural gas futures over the next 2-3 weeks,
potentially retesting the $4.80 to $5 per MMBtu area.
Now, while we all know that ?sayings? don?t move markets, the fact is the underlying fundamental and
technical activities that support those sayings most definitely do move markets. And what?s always
interesting is that once the pendulum swings one direction, it?s almost like clockwork that enough bullish
(or bearish) catalysts emerge to send prices moving in the opposite direction.
With all this said, here?s what I?m looking for to move August gas futures higher in comings days and
weeks. First off, I?m looking for an 81 Bcf injection for the week ended June 24th, which should be a
bullish enough catalyst to help lift gas prices higher. Looking a bit further out, I have a preliminary
outlook for a 90-93 Bcf injection for the week ended July 1st. Also, while in a state of flux, oil prices
appear to be bottoming out near the $90, with the potential for prices to climb higher as the US dollar
begins to find more debt related pain in the near future. However, cracks in the overall economy are also
likely to keep oil prices in check. Expectations for Wednesday’s Department of Energy (DOE) crude oil
and products inventories reports are: crude oil, down 1.5 million barrels; motor gas, up 755,000 barrels;
heating oil/diesel, up 1.050 million barrels.
From a technical perspective, natural gas futures have recently found a bottom near the $4.10 area
and now appear poised to run higher. As such, I?m looking for August natural gas to find resistance at
somewhere south of the $5/MMBtu mark. If the market holds at that price level, then we could feasibly
climb higher in coming weeks, particularly if the current storage deficit doesn?t erode throughout the
balance of summer. US marketed natural gas production continues to fluctuate between 64 Bcf and 65
Bcf per day with a majority of the most recent production increases coming from the Green River basin,
which is up nearly 110 MMcf per over the 30-day average. Meanwhile, increasing summertime demand
has been offsetting production to a degree. Currently, US gas demand has been oscillating near 60 Bcf
per day with the biggest concentration of coming from gas power plant generation. The US Dept of
Energy?s ?Energy Information Administration (EIA) will release its US natural gas production data,
known as the EIA-914 report tomorrow, June 29th. According to intrastate pipeline flows analysis,
natural gas production in the Lower 48 is likely to climb by roughly 0.5 per day for the EIA?s reporting
period, which isn?t exactly bearish.
According Baker Hughes rig count data released last week, the gas rig count increased by 3 rigs last
week coming in at 873 active gas rigs. While the amount of active rigs has been in an eroding trend since
last August, the current drilling activity, not to mention hundreds of wells waiting for tie-in/completion is
likely to result in an increase of 3 Bcf to 5 Bcf per day for the balance of the year.
Another supportive factor, at least from the psychological perspective, is that the tropics are starting to
become a bit more active, which will be a encouraging to prices in the oil and gas complex. However,
keep in mind that gas production in the Gulf of Mexico represents less than 10% of US on-land dry gas
output. As such, it would take some very sizeable hurricanes making a beeline straight for the heart of the
offshore production area to dent overall production numbers. WeatherBell Analytics meteorologist Joe
Bastardi contends that this year?s hurricane season is likely to be an active one with the potential of more
powerful than average storms. Because of all the onshore supply of natural gas, not to mention LNG
capacity, the market has written off the impacts of the hurricane season to a degree. But it should be
noted that Mother Nature loves to throw curve balls when they?re least expected.
Other bullish drivers surround news released late last week that the Environmental Protection Agency
(EPA) will launch a study of hydraulic fracturing, which will analyze the safety of drinking water as it is
related to the shale gas drilling and production procedure. The analysis will begin this summer and is
expected to show first results in 2012. The study was recently approved by the US Congress in the midst
of growing allegations that the ?fracing? procedure is poisoning groundwater supplies near ?fracing? sites
around parts of the US.
The EPA said that the study is going to include ?seven? well locations around the US, selected from
known shale/fracturing fields as part of its research. The EPA indicated that five sites for retroactive
studies would also be included in its study, with targeted sites being chosen in Texas, Colorado, North
Dakota, and Pennsylvania. Furthermore, the agency said that studies for the complete lifecycle of a well
would also be conducted at well locations in Pennsylvania and Louisiana.
While there has been lots of scrutiny over shale gas drilling utilizing hydraulic fracturing technology
that could result as a bullish catalyst to the gas market depending on the findings, there?s another major
issue in the nuclear energy industry that is sure to get more press in the near future. According to an
investigation by the Associated Press, radioactive tritium has leaked from three-quarters of US
commercial nuclear power sites. The radiation is finding its way into groundwater from rusted and
corroded piping buried in the ground.
According to the report, the number and severity of the leaks has been steadily on the rise, even as
federal regulators have recently extended the licenses of more and more reactors across the nation.
Tritium, which is a radioactive form of hydrogen, has leaked from at least 48 of 65 sites, according to US
Nuclear Regulatory Commission records reviewed as part of the AP’s yearlong examination of safety
issues at aging nuclear power plants. According to the report, leaks from at least 37 of those facilities
contained concentrations exceeding the federal drinking water standard – sometimes at hundreds of times
Currently, the technical indicators for August natural appear bullish. If prices are able to close above
$4.315, it will set the stage to approach key resistance near $4.35. If violated, buyers will likely test the
$4.43 to $4.50 area, followed by $4.62, $4.814 and $4.99 seen at the beginning of June. Conversely, a
close below $4.21 suggests that market bears may attempt to press prices lower, potentially testing the