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Strong Cash Prices Offset Bearish Natural Gas Report; Big Inventory Drop Continues to Underpin Crude

There are a record number of shorts in the natural gas market and they have to either rollover into the October futures contract, hoping for a bearish September, or they have to start covering while preparing for the Fall Shoulder Season. It looks like some have decided to lighten up on the short side.
James Hyerczyk
Energy, Natural Gas, Crude Oil

Energy continued to be in focus on Thursday with stocks posting solid gains on top of yesterday’s robust performance. U.S. West Texas Intermediate (API) and international benchmark Brent crude oil remained underpinned by Wednesday’s bullish Energy Information Administration (EIA) weekly inventories report. Natural gas futures rallied on the back of a very strong cash market despite a bearish EIA weekly storage report.

Energy Sector Stocks

Energy sector stocks rallied on Thursday, helped by a broad-based rally, yesterday’s bullish EIA inventories report and an easing of tensions between the United States and China that reduced concerns over future demand growth.

At 18:03 GMT, the S&P 500 Energy Sector was trading $421.03, up $5.21 or +1.25%.

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WTI, Brent Strengthen

U.S. WTI and Brent crude oil continued to strengthen and are now in a position to finish higher for the week.

Underpinning crude oil early in the session was follow-through buying related to Wednesday’s bullish EIA inventories report and Tuesday’s American Petroleum Institute’s (API) weekly inventory summary.

The EIA said on Wednesday that American crude oil stocks dropped the week-ending August 23 by 10 million barrels, while gasoline and distillate stocks each fell by 2.1 million barrels. On Tuesday, industry group API said U.S. crude stocks had fallen by 11.1 million barrels last week.

Crude oil prices jumped shortly before the regular session opening after China said it wished to resolve its protracted trade dispute with the world’s largest economy with a “calm” attitude.

Later in the session, President Donald Trump said the U.S. and China are set to have trade talks on Thursday “at a different level.”

The news helped ease concerns over an escalating trade war between the economic powerhouses, while reducing worries over a global economic slowdown that could lead to lower demand growth.

At 18:16 GMT, October WTI crude oil is at $56.32, up $0.54 or +0.97% and December Brent crude oil is trading $59.35, up $0.12 or +0.20%.

Natural Gas Traders Shrug Off Bearish EIA Storage Report

Natural gas futures are trading higher on Thursday as strong cash market gains and aggressive short-covering after the futures contract rollover on Wednesday helped spike prices to their highest level since August 1. The news offset a bearish government weekly storage report.

Although the tropical storm in the Atlantic has been upgraded to Hurricane Dorian, it is not having a direct on prices at this time. The hurricane is expected to slam into Florida over the weekend, but this could actually be bearish for prices because of lower power plant demand. Should it travel across Florida and regain strength over the Gulf of Mexico then that would be another story.

EIA Hurricane Path Map with Natural Gas Processing Plants

Different Opinions on Hurricane Impact

The Wall Street Journal is saying the market is concerned about production disruptions, but demand tends to be the issue when hurricanes hit Florida.

According to the experts at NatGasWeather, “Two tropical systems, but the only one of primary concern is Dorian tracking through the Caribbean and towards Florida. The latest track was a touch further, which means less opportunity to impact much of the Gulf of Mexico. We expect bearish impacts through cooling and showers for lost demand but could also be slightly lighter production and LNG export issues. The second storm, Erin, is expected to remain off the US Coast.”

“The latest guidance was a little stronger and increases the cyclone to hurricane strength prior to impacting Florida and the Southeast U.S. Atlantic Coast Sunday-Monday,” NatGasWeather said. “But again, impacts are likely to be more bearish than bullish” due to the projected loss of demand from cloud coverage weighing more heavily than any loss of production.”

The forecasters still aren’t sure if it will continue up the East Coast of Florida or move across the state.

“The hurricane looks likely to make landfall in Florida and move north rather than into the Gulf from what “I’ve seen, so [there’s] no reason to expect shut-in production form this,” said Marshall Steeves, energy market analyst at IHS Markit.

“Should the forecasted path take a turn toward the Gulf, crews [from oil and natural-gas platforms] will be evacuated, and production will decrease for a short period of time,”according to a report issued Thursday from energy data analytics company, Enverus Drillinginfo.

“This path change must happen soon for production to be impacted as Dorian is expected to hit the eastern coast of Florida this weekend,” the report said. “Additionally, should the hurricane path stay true, production will stay near current levels and demand will decrease, pressuring prices lower,”

At 18:34 GMT, October natural gas futures are trading $2.296, up $0.074 or +3.33%.

Natural Gas EIA Report

On Thursday, the EIA reported a 60 Bcf injection into storage inventories for the week-ending August 23. With estimates coming in at 45 Bcf to 61 Bcf, hitting the high end of the range is concerned bearish.

“The market so far is hanging on well through, thanks to very strong cash in today’s trading session, and some tightening more likely for next week’s report given the production dip and recorded liquefied natural gas (LNG),” Bespoke chief meteorologist Brian Lovern said.

Technical factors are also playing a role in the rally with buy stops hit over $2.226, $2.273 and $2.278.

There are a record number of shorts in the market and they have to either rollover into the October futures contract, hoping for a bearish September, or they have to start covering while preparing for the Fall Shoulder Season. It looks like some have decided to lighten up on the short side.

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