July natural gas is expected to open 2 cents higher Monday morning at $2.68 as traders continue to see a consolidation pattern and discount near-term weather reports showing slightly milder conditions. Overnight oil and equity markets fell. Dow Jones futures dropped 123 points to 17,124.
Risk managers see a ripe opportunity for producers to establish forward hedges.
"Over the past few weeks, the nearby contracts gained significantly relative to the deferreds," said Mike DeVooght, president of DEVO Capital. "We continue to see good sell interest when the long-term strip approaches the $3.00 level. Now that we have seen the short-covering rally we thought was possible, we feel current levels represent attractive levels for producers to start to establish forward sales. But since we are not that bearish, we would establish hedges with either floors or collars."
DeVooght counsels trading accounts and end-users to stand aside, but producers should "hold an August-July $2.70 put and short a $3.50 call at flat or hold a $2.75 put and short a $3.75 call paying 7 cents."
Near-term weather forecasts turned cooler over the weekend. "Near to cooler than average period anomalies are forecast across the Northeast, Midwest, southern Plains and into portions of the southwestern U.S.," said WSI Corp. in its Monday morning six- to 10-day outlook. "The remainder of the West, as well as Texas and the Gulf Coast will likely run warmer than average. [Monday's] forecast is cooler than Friday's forecast over much of the West and Plains. Texas and the Gulf Coast are warmer. CONUS PWCDDs are down 0.9 to 56.8 for the period.
"Overall forecast confidence is average today, but decreases by the end of the period. Medium-range models are in good agreement with the eastern trough and cool conditions, but there are key differences late in the period over the western U.S."
Forecasts come with inherent risks and WSI said, "There is minor upside risk to the hot weather across Texas into the southwestern U.S. The eastern U.S. has a cooler risk, mainly during the front half of the period. The Northwest and northern Rockies could run cooler late."
In overnight Globex trading August crude oil fell $0.80 to $46.84/bbl and August RBOB gasoline shed 2 cents to $1.5130/gal.