August natural gas is set to open a penny higher Monday morning at $2.77 as forecasts call for no new incursions of warmth and risk managers suggest forward sales. Overnight oil markets eased.
Longer-term weather forecasters see temperatures a scooch cooler than previously forecast, but well above average. "Near to above average warmth is expected to persist over a good portion of the nation," said WSI Corp. in its Monday morning 11-15-day outlook. "Except for the southwestern U.S., today's forecast is cooler than Friday's forecast for days 11-12. CONUS PWCDDs are down one for those two days and are now forecast to be 68.8 for the period. This is 13.9 CDDs higher than average.
"Forecast confidence is only average today. There is modest model support for the general pattern, but spread with the amplitude of the flow and magnitude of temperatures, especially over the West. The likely retrogression of the pattern supports an upside risk across portions of the West, especially the Pacific Northwest and California given the GFS op [Global Forecast System operational model]. Texas and the southern U.S. have some downside risk due to potential wet weather.”
Risk managers see the market focusing on temperature dynamics to the exclusion of most other factors. "The market shrugged off the [storage] news as market participants looked forward to the warmer than normal temperatures that will be covering much of the U.S. next week," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm.
"On a trading basis 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 (with a ceiling as close to $4 as possible)," he said in a weekend note to clients.
He recommends that trading accounts and end-users stand aside while physical market longs "hold an Aug. 16-July 17 $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."
In overnight Globex trading August crude oil fell 59 cents to $45.36/bbl and August RBOB gasoline shed 3 cents to $1.3964/gal.