As both Tropical Storm Franklin and Tropical Depression Gert looked significantly less threatening to Gulf production on Monday, August natural gas futures continued to explore the lower reaches of the $7-8 range.
After notching a $7.140 low on the day in morning trade, the prompt month zig-zagged for the remainder of the session, ultimately settling at $7.284, down an even 10 cents on the day.
The move on Monday closed the gap established earlier this month, when August closed at $7.171 on July 1, but opened at $7.380 on the next trading day, July 5.
"Natural gas futures rebounded from their lows after filling in a July 1 price gap on the chart, but still ended lower on the day, as Tropical Depression Gert moved inland, with no obvious new storm threat to take her place," said Tim Evans of IFR Energy Services. "The price gap from July 1 has been filled. Now the market has to sit and evaluate whether the market can rally following that accomplishment or will continue to sink. We think it's short-term oversold to a degree that makes an eventual rally more likely."
While crude and heating oil recorded small gains on Monday, traders are beginning to mull a changing fundamental landscape in the markets. September crude settled 35 cents higher at even $59/bbl, while August heating oil climbed 2.47 cents to settle at $1.6066/gallon.
According to veteran traders, natural gas, crude and heating oil markets are poised to take a tumble. "The crude oil, heating oil and natural gas markets are vulnerable to a sharp drop in prices in the absence of any very bullish headlines," says Mike DeVooght, president of DEVO Capital. DeVooght's rationale is based on four key observations, which are:
"We feel this end user buying is what has caused the backs (more deferred futures contracts) to gain so much relative to the front months," DeVooght added.
On Friday after the close of trading, the Commodity Futures Trading Commission in its natural gas Commitments of Traders report said that as of July 17, noncommercials held a net short natural gas position (futures only) of 24,099 contracts. This represents an increase of 3,299 contracts (short) from the week earlier, and on balance is still a potential source of additional buying, traders point out.
DeVooght's assertion that speculative positions are very long incorporates the "non-reporting" or small speculator positions along with those of the non-commercials. He contends that when the two are combined, the sum is a net long position of 19,500 contracts.
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