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Futures Finish Bearish Week $1.64 Lower; More to Come?

After regrouping on Thursday with a mostly neutral session, traders on Friday resumed the downtrend in natural gas futures. The December contract pushed as low as $11.215 before finishing Friday at $11.415, down 27.4 cents on the day and a whopping $1.64 lighter for the week.

The bearish week was a result of moderate temperatures, a healthy storage situation and the lack of storm activity in the Gulf of Mexico. The end of the 2005 Atlantic hurricane season at the end of the month can't come fast enough as the oil and gas industry continues to deal with the aftermath of Hurricanes Katrina and Rita. The Minerals Management Service reported Friday that 4.569 Bcf/d remains offline, which is 45.69% of the Gulf's normal 10 Bcf/d of production. Shut-ins were down from 4.727 Bcf/d on Thursday.

"I really think this down move is all weather-driven right now," said Brad Florer, a broker with ICAP Energy. "Our meteorologist is calling for well above normal temps to stick around for a couple more weeks. We have also seen a lot of rain and moisture in the Northwest recently, which will help with the hydropower in that region. There really are a lot of things happening right now that are being tacked on top of the demand deconstruction from the higher prices over the past couple of months."

As for critical price levels, Florer said he believes the gap just below the market's current level could be telling. "Basis December futures, that $10.88-11.10 gap will be a crucial level," he said. "If the market can take it out next week and keep it from bouncing, I think there is a good chance that more air can be taken out of this thing."

Calling Thursday's 8.5-cent increase a neutral day, Florer said, "The only thing I question is how many down days in a row this market can have before it gets a significant bounce. I think we have to look at the fact that we rallied so hard and so long, we have been trading at unprecedented levels for the last few months," he said. "So, I am not sure this pullback will look like what we are used to seeing either. I think there is a chance we could continue to fall pretty hard [this] week unless we see a change in the weather or something going on in Iran." Florer noted that if unrest in Iran flares up, then crude would obviously rally and natural gas could follow as well.

"Right now, it looks like storage is going to be close to full," the broker said. "At this point, we normally would only get one more injection, but at this point it looks like we could get two more builds and end up around 3.3 Tcf, which is way higher than anyone was thinking six weeks ago."

Florer added that there is still fear in this market. "There is still fear that if does get cold, we won't be able to produce what we will need. That is what is keeping this pullback as orderly as it has been. Otherwise, I think it would have been a real flush."

Market technicians looking at long-term data see the market working lower. According to Tom Saal of Commercial Brokerage, natural gas futures are "technically overbought and the market is working on its overbought condition by working lower." He bases his assessment on a study of weekly data and the use of overbought oversold oscillators. The stochastic oscillator when applied to weekly data currently hovers at a level of 79.4% and if it should fall below 75%, "look out below," said Saal. Oscillators such as the stochastic range between 0 and 100% and high levels, typically above 75%, indicate an overbought market, and readings below 25%, an oversold market.

In addition to the weekly stochastic indicators, Saal also pointed to major retracement points that the market is likely to seek as it works lower. Adherents of retracement analysis model market movements as percentages of prior market advances or declines. In the large advance from the summer 2004 low of $4.52 to the recent high of $14.75, Saal identifies the important 38.2% retracement point of $10.860 and the 50% retracement price of $8.440 as areas that would help relieve the market's overbought condition.

From a fundamental standpoint, near-term weather forecasts are not promising for bulls either. In its most recent six-to-10-day forecast Friday, the National Weather Service predicts above normal temperatures for the eastern two-thirds of the country. In addition, California, Nevada and parts of Arizona are expected to be above normal as well, with only Alaska coming in with colder than normal temps.

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