After trading significantly higher in the overnight Access session, March natural gas began regular trading on Friday at $7.330. However, bearish fundamentals and concerns about the validity of cold weather forecasts allowed the prompt month to come off during the pre-holiday shortened trading session, leaving March to close at $7.182, up 4.8 cents on the day, but down 13.4 cents from the previous Friday.
Equating the natural gas futures market's actions of late to those of a merry-go-round, IFR Energy Services analyst Tim Evans said he is really starting to get dizzy. "There is real motion sickness every time we try to rally on the idea that it is going to be colder; however, the progress is very limited. The one thing this suggests to me is that there is a lot of downside potential in this market once we get any kind of a warming trend. If there is only 20 cents of upside in the market, that makes me worried that there might be $2.00 to the downside as soon as the weather shifts."
The analyst said one thing that might be capping gains is the confidence level in the latest forecast from the National Weather Service. "Using a one-to-five confidence scale where five represents the highest confidence level, Thursday's forecast, which still had cold in it, only had a confidence level of two, so not all of the models were in agreement," Evans said. "It is possible that the cold pattern may not hang together."
The market's direction this week really is a "coin flip" situation, Evans told NGI. "We are either going to $8.00 or we are going to $6.00, and I think it depends on the weather outlook when we get back following the holiday weekend. While we could see $8 this week, I don't think it will take that much of a weather disappointment to just let the bottom drop out of the market."
Evans said open interest on the market currently stands at 597,000 contracts, which is a new all-time high. "What that is saying is that there are big bets on both sides," he said. "There are a lot of fund shorts, some producer selling, and there has to have been a lot of consumer hedging happening on the other side of the market. The big question is who is on the right side of this thing. If you want to know where the selling might come from to blast the market lower, it would be long liquidation from the consumer side...[by those] who don't want to answer that margin call...or can't answer that margin call."
Turning attention to the glut of natural gas in underground storage, Evans pointed out that this season's sizeable surplus could have far-reaching effects. While Thursday's 102 Bcf withdrawal for the week ended Feb. 10 was near expectations, overall levels in storage are at record highs for this time of year. As of Feb. 10, working gas in storage stood at 2,266 Bcf, according to Energy Information Administration estimates. The only year that storage came close to that level was 2002, when 2,160 Bcf of working gas remained in storage following the second report of February.
"In order to work off this surplus, we will need more heat, more hurricanes and a colder than normal winter in 2006-2007, just in order to set up possible physical tightness for 2007-2008," Evans warned. "It really is going to be a long-term project."
Whether the forecasted arctic burst of air for the weekend was on course remained undecided Friday afternoon. According to AccuWeather.com, "big league" arctic air was poised to march south into the central U.S. Friday and over the weekend.
"The interesting thing about this is that the coldest air in North America right now is located right over south-central Canada. Some mighty low temperatures were reported not too far north of the border [Friday morning]. At Key Lake, SK, the mercury hit bottom at 56 below zero," said John Kocet, AccuWeather.com meteorologist. The high Saturday in Chicago was expected to reach just 12 degrees, the forecasting firm predicted.
Weather or no weather, some top traders still consider natural gas a sale. "We look for trade in the natural gas market to remain weak as [the] weather premium dissipates amidst an oversupplied market. In view of bearish fundamentals and a weakening oil complex, we feel that this market is poised for lower values in the coming sessions," said Jim Ritterbusch of Ritterbusch and Associates. He said he will be maintaining a bearish trading posture in natural gas. "Any short positions should be maintained, and we would continue to view any weather-related rallies as selling opportunities. Sub-$7.00 prices are still projected."
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