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Rebounding from Monday's 24.3-cent decline, April natural gas futures on Tuesday climbed as high as $6.750 before settling at $6.678, up 13.1 cents for the day. Despite the bounce, market experts said the level of bearish fundamentals in the market right now would make any sort of significant rally difficult.
"Trading on Tuesday resulted in a little bit of a moral victory for bulls by closing closer to the high on the day rather than the low," said Tim Evans, an analyst with IFR Energy Services. "We've now gone 30 hours without making a new low. What an accomplishment. Tuesday was constructive, but it is still a long way from establishing a solid base of support. We really have limited fundamental support, even with some of the colder temperatures expected for the West next week."
Evans said the larger problem right now for bulls is the record storage surplus. "Once we get through March, the next surge of demand can't be expected until July, if then," the analyst told NGI. "There is a little bit of gas in storage right now. Even with producers backing off of maximum output here, we still have too much gas. It is hard to imagine what price we would be trading right now if we hadn't have had Hurricanes Katrina and Rita. We might even have $1.50 gas if we had that 700 Bcf back. Put another 700 Bcf back into this market and it truly would look ugly."
Looking at the near to medium term, Evans said he did not see much of a leg for bulls to stand on. "We could go into a holding pattern here until winter is really over, but there is really not a credible upside threat here," he said. "We can bluff it higher, which is always possible, but unless the funds hit their magic number here to cover up, I don't see much rally potential."
Traders have been getting mixed weather forecasts. Weather bulls could get some short-term help in the form of lingering cold if AccuWeather.com's forecast holds up. AccuWeather reports that the Northeast has been under a chilly weather pattern for the past week and the pattern could continue. "A persistent dip in the jet stream will be allowing cold Canadian air to flow into the region on a northwest wind. While temperatures are not extreme, the constant chill is starting to get on everyone's nerves as afternoon highs linger in the 30s and low 40s," the forecaster noted.
However, the National Weather Service outlook for this week is not so promising for the bulls. The NWS anticipates below-average accumulations of heating degree days (HDD) for the large energy markets of the East and industrial Midwest. For the week ended March 11, New York, New Jersey and Pennsylvania are expected to receive 183 HDD, 23 below normal and 57 below last year. Ohio, Indiana, Michigan, Illinois and Wisconsin are forecast to endure 175 HDD, 41 below normal and 59 below last year.
Prior to Tuesday's session, Tom Saal of Commercial Brokerage in Miami advised storage operators to buy June natural gas at $6.97 and sell January 2007 natural gas at $10.37, thereby fixing the cost of storage gas and locking in a profit of a whopping $3.40/MMBtu.
Walter Zimmerman of United Energy said the weak performance of Friday and Monday "leaves little room for doubt regarding the direction of the trend -- it is still clearly pointing down." Prior to Tuesday's trading, he said that for natural gas futures to have any chance at forming a market bottom from the perspective of Elliott Wave analysis, the market needed a decisive close above $6.610, which it accomplished.
"It is worth noting that so far natural gas has peaked and reversed lower from every single such key resistance point," he said. "Our near-term target on a failure to break above $6.610 is the $6.380 level. A break below $6.380 targets the $6.200 to $6.060 area. This $6.200 to $6.060 area is still our only potential support of any significance between here and the $4.530 area," he said.
Phil Flynn of Alaron in Chicago says to buy April natural gas at $6.200 with a stop loss order at $5.990.
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