December natural gas futures ventured above the psychological $8 price level for a second consecutive session Friday only to retreat lower once again. As it has been for much of the week, price direction appeared to be a little bit in question on the day as the prompt month ended up closing at $7.884, up 7 cents on the day and a mere 5.7 cents above the previous week's settle.
With reports of above normal temperatures in a number of regions slated for this week and the winter weather picture still up in the air, traders appear to be willing to bide their time on decisions related to market direction.
"This $8 level is more of a psychological resistance level, but I don't know if we are going to breach it that much unless we see an extreme cold snap somewhere," said Steve Blair, a broker with Rafferty Technical Research in New York.
The broker noted it appears the market's psychology regarding storage has changed over the last two weeks. "In speaking to a few people in the physical gas market, they said that during the cold spells in early October, people were not going into storage to get what they needed in favor of going to the cash market," Blair said. "I think this has changed now as we saw a low build for the week ended Oct. 20 [19 Bcf injection] and an actual withdrawal for the week ended Oct. 27 [9 Bcf draw]. I think people are leaning towards pulling gas out of storage now that we are getting closer to the actual winter season.
"As a result, I think the market is going to stay somewhat range-bound," he said. "The $8 level is a minor resistance level, while the real resistance is up between $8.40 and $8.60. If we do get back above $8 early [this] week, we could take a run at $8.40, but for the most part I think we are range-bound between the low-to-mid-$7 area to up around $8.40 to $8.60. There are a lot of conflicting winter weather forecasts, so I think this range will hold until the winter weather picture comes into better focus and this market picks a side."
Risk managers holding short positions with hefty profits derived from Hurricane Katrina-era hedges are hinting it may be time to call in their chips. Presently, DEVO Capital is holding short hedges for producer accounts established at $13.95 and presently is counseling producers to maintain these hedges for 30-50% of their winter 2006-2007 production. If prices continue to rise, however, they may take some of those off the table.
"We would just lift a portion of those hedges if December settled above $8," said a Denver trader with DEVO Capital. He added that the longer the market was able to fend off price advances to the upside, the longer DEVO would be likely to maintain the hedges. "The November contract expired and didn't do anything [November futures expired at $7.153, down 34.4 cents], but if technical support develops and we see some good draws in the inventory figures, then we will start to liquidate some of those short positions. We haven't decided on a specific number, but I suspect if there are a number of days with significant closes of the December contract in the $8 to $8.50 range, we would reevaluate the situation," the trader admitted. He said the market has not really found a definitive direction.
The weather outlook for this week may help determine a direction, which in this case might be lower. According to AccuWeather, a cold air mass was encompassing much of the east during the weekend, but by early this week a milder flow returns to the East. "Temperatures in the afternoon will climb to near normal as warmer air presses into New England, and by early [this] week, New York City will be in the 50s, reaching the upper 50s by midweek," said AccuWeather meteorologist David Thomas. Temperatures in the 60s will return to the South and the southern Mid-Atlantic states, he added.
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