After January natural gas futures traded in a 23.5-cent range from $7.330 to $7.565 on Tuesday, the lack of market direction became even more evident as the contract closed out the day at $7.430, a mere three-tenths of a penny higher than Monday's $7.427 settle.
"All in all it was a pretty quiet day, especially with the three-tenths of a penny higher settle," said Steve Blair, a broker with Rafferty Technical Research in New York. "Looking at the market over the last couple of weeks, once we got above that $8.74 level I thought we would see more follow-through than we did. Instead, after reaching the $9.05 high, we broke back below that $8.74 level just a day later. That was a major failure on the charts and it was followed by another blow when we fell below $8. Now we appear to be back into a major comfort level.
"On Monday we got down near our $7.18 support level at $7.22 and bounced," Blair said. "On Tuesday, we got into our minor resistance levels at $7.44 and then $7.50 and we came back down again, so I really think we are in a comfort range right now. We could get up to some more minor resistance up at $7.71, but the next major resistance area is up around $8.07. Unless something changes weather-wise or storage-wise, I don't see the market getting out of the $7.20 to $7.50 -- or possibly $7.70 range."
Blair also noted that the changing relationship between the January and February contract is of interest. "The Jan-Feb spread flipped from backwardation to contango, which could be very telling about how people feel about the market." A contango market is a market situation in which prices are higher in the succeeding delivery months than in the nearest delivery month. It is the opposite of backwardation. The February 2007 natural gas futures contract closed at $7.570 on Tuesday, 14 cents higher than January's close.
"The reason the market is down at this level is because people are comfortable that the warm weather is going to stick around for a while and that storage is not going to be affected, so it makes sense for the January contract price to pull under the February price," Blair added. "About a week and a half to two weeks ago the spread was around these levels, but in the other direction, so we have flipped the spread and that is bearish."
Jay Levine, a broker with enerjay LLC, said the range for Thursday's natural gas storage report for the week ended Dec. 8 appears to be a withdrawal between 130 Bcf and 178 Bcf. He said he is looking for a 132 Bcf pull, "although I doubt it'll matter all that much -- unless it's way out of whack.
"I've felt the complex would remain choppy -- whip-saw-city -- and it has, if not terribly extreme in nature," Levine said. As for resistance, the broker said the front month could once again test initial resistance in the high-$7.40s to $7.50s, then closer to $7.75-$7.85, followed by $8-plus. For support, Levine suggested down in the sub-$7.20 area followed by sub-$7.
Some traders see a fully discounted near-term weather environment and an encouraging technical picture. Discounted or not, some are looking for continued weakness in the January contract. "[Monday's] plunge in spot values to as low as the $6.80 area could easily be furthered during the next couple of days and could force new lows in the January futures," said Jim Ritterbusch of Ritterbusch and Associates. He noted that with mild temperature expectations extending into the last week of December in some cases, the January contract is at increasing risk to the downside given its coincident expiration of Dec. 28.
Last week, January futures plunged 86.1 cents in anticipation of warming temperatures, yet the forecast calls for continued warmth and could set the stage for further deterioration. The National Weather Service (NWS) forecasts above-normal accumulations of heating degree days (HDD) in key energy markets. For the week ended Dec. 16, the NWS says that New York, New Jersey and Pennsylvania will receive 170 HDD, or 50 less than normal. Ohio, Indiana, Michigan, Illinois and Wisconsin will "bask" at just 185 HDD, or 66 fewer than normal.
Forecasts by the NWS have been close to target. For the week ended Dec. 9 for the Mid-Atlantic states above the NWS predicted 223 HDD and the actual figure came in at 234, 30 more than normal. For the Midwest states, the NWS said 269 HDD would be observed, and the actual figure was 298, or 65 more than normal.
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