After dipping below the psychological $7 level in Monday's overnight electronic trading session on Globex, traders on Tuesday were unable to muster any follow-through selling. However, they also were not able to create any real rally as the prompt month ended up closing out the day at $7.083, up eight-tenths of a cent from Monday's close.
With forecasts calling for mostly mild weather across the eastern half of the country through the end of the year, the January contract, which dropped below $7 for the first time since February 2005, reached a new 22-month low of $6.905 in overnight trading. The $6.905 low was also the lowest a prompt month has been since the November contract put in a $6.775 low on Oct. 24.
"Despite the little rally from the overnight lows, I am still not too impressed. I really think this thing is still in bearish mode here," said a Washington, DC-based broker. "Compared to the rally in most petroleum futures markets on Tuesday, the natural gas rally did little to change the downtrend for the moment. Our systems are still showing that the momentum to the downside wasn't affected too much by Tuesday's action."
January crude closed 94 cents higher on the day at $63.15/bbl while January unleaded gasoline finished 3.83 cents higher at $1.7005/gallon. January heating oil slipped less than a penny to $1.7187/gallon.
"The downside momentum in natural gas had been increasing over the last four trade sessions, and Tuesday's action may have evened it out a little bit, but I think we are still a long way away from seeing a return of any sort of genuinely bullish behavior," he added. "I think these little rallies are all little profit-taking moments where shorts are covering, which will be met with still more selling while there remains no weather to speak of."
The broker noted that the prompt month just recently broke below the 38.2% retracement ($7.14) from the $4.03 to $9.05 move, but is now hovering right back near it. "We are just a little bit under that 38.2% retracement at $7.14, so I am not surprised that we have paused a bit right here," he said. "If we weaken more we would be going down to a 50% retracement down near $6.55, where some decent technical support should come in."
He said that weather is still king in deciphering which way the market will travel. "The question is when do people start to make a forecast for January," he said. "As of now it looks to be warmer than normal for most of the key demand areas through New Year's Day. Even AccuWeather's Joe Bastardi threw in the towel on his idea that December would get cold right at the end of the month. I think he ran out of days for that pattern to change and get some cold in here. None of the forecasts are calling for anything threatening in the near-term."
Looking ahead, a northeastern local distribution company buyer sees no immediate floor under current levels. "With the warm weather we are experiencing, we are comfortably above our end-of-month targets for storage," he said. "Right now we are able to rely mostly on our baseload purchases, though we are picking up some supply in the daily market and drawing a little from storage."
In order for him to ramp up purchases in the spot market, he said cash prices would have to drop significantly lower. "We would have to look at a number of factors, including the cost of storing the gas and the prices during the injection season, but I think spot prices would need to fall considerably for us to change our current strategy." If winter weather returns to the Northeast, he said he would simply ramp up withdrawals. "That is what [storage] is there for," he noted.
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