With natural gas supplies in storage remaining ample and weather forecasts still calling for unseasonably warm temperatures in most major gas demand regions, January natural gas futures worked lower in Monday's overnight Globex trading session and continued the plunge in Tuesday's regular session. With the lack of bullish fundamentals, the January contract, which expires Wednesday, threatened a breach below $6 with a low on the day of $6.060 before ultimately settling at $6.113, down 52.2 cents on the day.
Prompt-month natural gas futures have not traded this low in more than two months. The last time they traded lower was on Oct. 16 when the November contract put in a low of $5.920. Tuesday's $6.113 close is also significant in that it shows how far the market has fallen in less than a month. Since the high of the recent up move of $9.050 was set on Nov. 30, prompt month natural gas has dropped an astounding $2.937.
With January options settling on Tuesday, traders are now focused on the expiration of January natural gas futures. Despite the low activity levels elsewhere around the energy industry during the holiday season, the market was red hot Tuesday.
"We had one of our busiest natural gas days," said a Washington, DC-based broker. " Despite being in between the holidays, there certainly is some action out there. The continued decline is really being sparked by weather and the high inventory situation that we have.
"From a technician's point of view, the December sell-off from the $9.050 high on Nov. 30 was initially seen as nothing more than a correction in the bull phase that we had been in," he added. "It remained that way until we hit $6.800, which destroyed the bull market correction argument. As it moved below $6.800 it became a bearish market. Even a rally now would only be seen as a selling opportunity."
Below Tuesday's $6.060 low, the broker said he sees support at $5.950, $5.720 and then $5.580. "If $5.580 fails, then you have a gap down from $5.270 to $4.500 that marks the transition at the end of September when the October contract expired and November took over spot," he said. "The question is whether that gap gets filled. In the short run it would appear that there is not much operating on the side of the bulls."
Adding to the bearish scenario, the broker noted that a lot of people are on last-in first-out (LIFO) storage inventory. "When you are on LIFO inventory, the idea is to get your inventory as low as possible at the end of the year because of tax considerations, so it could be that a lot of people who are holding that inventory are trying to dump it."
He noted that the market is currently in a very low demand period. "Nothing ever happens between Christmas and New Years," the broker said. "Businesses are very slow during this period while many are closed all-together for year-end vacations. Now with no weather, there is even less gas demand. In the new year, things could change. There are a number of things cooking on the geopolitical side, which could affect gas as well. In addition, the Democrats are taking over congress and they have made it pretty clear that they have a different approach. It is hard to know what the effect of that will be."
Even with the massive sell-off in recent weeks, Commercial Brokerage Corp.'s Tom Saal was looking for lower prices even prior to Tuesday's session. "The market is oversold, but the path of least resistance is still down," he said Tuesday morning. "Look for a test of support just below the $6 level for the January contract."
The weather picture still remains one of above normal temperatures for most of the country. In the National Weather Service's (NWS) six-to-10-day forecast (Jan. 1-5) released Tuesday, a large majority of the country is expected to experience above normal temperatures with the exceptions of New Mexico, Texas, Louisiana, Mississippi, Alabama, Georgia, Florida and southern South Carolina, which are expected to see seasonal temperatures.
Even more alarming is the eight- to 14-day outlook covering Jan. 3-9. During that timeframe, the NWS sees the entire country experiencing warmer than normal temperatures with the exceptions of South Texas and the Florida Peninsula, which are expected to see seasonal temperatures, and Alaska, which is expected to experience colder than normal temperatures.
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