After riding the roller-coaster of a session Monday up to a $9.595 high only to return to the station with a 2-cent loss at $9.346, natural gas futures traders were content to mostly sit on the sidelines Tuesday, perhaps in an effort to recover from motion sickness. The April contract traded in a quiet 18-cent range between $9.270 and $9.450 before closing out the day at $9.353, up less than a penny.
Surveying the market following Monday's spike and retreat, Citigroup analyst Tim Evans said both the bulls and the bears appear to have parts of the market behind their cases. "The natural gas market continues to find sufficient cold to keep the pressure on the bears, although still carrying a year-on-five-year surplus in storage as a cushion against more intense weather," he said.
However, Evans noted that the Energy Information Administration's (EIA) natural gas storage report for the week ended Feb. 29 would likely reduce the year-over-five-year average surplus. He said his early estimate for Thursday's report is for 130 Bcf to be withdrawn from underground stores, which is more than the 99 Bcf date-adjusted withdrawal last year and the five-year average pull of 111 Bcf. Whether there will be further larger-than-average withdrawals remains to be seen.
"The larger pattern in temperatures also remains the same inconsistent cycling that we've seen over the past month or more, with cold in the Midwest this week, followed by a warm spell next week, followed by more cold in the week following," he said. "If it were all a matter of temperatures, prices would chop. If it were a matter of the storage surplus, prices would fall. But with some of the funds still heavily short, there is still a chance that prices will stage an even more significant spike, blowing those funds out of their positions."
Traders are currently assessing a bullish undertone to the market countered by soft economic data. Mike DeVooght of DEVO Capital identifies two underlying bullish dynamics. When last week's modestly bearish inventory figure was released, the market was still able to rally. The EIA reported a withdrawal of 151 Bcf, somewhat less than the 155 Bcf shown in a Reuters poll and the 158 Bcf draw revealed in a Bloomberg survey.
"When the number was released, and it was not negative, it seemed to be a signal for the bulls (and bears throwing in the towel) to buy aggressively," he said. DeVooght also noted that distillate prices hitting record highs helped to push the market higher. "On the negative side, U.S. economic numbers continue to point to the further weakness ahead. On a trading basis we continue to hold current positions," he said in a note to clients.
On Monday the Institute for Supply Management (ISM) reported that its manufacturing index dropped to 48.3% in February from 50.7% in January. Readings below 50% indicate that more firms are contracting than expanding, and the index is considered one of the best and earliest coincident indicators of the economy. Economists and analysts, however, had been expecting a 47.5% index.
For the moment DeVooght is bucking the trend. He advises trading accounts to hold short April futures at $8, and maintain a short October, long January spread at a differential of 70 to 75 cents. End-users are counseled to stand aside, and producers are to hold short a summer strip at $7.900 to $8 for a small portion of production, and hold short a second summer strip at $8.250 to $8.350 for 50% of production.
For their part on the day, crude futures also took a break from pounding the upside. After recording a number of new all-time high price records over the last few weeks, prompt-month crude was on the retreat on Tuesday. April crude dropped $2.93/bbl on the day to close at $99.52.
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