April natural gas futures values continued to sink Tuesday despite a morning attempt to break back above the psychological $4 level. After running up in impressive fashion to notch a high of $3.956 just after 10 a.m. EDT, momentum stalled and the contract ended up closing out the regular session at $3.840, down 2.5 cents from Monday's finish.
While current futures prices are residing at levels that haven't been seen in more than six years, traders are not expecting any rally in the near term as the economy remains weak, winter is coming to a close and demand remains lax.
"I see no reason to break out in either direction. Let's call it adequately priced for the time being," said Ed Kennedy, a broker with Hencorp Becstone Futures LC. "Temperatures are supposed to be below normal starting towards the end of the week, but the bulls shouldn't be ready to charge. The last time I looked spring starts on March 20, so we are running out of time for any real cold to suck down the ample supply of gas in storage."
Despite the lack of bullish indicators, the broker said current support levels will likely keep the market locked right around the current price level for the time being. "I don't think we are going anywhere right now," Kennedy said. "There is too much support under the market and on the other side there really is no reason for a sustained bull move. For the near term I see us trading between the $3.750 and $4.250 brackets."
Kennedy added that pretty good support is likely just under the current price level because the market is at a low that is more than six years old. "I think we have found some pretty good support here. You also have to look at the storage strip. If you have storage and are going to be injecting gas for the next winter heating season, isn't $4.130 a nice price to protect? A prudent man just has to protect that price due to the unknown. We don't know how hot the summer is going to be or how active the Atlantic hurricane season is going to be. The next piece of information this market will react to is the long-range temperature forecast for the summer. The only one we have so far is the Farmer's Almanac, which is saying the Chicago-to-Boston corridor will see above-normal temperatures this summer."
It may be just a matter of time before a reduction in natural gas supplies leads to some price firming. Some analysts have suggested that the number of rigs drilling for natural gas in the United States needs to fall to 800 before a meaningful supply impact can be realized. Baker Hughes in its March 6 release of rig count data showed gas rigs had declined to 916, down 54 from the previous week and 540 from a year earlier.
Some traders don't wish to push the short side of the market much further. "We continue to emphasize a weakening in industrial and [electric generation] demand that is directly translating to a much smaller storage withdrawal pace than is usually the case during the first quarter of the year," said Jim Ritterbusch of Ritterbusch and Associates. He still remains bearish on the market but is "suggesting caution in establishing fresh short positions at sub-$4 levels. As a matter of fact, we remain willing to take profits out of short April positions on further declines to the $3.75 area."
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