After putting in a new low for the move of $3.155 in morning trade, May natural gas futures ended up creeping higher from there for the remainder of Monday's regular session before closing at $3.253, down 4.4 cents from Friday's finish. Despite the fact that there is no bullish case anywhere to be found, traders and analysts warned that anything can happen Tuesday, which marks the May contract's expiration.
"The market made yet another new low for the move on Monday, so it will be interesting to see what happens on expiration," said Steve Blair, a broker with Rafferty Technical Research in New York. "No matter what occurs Tuesday, I think front-month futures are headed to $3 or below. There is no doubt at this point that we are going to get to $3, but there are a lot of people who are eyeing the $2.500 price level, which represents a major support line that goes back more than 10 years."
Blair said he believes the overall storage level is contributing greatly to the current decline in values. As of April 17, working gas in storage stood 459 Bcf higher than last year at this time and 322 Bcf above the five-year average. "Take the fact that storage is so high at the beginning of the injection season and add the fact that demand destruction has been so great in this down economy and you start to see how prices have fallen so far," he said. "Until we start seeing more shut-ins, or a change in the larger supply/demand picture, we're not going to get out of this hole. The economy isn't really showing any turnaround yet, so that demand will remain on the sidelines. Unless we get some early sustained hot weather, the bulls, in my opinion, don't have anything to hang their caps on. The bears are still running this thing."
Currently in the futures market, traders are seeing an end-user community that has already bought its supply, or is uninterested in making forward purchases, while producers are being forced to consolidate holdings.
Some top traders see the natural gas market going through a period of deleveraging while reduced rig activity eventually brings production in line with demand. "We feel the gas market is suffering from liquidation and hedge selling by those that got caught with a little too much leverage at a time [when] financing, especially by the banks, has dried up," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management company.
It is DeVooght's observation that producers are somewhat at the mercy of end-users who feel no urgency to conduct any forward purchases. "At some point, imploding rig activity will be bullish for the gas markets. But until we hit the levels that force producers to start to shut in wells, the gas markets will be on the defensive," he said.
DeVooght is taking a bold trading stance. "On a trading basis, we have been probing the long side. At this time we will increase our position, but if we do not rebound, we will step to the side quickly." DeVooght suggests that trading accounts continue to stay long October futures from $4.500 to $4.650 and end-users hold a May-October strip at $4.300 or better for 10% to 20% of their position. Producers should stand aside.
Deleveraging and raising cash by forgoing the hefty capital expenditures needed to drill and produce natural gas may be what producers had in mind last week as they continued to lay down rigs. Baker Hughes reported that for the week ended April 24 rigs drilling for natural gas in the U.S. declined by 18 to 742, down a stout 731 rigs from a year ago (see Daily GPI, April 27).
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