Led lower for much of Monday's regular session by weakness in crude futures prices, June natural gas futures values rebounded in the afternoon following a rally in the June crude contract. Front-month natural gas ended up closing Monday at $4.302, down less than a penny on the day, while prompt-month crude finished the session at $58.50/bbl, down a mere 13 cents.
The on-again, off-again relationship between natural gas and crude prices has produced much debate and confusion among traders, who note that any fundamental linkage is tenuous at best. On Monday some of the charts' peaks and valleys for the commodities coincided.
After putting in the day's regular session high of $4.364 just prior to 9:30 a.m. EDT, June natural gas dropped to the day's low of $4.195 approximately 45 minutes later. The contract made two more runs higher during the day to peaks of $4.344 at 10:44 a.m. and $4.356 at 1:12 p.m.before closing out the session. June crude similarly put in an early low for the session of $57.33/bbl before recording the day's high of $58.63/bbl at 10:44 a.m.
"The natural gas market may also be poised for a look at the downside this week. Sympathy with a falling crude oil market could be part of that shift in sentiment, but natural gas also still has the prospect of above-average storage injections for [at least] the next few weeks," said Tim Evans, an analyst with Citi Futures Perspective in New York. "An initial read on the degree day forecast for the week ending May 22, for example, suggests we might see a net injection in the 110-115 Bcf range, a clear surplus over the 90 Bcf five-year average level."
With producers scaling back drilling operations over the last number of months, traders have been attempting to pinpoint when the rig laydowns will translate into reduced supply and commodity price hikes (see Daily GPI, May 11a; May 11b).
"We do see some evidence that natural gas production has begun to slip, just as the downtrend in drilling activity suggests that it should," Evans said. "However, we view this as a market in transition, where the market may be growing less bearish, but is not yet fully bullish."
Some of the top traders note that last week's 76.5-cent gain by June futures to $4.311 and its tendency to trade with many of the other major commodity markets marked a change from the last few months. "It is difficult to point to any one factor that sparked the rally. We feel it was primarily buying by end-users because of the change in psychology on future economic growth. End-users have become more optimistic so they decided to make some purchases," said Mike DeVooght of DEVO Capital Management.
DeVooght may have just called the bottom to the natural gas market. "On a trading basis we have felt that the gas market was searching for a bottom. We still feel that is the case. But even though we increased our long positions last week, we would caution against getting too bullish because the short-term fundamentals could continue to weigh on the market. We will hold our current long positions at this time," he said.
DeVooght currently advises trading accounts to hold onto a long October futures position established between $4.500 and $4.650 as well as $3.800. He says to place a stop-loss order at $3.600. End-users should hold a May-October strip placed at $4.300 and $3.600 for 10-20% of their requirements. He advised producers to stand aside.
Fundamental bulls got some good news on Friday when Baker Hughes reported further reductions in the number of rigs looking for natural gas. As of May 8, the number of rigs drilling for natural gas in the U.S. fell 11 to 730 from the week before. Rigs are down 745 from a year ago. All U.S. rigs dropped 17 to 928 and were down 918 from a year earlier.
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