After June natural gas futures fell 19.4 cents on Friday, traders were left to wonder whether the rally of the last few weeks had been snuffed out. Despite the contract's 4.1-cent gain to close Monday's regular session at $4.139, the question was still unanswered as some traders saw the gains as more indicative of a sympathy move with crude futures strength rather than a resurgence of the recent rally.
June crude lodged impressive gains on Monday as it roared $2.69 higher to close at $53.03/bbl. Some market participants said strength like that in petroleum futures would be hard for natural gas traders to ignore.
"The reason we were up a few pennies in natural gas on Monday is because the oils were up so dramatically," said a Washington, DC-based broker. "Anybody who does any inter-fuel hedging would have had to do some natural gas buying on Monday in connection with this."
Looking at the steep rally and subsequent sell-off in natural gas that has played out over the past three weeks, traders are left to guess which will be tested first -- the $3.155 low for the move from late April or the $4.575 high of the rally recorded last Wednesday.
"I think we're likely looking at the $3.155," the broker said. "While the number of rigs actively searching for natural gas in the United States continues to decline, you can't get past the fact that we have an awful lot of gas in storage. The Department of Energy made the point recently that this is the earliest we've had more than 2 Tcf in the ground since they began keeping the data back in 1994. Now they also said storage has been filling quicker in recent years, so this could be the new rule as opposed to being the exception.
"That said, most of my indicators look like the price is ready to move lower once again. From a seasonal point of view, we've had our spring rally and now we're headed lower once again. We have to break $4.030 -- which is a 38% retracement of the move from $3.155 to $4.575. I don't think it is out of the question for natgas to break back below $4 to $3.860, which is about a 50% retracement of the move. I'm looking for that to happen given the large inventories and the appalling state of demand. Below $3.860, support could come in around $3.700. At the end of the day there is nothing out there that is telling me that the economy is improving. The best we can say is it is things might be getting less bad."
Commenting on the noise last week surrounding the alleged dominance of the natural gas futures market by the United States Natural Gas Fund, the broker said he is skeptical of the analyst claims that the exchange-traded fund (ETF) was holding title to as much as 80% of the June contract's open interest on the New York Mercantile Exchange (Nymex).
"I don't think that any one entity would be able to hold such a large share of the market," he said. "The thing people don't want to recognize is there is a regular reporting regime. The CFTC [Commodity Futures Trading Commission] watches over position levels pretty closely and would look into it if any limit was tripped. You also have to remember that there is a new administration/sheriff in town and they have already shown that they are a lot more proactive then the last bunch of guys."
The buzz amongst traders and analysts last week was that the fund might have been responsible for the rebound in prices over the last month despite the lack of supportive fundamentals (see Daily GPI, May 15).
The broker said when unexplained moves occur, people look to point the finger immediately, but the rally of the last few weeks shouldn't have sparked such a witch hunt given its relatively small size. "I don't understand how a market could have given up $10.540 of its value since last summer's $13.694 high, then rallies $1.420 and people are shocked," he said. "Why would it surprise anyone that even pure speculative length would come in with those low prices? We're always looking for a boogeyman in the market. Markets do what markets do and that's it."
Last week traders elected to focus on some negative economic reports and June natural gas futures skidded. Particularly disappointing were Commerce Department figures showing that April retail sales posted a 0.4% decline, well below expectations of a 0.1% gain, and the Labor Department said weekly jobless claims were a suffocating 630,500, higher than the previous week's tally of 623,000.
"A spate of weak economic news both in the U.S. and abroad seemed to take the wind out of the commodity market's sails this past week. If all of the major economies flatten out at current levels, it is very unlikely that the recent commodity rally will be sustainable," said Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm.
DeVooght is thinking the recent rally in natural gas futures may not have much life left in it. "On a trading basis, we will look to book profits on our long gas position if last week's lows are broken. We will also start to establish a light short position for producers at this time. We are not giving up on our view that the gas market is trying to establish a floor; we just think the probability of an extended trading range is more likely than a large rally at this time. The late summer collars in the $4.500 to $6 range look especially attractive to us at this time," he said.
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