July natural gas futures posted a healthy gain Wednesday as traders acknowledged the likelihood that in spite of bearish fundamentals the market has put in a bottom and also observed new buying. July futures rose 12.4 cents to $4.253, and August gained 11.2 cents to $4.424. July crude oil added 56 cents to $71.03/bbl.
Short-term traders sense that if the market can hold the line on price corrections, higher prices may be at hand. "If we can hold mid-teens on pullbacks, I think we can get to the $4.500-4.600 area with a brief stop at $4.360-4.420. The market should hover there briefly before advancing to $4.500-4.600 and should hold $4.300 on any pullback from there," said a New York floor trader.
He added that there were still holders of short positions in the market that needed to cover, but "I think there is new buying coming in as well. The thinking is that fundamentals aside, a technical bottom is in."
Thursday's release of Energy Information Administration storage figures may not be able to derail the trader's outlook. A Bloomberg survey of 14 analysts revealed a median 105 Bcf gain expectation, and a similar Dow Jones poll showed that an average 104 Bcf build was expected. Last year only 60 Bcf was injected during the corresponding period, and the five-year average stands at 80 Bcf (see related story). The trader said if the build came in higher and knocked prices down to the mid-teens, "it would be a buying opportunity against that level."
The U.S. Natural Gas Fund (UNG) continues to attract attention for its size as well as suggested impacts on the natural gas markets (see Daily GPI, June 17). The open-ended exchange-traded fund is a pure play on natural gas prices with a substantial portion invested in the front two natural gas futures contracts as well as IntercontinentalExchange-cleared Henry Hub swaps contracts. The fund is clearly suffering growing pains in large part due to a huge influx of speculative money. It has seen its assets swell to $3.7 billion from about $670 million in February.
When queried about whether he thought the activities of the fund were affecting day-to-day movements in gas futures markets, a Chicago broker said "the short answer is no. The fund is basically a long-only fund, so naturally as the market rallies it's going to attract more investors and it's going to have to buy more contracts. It may extend rallies that are already going on, and likewise when the markets reverse and their investors pull out and they have to sell positions, it may extend declines."
He also said the rolls from one month to the next that take place at contract expiration do not have "a meaningful impact," but he mentioned that the combination of front-running and rolling could have a short-term impact, but "where final settlements come out at the end of the month, I'm not sure it has an effect."
Soaring temperatures in the Southwest will provide an early summer test for the use of natural gas as a peaking fuel for power generation.
"Heat-weary residents from Kansas to Texas eastward to the Tennessee Valley will have to endure warm, muggy weather Wednesday night and another day of widespread 95- to 100-degree temperatures Thursday," said AccuWeather.com meteorologist Dave Houk. He added that heat indexes will "soar into the lower 100s over a broad area from Texas to Kansas, Missouri and western Tennessee Thursday and Friday."
Tom Saal and Ed Kennedy of Hencorp Becstone Futures in Miami suggest following the "two-day rule." According to that methodology, "If July takes out the high of $4.385 then look for a test of $4.665 then $4.945. If it takes out the low of $3.825, then look for a test of $3.545 then $3.265," they said.
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