Continuing its little streak of recent weakness, July natural gas futures followed crude values lower on Monday, piercing the psychological $4 price level before closing at $3.933, down 9.9 cents from Friday's finish.
Monday's drop was the contract's third consecutive close lower. Over that period the July contract has shed 32 cents. A number of traders attributed the weakness in natural gas to that of other commodities, especially crude. July crude on Monday dropped $2.62 to close at $66.93/bbl.
"The day started very differently than it ended up. When I came in most of the commodities were in the red except for natural gas, but the contract finally gave in, preserving the possibility that there is some semblance of reality within the natural gas market," said Steve Blair, a broker with Rafferty Technical Research in New York. "That said, I'm not sure this break in the market really had to do with the fundamentals. I think it had more to do with the strength in the U.S. dollar and the weakness in all the other commodities."
Blair said the first of the minor support lines came in at $4.025, which the market tested a couple of times last week. "With $4.025 broken now, I think we're probably heading lower, but there are some other snakes in the grass," he said. "Some more minor support prices come in at $3.900 and then down at $3.800. Major support pops up at $3.630, but I think the real important number is down around $3.510. On the charts that is the bottom of a huge horizontal congestion channel. I think we could test $3.510, but I think it will hold up."
Blair noted that the fundamentals remain as bearish as they were last week and the week before. "We have an awful lot of gas lying around now. From what I'm hearing we should get another triple-digit injection in the storage report Thursday for the week ending June 19, which would mark the sixth consecutive triple-digit build. After this report, we should ease off a bit, but not by a whole lot. The injection for the week ending June 26 will likely be in the 90s Bcf, so the drop-off is not going to be huge.
"While supply is still ample and demand is still weak, the bulls may find some support in the Atlantic hurricane season and summer heat. A lot of the storm forecasters are calling for a milder hurricane season than we've seen over the last several years. Nonetheless, I think the first time we start to see any kind of tropical threat coming our way, this market is going to take off higher, just because that's what the market historically has done. On the temperature outlook, while prolonged stretches of heat are hard to come by in the current forecasts, if it does get hot and stays that way for a while in a major gas usage region, we could definitely see the bulls step in and push prices back up."
Citi Futures Perspective analyst Tim Evans also pointed to crude for answers. "The natural gas market is testing the downside on the back of the weakness in crude oil and the equity markets, but its own fundamentals look very little changed from Friday," he said.
Evans noted that above-normal temperatures and the corresponding cooling demand still belong in the "plus column" for the market and he continues to forecast narrowing bearish divergences with the five-year average storage injection rates in the weeks ahead.
"Last week's report added 35 Bcf to the year-on-five-year average storage surplus, but by the week ending July 3 we think storage might build by 90 Bcf, right in line with the five-year average net injection of 89 Bcf," Evans said.
According to private forecaster Frontier Weather, Evans said the June 27-July 1 period should see above-normal temperatures from the Southwest and Plains through much of the East Coast, with normal temperatures in the West, New England and Florida as the exceptions.
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