May natural gas futures advanced Monday as traders noted favorable internal dynamics and identified higher short-term trading objectives that could take May futures up to 20 cents higher. At the close the May contract had gained 6.7 cents to $4.108 and June was up 6.9 cents to $4.176. May crude oil tumbled $2.87 to $109.92/bbl.
Students of Market Profile see an encouraging pattern emerging. "What you do is put several of the profiles together. You start with the short term and move to the long term, but other charting systems go from the long term to the short term," said Tom Saal, vice president at Hencorp Futures in Miami.
"By pushing market profiles together you start to see where the minus development is, and the natural gas market shows areas of negative development above. The market ought to work higher," he said.
Market Profile is premised on the idea that trading in all markets takes place in such a manner as to form a bell-shaped curve with the peak of the curve at a conceptualized "value." As markets trade (prices move), the shape of the bell-shape "curve" begins to change and often will leave incomplete areas. These areas of minus development typically offer trading objectives both in short-term and long-term frameworks.
"There is minus development above and nothing below. In the short term 'trend-day space' is the ultimate minus development." Saal acknowledged that trend-day spaces acted like another form of technical support.
Saal sees the market in the near term trading higher and testing areas at $4.164 to $4.233 and $4.255 to $4.294. "I expect the market to drift higher here," he said.
Analysts hoping to determine the market's next direction using open interest figures don't have much to work with. On Friday the Commodity Futures Trading Commission issued its weekly Commitments of Traders Report and the data showed little in the way of solid trends. For the five trading days ended April 5 there was only a very modest contraction of managed money long positions at the two exchanges. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) fell 33,399 to 294,528 and short futures and options contracts rose 6,965 to 48,422. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 6,228 to 145,512 and short contracts eased 1,261 to 212, 916. When adjusted for contract size, long futures and options at both exchanges fell 2,126, and short positions rose by a minuscule 480 contracts. For the five trading days ended April 5, May futures fell 3.2 cents to $4.231.
A top trader is booking profits on an earlier short position and took a long stance Monday morning. Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm, is not taking the position due to fundamental market developments, but more from a trading perspective.
"Natural gas continues to be the whipping boy for the commodity markets. There continues to be a lack of bullish fundamental news for the gas market. Production is more than adequate; demand is flat because of relatively slow economic growth in the U.S.," he said in a weekend note to clients. "A huge negative for the gas market is the lack of urgency by end-users to lock in forward prices. There tends to be the feeling that if they wait and buy it in the spot market, it will be cheaper than it is on a forward basis. What market force will eventually change this market psychology is yet to be determined.
"On a trade basis, at this time we will book profits on the May-July calls we sold earlier. We will sell May-July $4.00 puts Monday morning."
DeVooght hopes to capitalize on a market rise as he recommends for both trading accounts and end-users selling May-July $4 puts for a 30% position. For producers and those with exposure to lower prices he counsels holding on to an options strip consisting of long May-October $4.50 put options offset by the sale of $5.50 calls at even money for a 10% position.
Others see a bullish market dynamic in that the market has misinterpreted last week's Energy Information Administration (EIA) inventory report. What was seen as bearish is actually bullish, they think.
"We still feel that the majority got last week's EIA underground storage report wrong. Last week's drawdown [45 Bcf compared to expectations of more than 50 Bcf] was well beyond anything we had seen for the week in years," said Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.
"Previous draws had come in at 9 and 29 Bcf, with six of eight previous years showing builds. The previous week, stocks had been 12 Bcf (minus 0.74%) below a year ago; now they are 86 Bcf lower (minus 5.17%). Against the five-year average, they went from 68 Bcf (4.37%) higher to just 10 Bcf (0.64%) higher. We continue to insist that it was a bullish report that only looked bearish in comparison with overly optimistic estimates. If prices break below $4.00, we expect there to be a good amount of broad-based buying interest."
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