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Less Flooding Risk, Weak Economic Reports Propel June Loss

June natural gas futures retreated in active trading Tuesday, as traders noted a lessening of risk from Mississippi River flooding, but a bevy of weak economic reports proved difficult to ignore. At the close June had fallen 13.6 cents to $4.182 and July was down 13.3 cents to $4.246. June crude oil shed 46 cents to $96.91/bbl.

"Natural gas is not necessarily going to liquidate along with crude oil and petroleum because it is not overpriced. Natural gas was firm because of the potential threat of flooding, but they have done a pretty good job of mitigating that," said a California trader.

The trader acknowledged that with natural gas prices as low as they are it would be a good idea to hedge upside price exposure. "I don't see anyone on any campaigns right now. I did a little [long] hedging out in 2012, but most of my clients are content to go to the spot market."

The trader's clients typically only hedge a fraction of their upside market exposure, and "any hedge that has been less than 40% has been hugely effective [as losses on long futures or options were more than offset by lower-priced spot purchases]. I have a hard time thinking that futures want to fall below $4 as long as crude oil is at $98."

The housing sector of the economy remains sluggish. The Tuesday morning report by the Commerce Department showed April housing starts lagging expectations. Traders had been looking for a seasonally adjusted annual rate of 570,000 units, ahead of March's 549,000 units, but the actual figure came in at a softer 523,000. The trend in housing starts remains tempered. A year ago housing starts were more than 600,000 units.

In addition, figures on April industrial production and capacity utilization from the Federal Reserve came in lower than expected. Analysts were expecting April industrial production growth of 0.4%, but the actual figure showed a 0% increase, and capacity utilization was forecast at 77.6% and the actual figure came in at a disappointing 76.9%.

Instead of going to the spot market to purchase gas, other traders see merit in buying puts or calls outside the recent trading range. "I have to characterize this market as having far more risk to the upside than downside," said Ed Kennedy, vice president at Hencorp Futures in Miami.

Kennedy pointed out that "you are below the cost of production in the low $4 range, and what you can do are some long-dated calls just above the top of the range. They wouldn't be very expensive, and eventually it [the futures market] is going to break out of here, but I would need a crystal ball for that."

Currently the $5 July call option is quoted at 4 cents, and whereas some have advocated a trading strategy of selling out-of-the-money call options to capture premium, "I would not sell that," said Kennedy. "Volatility is low, and if it goes up, you are going to get creamed. You would be short volatility. I would buy it, though."

Analysts are looking for this week's inventory report to hover near historical levels, but the inherent volatility associated with the report is likely to push prices higher. "This week's supply injection probably won't be far removed from five-year averages for about a 91 Bcf hike. However, we feel that the upward momentum shift of the past couple of sessions will sensitize this market to bullish rather than bearish surprises," said Jim Ritterbusch of Ritterbusch and Associates.

"With this in mind, we feel that a near-term price upswing toward the $4.56 area per June futures could easily develop by week's end. But such a price advance could also be followed by another move back down toward the $4.10 area. This wave-type, sideways price pattern is likely to be maintained through the balance of the shoulder period and into the summer when cooling needs and hurricane issues will begin providing more significant price guidance," he said in a morning note to clients.

Nuclear generating capacity, or the lack thereof, continues to be supportive. According to NGI's Daily Gas Price Index NRC Power Reactor Status Report, there are presently 34 nuclear generating plants either offline or producing at less than 100% of full power. The 34 nuclear plants' generation represents a loss of 22,971 MW out of total U.S. capacity of 100,900 MW generated from 104 facilities. A year ago 13,807 MW was offline.

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