July natural gas posted a double-digit gain as traders factored in a warmer temperature forecast and the emergence of tropical activity in the central Caribbean. At the end of the day July rose 12.0 cents to $4.827 and August gained 11.8 cents to $4.857. July crude oil tumbled $1.21 to $99.01/bbl.
"Now we'll see how the market behaves against $4.95 to $4.97. If it can make it that far, it may be positioned to reach over $5, but if it stalls out against $4.95, I think it will test the $4.73 area," said a New York floor trader.
The trader wasn't sure whether the buying was the result of short-covering or new length coming into the market. "It may be that with prices at the high end of the trading range, there is pressure building to break out of the range, which would suggest new buying," he said.
"I think there is a definite incentive for those who are long to push the market higher to try and activate buy stops above $5, but I don't have much faith that the market will make it past $4.95."
Weather forecasts also became more supportive. Commodity Weather Group in its six- to 10-day forecast calls for above-normal to much-above-normal temperatures within a broad ridge defined by Virginia, southern Iowa, western New Mexico and southernmost Texas. The northern Rockies are also expected to be above normal.
"Faster and stronger are the key words for this week's heat in the Midwest and East compared to our forecast on Friday," said Matt Rogers, president. He added that "hot and humid 90s are expected to sear across the Midwest (peak days Tuesday-Wednesday) and East Coast (peak days Wednesday-Thursday) with temperature anomalies ranging from 12-18F above normal. Strong heat continues in the South where hot/dry Texas should continue to see 100-degree weather. Beyond this week, the six-15 day window is still looking cooler in the Midwest and East, while heat continues in the South and fills into more of the West (especially the interior West/Southwest and Northern California)."
At 2 p.m. EDT the National Hurricane Center reported that it was monitoring a large low-pressure system approximately 90 miles southwest of Grand Cayman moving slowly to the northwest. It said the system was becoming better organized and had a 50% chance of becoming a tropical cyclone in the next 48 hours.
According to figures from the Commodity Futures Trading Commission (CFTC), funds and managed accounts exited both short and long positions for the four trading days ended May 31, but those who covered shorts did so at a rate four times greater than those exiting long positions. In its Commitments of Traders Report the CFTC said long futures and options (2,500 MMBtu per contract) held by managed money at IntercontinentalExchange rose 17,795 to 430,874 and short futures and options contracted by 8,116 to 36,708. At Nymex long futures and options (10,000 MMBtu per contract) fell by 16,616 to 112,463 and short positions dropped by a hefty 49,306 to 148,035. When adjusted for contract size, long futures and options at both exchanges fell by 12,168 and short positions were reduced by 51,335.
For the four trading days ended May 31, July futures rose 27.5 cents to $4.666.
Traders are not necessarily convinced that the market is ready to make a sustained move higher. For the week ended June 3, July futures gained 18.9 cents, but Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm, said Thursday's 83 Bcf injection number "was enough to push the spot month into key resistance levels (and to the top of its protracted range), $4.80 to $4.90. Fundamentally, we don't see last week's activity as a game-changer (or a trend-changer) for the gas market."
DeVooght sees the gas market as "establishing a major bottom and breaks into the high $3.00s will be well contained. But a few warm days will not be enough to push the gas market into a bull market. We feel a considerable amount of [last] week's rally can be attributed to unwinding of the short gas-long complex Btu spreads. As it will be for many of the commodity markets, it is going to be difficult for the gas market to have a major sustainable rally in the face of weaker economic growth in the U.S. On a trade basis, we have covered our short puts and sold calls this past week."
His strategy to gain from this type of market environment is to "use rallies into the mid to high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profit on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls if we trade back above $4.60 or sell puts if we break below $4.15."
The early read on this week's storage injection report is for a build of 89 Bcf, according to John Sodergreen, publisher of Energy Metro Desk. That would be less than the five-year average of 96 Bcf and the gain last year of 98 Bcf.
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