Following the April natural gas futures contract’s 20 cents-plus decline on Thursday, traders on Friday took a break to assess the damage. Despite Friday’s 8.4-cent rise to $4.169, most market watchers still see yet lower prices ahead. The week’s close was 23.1 cents lower than at the end of the prior week.
Traders who chalked up Friday’s action as a “rest day” were quick to point out that winter is over, which has left market bulls frantically searching for support.
“I think what we’ve been seeing in the natural gas market is the realization that the season has changed,” said Gene McGillian, a broker at Tradition Energy. “Winter is gone and spring is here, so without any heating demand we’ll see ample gas supplies. Front-month natural gas values have dropped more than $2 since the first week of January and in my opinion it doesn’t look like it’s ready to stop anytime soon, regardless of the rebound on Friday.”
McGillian told NGI that the larger question that was being asked during this downtrend is in need of a revision. “It is no longer a matter of whether we’ll see sub-$4 pricing, because I think it is now pretty inevitable that we will, especially if that was our last storage withdrawal. Instead, it is now a question of whether we’ll see sub-$3 pricing.”
While admitting that the market could be near a tipping point where the market is vulnerable to an upside correction, McGillian said he does not see how a real turnaround could occur in the next six to eight weeks barring some sort of infrastructure problem.
“If we break below $4, I’ve got support coming in around $3.600,” he said. “Last year we traded below $3, but I’m a little skeptical about that happening this time around. If more LNG and increased production from the Marcellus Shale does show up like some of the analysts are predicting, then we could move considerably lower, but I don’t think we’ll get near last year’s $2.409 low. In the coming weeks and months we’re going to have to pay close attention to the storage injection rates, summer weather and the hurricane season to grab our next cue. As for now it looks like the bulls have been put in the barn for the spring at least.”
Thursday’s April contract fall had market technicians seeing the market setting up for still lower prices. “Thursday tumbled to a $4.054 low and a very weak close with no hint of bottoming action. Intermediate term, the real downside risk is certainly not $3.820 and not even the $3.200 level. The real serious risk is a decisive break below the $2.409 low,” said Walter Zimmerman of United-ICAP.
Defenders of the bullish case are few and far between, but Peter Beutel of Cameron Hanover suggested that the market has not taken into account the elimination of the large storage surplus that was looming at the beginning of the heating season. “While the trend is clearly lower and there is equally as clearly no supply shortage, we still feel that prices are artificially low here and that bearish factors have been discounted more than a few times while this market’s positive developments have been ignored,” he said.
Beutel believes that it is “indefensible for prices to be lower than they were at the start of heating season, when the surpluses were 379 Bcf and 11.11% higher than a year ago and 414 Bcf and 12.27% above the five-year average. There should be some recognition of the elimination of those surpluses.”
A Chicago banker said those with exposure to higher prices can afford to be patient. “If I were a [long] hedger, I would be hedging now, but I had a guy call me [Friday] who was 60% hedged and he is worried about this fall. He asked if he should take it up to 85% and I told him there was no rush,” he said. “If you were 0% hedged, I absolutely would buy some now. You have time on your side.”
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