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April Futures Contract Holds On For $2.30 Settle
The April Nymex contract went off the board in bearish fashionon Friday as the spot month fell 3.8 cents to conclude its tradingat $2.300. A broker noted this was as “boring” a settlement day ashe could remember, probably because low volatility last week gavetraders ample opportunities to get out of their positions beforeFriday, he said.
The all-time high trade for May is $2.46, and if the new spotmonth is to break this price, it will first have to overcomepotential sluggish demand during the first half of April. “I thinkMay will work its way down at first and then rise,” a Houston-basedmarketer told GPI. “The (physical) market is going out a littlelong for April. Producers are long, marketers are basically flat,and LDCs are going to buy as much gas as they can swing. That mayhurt (cash) prices initially, but if the market falls by more thana nickel from indexes, I’d be surprised. There should be somepretty good storage buying after the 15th, once utilities completetheir accounting for the winter. After all, April is currently thecheapest price injection gas on the strip, so there should be anatural tendency to buy more now,” he said.
Warm weather will likely contribute to lower demand during thefirst half of the month. The CNG Energy Index predicts nationalenergy usage will be between 15% and 25% lower than normal nextMonday through Wednesday, while the National Weather Service iscalling for above normal temperatures across the United Statesduring the next 6-10 days.
However, one trader brushed off his old trigonometry skills toevaluate the potential low impact these weather predictions mayhave on gas demand. “Energy demand pretty much follows a sinecurve. The curve shows peaks during the winter and summer andtroughs during shoulder months. Everyone knows that. But volatilityaround those troughs tends to be much lower than the peaks. Aprilis a classic shoulder month. Therefore, any major deviations awayfrom the curve, up or down, aren’t likely to cause much of a changein prices,” he said.
However, demand is only half of the price equation. Supplyremains “as tight as it ever has,” a producer said, and as such,the market could be poised for a price shock. “The reason why thestorage surplus to last year was only able to drive winter pricesdown to $2.10 or so is that the long term supply picture remainstight. Production over the last 12 months is considerably lowerthan it was the previous 12 months, so if anything, we need thatextra storage just to maintain a status quo in available supply.
“There was basically no peak demand this winter, and yet priceshung in there. Imagine what they will do if this summer turns outto be normal, or even hotter than normal as expected,” he said.
But while fundamentals may be pointing to a rally, technicalsmay be suggesting otherwise. An analyst noted May stands overboughton the day-to-day charts, and that the contract broke out of ashort term wedge trading formation to the downside on Friday, anevent that usually leads to further selling.
But perhaps more importantly, the latest Commitment of Tradersdata show that as of the two weeks ended March 24, speculatorsreversed their net short position of approximately 4,600 contractsto a net long position of a whopping 16,631 contracts. “That’s ahuge turnaround. They also currently hold about 7.3% of total openinterest, so I’d say based on historical levels, they only havemaybe another 5,000 or so contracts they will get long before somefunds will begin to unload. That’s something those funds will haveto do anyway, unless, of course, they want hundreds of thousands ofMMbtus delivered to their offices. The more they get net long, themore pressure they will be under to eventually sell,” he said.
However, the technician noted as long as May remains above chartsupport at $2.30 and above the 40 day moving average, which ispresently at $2.288, May will likely remain high enough to preventthose speculators from triggering massive stop sell orders.
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