March natural gas is expected to open 3 cents higher Monday morning at $2.98 as longer-term weather forecasts push continued cold out to the middle of March. Overnight oil markets tumbled.
"At one level, the models are in excellent agreement by advertising a continued cold-dominated situation for the U.S., both this week and next week," said Matt Rogers, president of Commodity Weather Group in a Monday morning report to clients. "At another level, they are showing more disagreement than last week in terms of where the coldest anomalies will take place, especially by the 11-15 day, which is now fairly deep into March.
"For the six-10 day, the guidance offers general agreement that the coldest anomalies are found in the middle third of the U.S., including from upper Texas to the Midwest. We see more expanded cold into the western U.S. and less intense cold for the East Coast (especially on the European model side). The 11-15 day varies between more East-based cold on the American ensemble to more West-based on the Canadian. We favor a more central focus for the coldest anomalies, especially early in the period and then shift to East by late period, but confidence is lower for that time period."
Risk managers are focused on some changing basis relationships. "Over the past year, the basis in the West has been relatively strong on a historical basis, but over the past couple months the Rockies basis has been starting to deteriorate," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. "It is difficult to say if we are seeing a structural long-term trend developing or temporary weakness because of the warmer West temperatures. We will be monitoring closely over the next few weeks. On a trade basis, if the $2.45 level is broken, we will liquidate our long speculative positions."
DeVooght says for trading accounts and end-users to hold long April $4.20 call options and short April 3.90 puts (liquidate if close under $2.45). Buy April $3.00 calls Monday morning, he said in a weekend note to clients. Producers are counseled to stand aside.
Tom Saal, vice president at INTL FC Stone in Miami in his work with Market Profile is looking for the market to test last week's value area at $2.875 to $2.729 before moving on and "eventually" testing $3.252 to $3.025. He says that market participants' behavior continues to reveal horizontal pricing and possible "bottoming" action. "Buyers be ready for hedge trading," he said in a Monday morning note to clients.
In overnight Globex trading April crude oil fell $1.88 to $48.93/bbl and April RBOB gasoline shed 2 cents to $1.8180/gal.