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Risk-Reward Seen in Flux; Expiring May NatGas Called A Penny Higher

The expiring May natural gas futures contract is expected to open a penny higher Tuesday morning at $2.50 as traders acknowledge ongoing mild weather patterns yet at the same time see a pricing environment favoring long-term advances rather than continued price erosion. Overnight oil markets eased.

In the near term, traders see the market in a defensive mode as weather forecasts well into May are calling for mild conditions with resulting hefty storage builds. The risk-reward landscape, however, may be changing.

"Most models are favoring unusually mild patterns that will begin later this week and likely stretch through the first one-third of May," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Monday to clients. "This will virtually assure some above-normal injections that will tend to limit upside price possibilities well into next month. Furthermore, the market is likely pricing in a supply build this Thursday of around 85 Bcf that is in line with our ideas.

"However, we now see upside price risk as exceeding that to the downside by a sizable margin, and we are beginning to probe the long side of the market for a long-term or investment-type trade. While [Monday's] May option expiration may have forced some price gravitation toward the $2.50 strike, we look for [Tuesday's] futures expiry to prove more telling. We will continue to cite a comparatively taut front May-June switch amidst multi-year lows as a bullish portent. In sum, we have suggested accepting profits out of short positions on today's drop to below $2.47 basis, and we will look to begin a cautious approach to the long side within the $2.40-2.50 zone in referencing June futures in anticipation of an eventual price advance to a $3 price handle by June as low prices force more displacement toward gas usage."

Others, while not advocating a longer-term bullish stance, are not convinced the market is headed lower as well. "I'm surprised the market is this weak going into the summer," said a New York floor trader. "When trading is this slow, though, it's almost a non-existent event. It's the end of April and kind of a dead period anyway. I'll have to see what happens with the June and July contracts before I am convinced the market is going much lower."

Gas buyers across the PJM footprint won't be able to rely much on renewable power for the next day or so if weather forecasts prove correct. WSI Corp. in its Tuesday morning outlook said, "Weak high pressure will engulf the power pool during today and into a good portion of Wednesday as well. This may support partly sunny skies and seasonable temperatures with highs in the 60s to low 70s. An upper-level system and a better defined area of low pressure off the Southeast coast will combine to bring a chance of showers and rain across the power pool during Wednesday night, Thursday and Friday. Clouds, wet weather and a northeast breeze will support cool temperatures, with highs in the upper 50s and 60s. Partly cloudy and seasonably mild conditions may return by Saturday.

"Light wind generation is expected during the next day or so. A northerly breeze may lead to some improvement late Wednesday into early Thursday as output may climb over 2 GW. Relatively light and variable wind gen is expected during the end of the week into the start of the weekend."

In overnight Globex trading June crude oil fell 28 cents to $56.71/bbl and June RBOB gasoline eased a penny to $1.9942/gal.

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