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Traders See Hedging Opportunity; August Called A Nickel Higher

August natural gas is set to open 5 cents higher Monday morning at $2.85 as traders see no let-up in the pervasive heat and expected elevated levels of demand going forward. Overnight oil markets were mixed.

Overnight weather models continued to call for above-normal heat.

"The main narrative [Monday] morning is that the overall national pattern is still tracking hotter than normal than last year and against the 10-year running mean; however, the same-day demand comparisons (that include this EIA week and next week) are lower than Friday's views," said Commodity Weather Group in its morning report.

"Most of those cooler changes seem to occur in the six-10 day where we have a lot more near-normal temperatures for the Midwest and East, but we also have cooler weather in the West at times, too. The South maintains some anomalous heat in the six-10 day, but then the focus of hottest anomalies shifts toward the North Central U.S. in the 11-15 day," said Matt Rogers, president of the firm.

Near-term cooling load is also expected to be above normal in major energy markets. The National Weather Service reported that for the week ended July 16, New England would see 61 CDD (cooling degree days) or 20 more than normal, and the Mid-Atlantic states of New York, New Jersey, and Pennsylvania should endure 69 CDD, or 13 more than its normal tally. The greater Midwest from Ohio to Wisconsin is anticipated to experience 73 CDD, or 17 more than normal.

Risk managers suggest protective strategies for physical market longs utilizing an options strategy rather than futures. Mike DeVooght, president of DEVO Capital Management, advises trading accounts and end-users to stand aside the market. Producers, however, are advised to utilize options holding an August 2016-July 2017 put option and sell a $3.50 call option against it at even money. DeVooght also suggests holding a $2.75 put and selling a $3.75 call option paying 7 cents.

"On a trading basis now that we have seen the short-covering rally we thought was possible, we feel current levels represent attractive levels for producers to start to establish forward sales. But since we are not that bearish, we would establish hedges with either floors or collars," he said in a weekend note to clients.

In overnight Globex trading August crude oil fell 2 cents to $45.39/bbl and August RBOB gasoline rose a penny to $1.3782/gal.

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