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Buy the Forecast; Sell the Weather. Never Worked Better

Buy the Forecast; Sell the Weather. Never Worked Better

Even as temperatures were shattering records throughout much of the Northeast, sending electricity prices spiking near $1000/MWh Tuesday, natural gas futures were hit with a wave of selling to kick off the week. Speculative fund traders, who have been long positions for almost three months now, were prominent sellers early. But trade and local selling was not far behind, sending the August contract to its lowest level since the middle of April. The prompt month finished down 9.6 cents at $2.191, after carving out a $2.16 bottom. Estimated volume was a robust 124,967.

Many traders were at a loss to explain the price erosion in the face of triple-digit temperatures and strong physical market demand. By starting the morning in the low $2.30s, Henry Hub cash market deals were almost a nickel more than NGI's $2.27 first-of-month index price. However, several traders were quick to point to forecasts calling for moderating temperatures for the rest of the week as a negative feature in yesterday's market. Traders came back from the weekend and their first reaction was to buy the market in sympathy with the weather outside the window. Only after closer inspection did they realize that it was a here today, gone tomorrow situation.

According to the six- to 10-day forecast released Monday by the National Weather Service, temperatures are expected to moderate by this weekend for the entire eastern half of the country. The NWS calls for below normal temperatures across the Great Lakes, Ohio and Mississippi Valleys, and northern and central Great Plains. The West and extreme eastern seaboard are expected to stay above-normal, the NWS said.

But while a bearish weather outlook may have started the downward momentum, technical factors quickly added to the selling pressure. "Long liquidation by funds initiated the move lower and caught the attention of trade and local sellers once the market broke the $2.26 level," said Ed Kennedy of Miami-based Pioneer Futures. The low $2.10s is not out of the question, maintains Kennedy. "First, however the market could take a slight breather and possibly retest the $2.25 area," he continued. But Kennedy doesn't look for much of a rebound and feels that resistance in the mid-$2.20s should hold, which could result in another wave of selling.

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