Continuing the week's trend lower, December natural gas futures on Wednesday travelled as low as $11.49, before bumping slightly higher to settle at $11.604, down 25.6 cents on the day. Traders now await Thursday morning's natural gas storage report for the week ended Oct. 28, which technically marks the end of the injection season, as the next indicator on the market's price level.
Wednesday's prompt month loss brings December's three-day decline to $1.451. With December closing at $11.604, prompt-month futures haven't settled lower since Sept. 16, when October natural gas closed at $11.144.
"I think this downtrend is long overdue," said Steve Blair, a broker with Rafferty Technical Research in New York. "I am really not surprised by it, but I am surprised at its timing, especially with significant production shut ins still in the Gulf of Mexico. I guess this decline is really showing just how exaggerated this whole move up was."
As for who the major players in this move are, Blair said he believes the funds are well represented. "If you look at the Commodity Futures Trading Commission report, the funds are short," he said. "It wouldn't surprise me one bit if the funds were selling into this market. It may very well be a combination of some of the funds getting shorter and some of the funds that are still long, finally bailing.
"I wouldn't be surprised if that's a big part of what is propelling this market, as it did to the upside," Blair added. "I think a lot of traders are annoyed that we don't have the marketers like the Enrons, the Dukes and the El Pasos anymore. We don't have these guys in here to take the volume the funds are throwing, so it makes it easier for the funds to push the market around a little bit."
Looking at support areas, Blair said that from a technical perspective, he believes there is minor support around the $11.50 level, which is where December ventured Wednesday. "Our major support numbers aren't for another 40 cents until you get down around $11.10," he said. "I also think there are a lot of people in the market who think we might see some support just under $11."
Addressing the current down move, Blair said that at some point, the market is going to run out of room to the downside. "I don't know if we are going to see natural gas go too much lower," he said. "I think in the very near term this thing is going to bop up again."
The broker said current storage levels appear full. "No matter how you look at it, overall storage numbers are healthy," he said. "The only thing that's going to make a dent in this situation is if we have a harsh start to winter. If we get a number bigger than expectations Thursday morning, something in the 30s or 40s, natural gas futures will have their initial push lower.
"The thing we have to remember here is the fact that as we get closer to 3.2 Tcf in storage, it gets harder to put gas in the ground. Unless the country comes up with more storage capacity, injections will taper off and ultimately stop when storage reaches this area."
Citigroup's Kyle Cooper is calling for a build in between 21 and 31 Bcf for the week ended Oct. 28. He noted that a Bloomberg survey of 16 analysts was calling for an average injection of 32 Bcf.
"A build in our range would be considered very bearish on a temperature-adjusted basis," Cooper said. "This week certainly witnessed some heating related demand. In our opinion, a build in our range would definitely indicate some conservation measures are being employed at the residential and commercial level across the country. Mother Nature can still deliver a very cold winter to keep demand high, but if conservation measures are in force and the weather is moderate or warm, inventory levels will quickly rise in relation to historical averages."
Despite his outlook, Cooper warned that people need to remember that inventories have mean't "little to nothing to price" since early 2003 across the energy complex.
The storage number revealed at 10:30 a.m. EST on Thursday morning will be compared to last year's 41 Bcf injection and the five-year average build of 34 Bcf. Wednesday afternoon's ICAP-Nymex storage options auction, which allows traders to hedge against or bet on the storage number, predicted a 33.5 Bcf injection for the week.
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