Feeling rather comfortable with the market's recent $6.500 to $7.500 trading range, natural gas futures traders on Monday put in another uneventful session as support held once again. After trading within a slim 15 cent range between $6.560 and $6.710 on Monday, June natural gas ended up closing at $6.696, down 7.9 cents on the day.
"You can really stretch support down to $6.45, which was the spot low for March 10. These are some pretty important numbers just below us here," said Tim Evans, an analyst with Citigroup. "The question is whether we have a fundamental reason to hold this level?"
Noting that one might need to use a hammer to break out of the recent trading range, Evans said he could only think of two "potential hammers" that could do the job. "In order to shake this market in one direction or the other, there is the DOE storage report hammer and then there is the petroleum market hammer," he said. "We have a tremendous volume of open interest now...a lot of which has been added over the last two months. At some point we are going to get conformation on whether the bears or bulls are on the right side of this thing. Right now, I see more downside potential than upside potential.
"Summer heat and hurricanes are still a couple months off and even when they do factor into the market, they may not be all that impressive relative to what we saw last year." Evans pointed out that the Colorado State University forecast team is looking for 17 named storms this year, which is a lot when compared to historical averages, but pales in comparison to last year's 27 named storms. "Seventeen named storms is almost double the long-term average, but it is not 27," he said. "I am also not seeing enough weather support out there in the near-term to prevent a further break to the downside. We have an awful lot of gas in storage."
Although most traders remain intensely focused on the summer weather outlook and the prospects for disruptive hurricane activity, modest variations in present conditions can impact weekly storage figures. The heating season ended March 31, but heating requirements continue to linger and in some areas cooling is an issue.
The National Weather Service (NWS) forecasts below normal accumulations of both heating degree days (HDD) and cooling degree days (CDD) for major energy markets. For the week ended May 13, the NWS predicts New England will receive 69 HDD , or seven less than normal, the Mid-Atlantic states of New York, New Jersey and Pennsylvania will enjoy a seasonal 58 HDD, two below normal, and the populous states of Ohio, Indiana, Michigan, Illinois and Wisconsin will see 52 HDD, or 13 less than normal.
The same pattern is in place for cooling requirements. Both the Midwest and Mid-Atlantic states above are forecast to enjoy zero CDD, but that is seven less than normal for the Midwest and two less than normal for the Mid-Atlantic. New England is predicted to receive zero CDD as well, or normal.
The dearth of both HDD and CDD hs already enabled robust increases in storage. According to Department of Energy (DOE) figures, additions to stockpiles averaged 52 Bcf per week last month, matching the fastest pace for April since the DOE began compiling the data in 1994. April additions to inventories averaged 27 Bcf a week from 1994 through 2005, slightly over half the current rate.
Prior to Monday's session, Tom Saal of Commercial Brokerage in Miami, suggested taking advantage of the current trading range. He has identified a range in the June futures using a two-hour chart of $6.493 to $7.131, and suggests buying the June contract when it trades between $6.450 and $6.575.
According to a Bloomberg poll, eight of 17 traders and analysts said prices will drop this week according to a survey conducted May 5. Four said prices will rise, and five predicted little change. Respondents have forecast lower prices for 11 straight weeks. In futures trading, however, no good deed goes unpunished. For the week ended May 5, June natural gas rose $0.220 to $6.775.
In a longer-term time frame analysts at JP Morgan Chase & Co. in New York last week iterated that they would make no change in their U.S. gas price forecast for 2006 at $7.32 per MMBtu. They cited the greatest risk to their forecast would be hurricanes. They noted that although meteorologists are predicting another above-average season, the likelihood that storms would directly strike offshore gas production facilities in the Gulf of Mexico as Katrina and Rita did is low.
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