After working lower in the Sunday overnight Globex trading session, December natural gas futures opened Monday at $7.570 and stayed within a slim 20-cent range for the entire session as milder temperature forecasts and a technical failure to breach the $8 level last week kept the bulls penned in. After putting in a $7.630 high and a $7.430 low for the day, the prompt month ended up closing at $7.490, down 39.4 cents from Friday.
"Natural gas futures are certainly trading within a range, but I think there is still some fairly significant downside potential here in the absence of colder than normal temperatures," said Tim Evans, an analyst with Citigroup in New York. "Looking at the most recent Commitments of Traders report from the Commodity Futures Trading Commission, the funds are still net long. They are not always wrong, but it does represent potential for a further cycle of long-liquidation if we have fundamental reason for it. In the short-run, I think the storage report for the week ended Nov. 3 is going to be supportive...probably something in the neighborhood of a 20 Bcf withdrawal, which could stand as one more event we have to get past before the market can fully react to the warmer than normal temperatures."
Evans added that an interesting scenario could unfold next week. "If we do see a 20 Bcf withdrawal from storage for the week ended Nov. 3 and we assume that the National Weather Service's forecast of less heating degree days for this week is accurate, my early estimate for the storage report covering the week ended Nov. 10 is a 36 Bcf build, which would actually put us to a minor new high in storage. It is kind of an interesting potential swing there."
Heating degree day (HDD) data for major energy markets shows a flip-flopping weather pattern. For the week ended Nov. 4 a total of 131 HDD were accumulated for New York, New Jersey and Pennsylvania, or 7 above normal. For Ohio, Indiana, Michigan, Illinois and Wisconsin a whopping 178 HDD were tallied, or 41 above normal. The forecast for the week ended Nov. 11, however, shows fewer HDD. The Mid-Atlantic states above are predicted to experience 119 HDD, or 20 below normal, and the Midwest states 100 HDD, or 56 below normal.
Evans commented that the significant price drop in overnight trading was interesting as well. "Another scary bearish aspect to this market is that it can get marked down significantly on light volume in the overnight trading session and not necessarily provide traders with real continuity for an easier exit if they are trying to get out of the way of it...or even a better short entry," he told NGI. "Whether you were long or short or on the sidelines, dropping 30 cents in the overnight session kind of makes for stressful decision-making the morning after."
Risk managers are taking advantage of a range-bound market to capture option premium. "I am using (option) strangles to collect about 55 cents from the market," a California trader said Monday morning. He said that he was selling both the February $7 put and the February $12.50 call option, and in the December contract he made similar trades for clients. The beauty of such a trade is that as long as the market (February futures, for example) stay within the $7 to $12.50 range, neither the put or call option will be exercised, and the seller of the options will retain the premium. February futures settled Friday at $8.434, but on Monday they came down to close at $8.055.
"There's always enough premium in the options to make a profitable trade. You just have to be smart enough to determine how wide a range the market will trade," he counseled. "With a $12.50 call and $7 put, you have the emphasis on the trade to keep the call option further away from the market, because at this time of year the risk is for higher prices.
"Anytime there was a down market I would lock in the long side. I also bought some calendar 2009 strips for $7.85," the risk manager said. He added that he was closely watching the crude oil market as well. "If some of the threats to Nigerian infrastructure come to pass, it's possible for a $10 pop in crude oil, and that would take natural gas with it. It's that time of year where crude oil could stage a healthy rally," he cautioned.
Technically the natural gas futures market is close to breaking out to the upside. The risk manager said his estimate of resistance for the December contract is $8.12, and that was almost taken out in Friday's trading. The December contract reached a high of $8.05 but was repelled lower.
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