December natural gas futures on Tuesday broke above the psychological $8 level once again Tuesday, but like other recent sessions, the contract was unable to make it stick. After reaching a high of $8.220 on the day, the prompt month trickled lower to close at $7.977, up 8.3 cents.
Breaking above the $8 level during the day only to end up settling below it is nothing new for the December contract. In a little over the two weeks since December took over the front-month position, the contract has taken just such a journey no less than six times. However, Tuesday's retreat was the least pronounced.
Jay Levine, a broker with enerjay LLC, said he sees the market continuing to plod higher in a slow roundabout way. "Of course a close close to $8.00, as we've just seen, is fairly inconclusive especially since I expect we'll be seeing more of the three-steps-forward, two-steps-back and vice versa routine," he said. "Especially considering where we've come from and with the future -- the winter of 2006-2007 -- still very much an unknown..., I'd certainly play it wide if I was you, even if my bias remains up."
Justifying the recent strength in natural gas and petroleum futures, Levine said that "while the underlying fundamentals are 'classically' bearish, the 'times' we're living in are not. I'm not saying there's complete logic in seeing the complex higher -- and should the winter of 2006-2007 disappoint, it does make [natural gas futures] more vulnerable to down-drafts to say the least -- but since when does anyone rely completely on logic and/or common sense?"
The broker said that the reality of storage and inventories matches up nicely against the perception of the future and, "given the times we're living in, the future will likely always carry some sort of fear premium, justified or not... Fundamentals aside, 'classically' bearish though they seem, the long-bull market lives. Then, there's the technical and psychological picture to consider."
Traders as yet still do not have a coherent idea of what the winter weather patterns will be like as forecasts are diverse. "Although the various private weather forecasts appear unusually mixed at the present time, consensus favors normal- to slightly above-normal temperature patterns across most consuming regions within the six-to-10-day window at the present time," said Jim Ritterbusch of Ritterbusch and Associates. He added that as long as no clear pattern emerges, "this market will be forced to reckon with a record supply level, a factor that appears more important to the deferred contracts than the nearby futures so far in this week's trade."
The bottom line is that this market doesn't know where it's going. "This market remains locked in a trading range of about $1.50 and will likely stay within the zone of the past two months until the weather becomes a more significant price driver in a couple of weeks," said Ritterbusch.
Longer-term weather forecasts are diverse. AccuWeather in its 11-to-15 day forecast shows above-normal temperatures west of a broad arc extending from eastern Montana to East Texas. North of an arc from western Minnesota to Kentucky and up to Maine, however, are forecast to be below normal.
The National Weather Service in its eight-to-14-day forecast shows above normal temperatures from the Ohio Valley and Mississippi Valley all the way to California. Only portions of the Southeast from the Florida panhandle to central Virginia are expected to be below normal.
Technicians also see a confined market. "The bears need a decisive close below the $7.520 level to seriously weaken the case for a continued rally," said Walter Zimmerman of United Energy. He noted that Monday reversed higher from a $7.600 low but last Thursday's failure to rally above important resistance at $8.320 was also revealing. In short, the market needs to decisively break out of a $7.520 low or an $8.320 high to demonstrate its next direction, he said.
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