After trading between $7.910 and $8.180 on Monday, December natural gas futures ended up closing at $8.019, down 16 cents from last Friday's close. Even though the contract stayed firmly within its recent trading range, the drop was a little bit unexpected as the East Coast dipped to more seasonable cold temperatures.
"I was a little surprised that we didn't test that $8.220 level from last week, but I think we are seeing the clock ticking closer to winter," said Tom Saal, a broker with Commercial Brokerage in Miami. "The cash market [for delivery at the henry Hub] came up to around $7.900 as things are pretty chilly up and down the East Coast. As long as we have some seasonably chilly weather, the market isn't going to want to roll over and die just yet. I think it is waiting to see what kind of weather December brings us."
As for near-term futures market advice, Saal said he would play things a little conservatively here. "If you haven't done anything, I would probably continue to do nothing right now," he said. "December natural gas appears to be gravitating to the $8-even area whereas last month we were circling the $7-even level in November futures before expiring up around $7.15. I think we moved higher for December natural gas because the month is normally a stronger month demand-wise, so it warrants some premium. Now we will see if mother nature agrees."
Top traders favor the short side of the market but are wary of weather induced price surges. "The gas market seems to be biding its time, waiting for some bullish news, which is often the case at this time of the year," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm. He observed that buyers are ready to "speculate on the next cold wave," and sellers are tentative because of the sharp spikes you can see at this time of the year. "Even though the cold weather spikes tend to be of short duration, they are quite painful when you are short."
The ultimate market determinant, however, will be the arrival of weather of sufficient intensity to "chew through some of the storage." DeVooght believes if that does not occur the market most likely will break to the downside. "So we are now playing the waiting game."
He said on a trading basis he still wants to be "somewhat short this market." He presently advises end users to stand aside and producers to hold short earlier hedges established at $13.950 for 25% of winter 2006-2007 production.
Don't look for short-term weather conditions in major energy markets to chew through surplus natural gas anytime soon. "Chicago is in line for a big midweek warm-up," said Paul Dailey, a WGN Weather Center meteorologist in Chicago. He predicts a warm-up that should send high temperatures well into the 60s Wednesday and on Thanksgiving Day. "While two consecutive days with 60 degree-plus temperatures in the last 10 days of November are not that unusual (16 occurrences in 136 years of data), three consecutive 60 plus degree days have occurred only three times before in Chicago. On Thanksgiving Day, over half of the continental United States may see highs in the 60s or 70s," he said.
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