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Futures Finish Week Higher on Round of Short-Covering

After opening Friday at $6.560, which would end up sticking as the low for the day, February natural gas futures pushed higher as commercial hedgers covered their short positions ahead of the weekend. The prompt-month contract recorded a high of $6.940 before settling at $6.886, up 56.2 cents on the day and 28.5 cents higher than the previous week's close.

Industry experts reiterated what they have been saying for months now. "It all comes down to weather in winter," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "We've been saying if the nation ended up getting some weather, we would likely see some higher prices, which we have. I think the market is reacting accordingly. The big question is how long will this cold stick around? That will determine what the next move is."

As for the significant move up Friday, Saal said he doesn't think there was much new length involved. "What I have heard from the floor is that the bump higher is mostly commercial hedgers buying, so my guess is it is more short-covering. Last week's Commitment of Traders report showed that the commercial traders were still pretty short. I don't think there are many new longs coming in yet. While this coming storage report for the week ended Jan. 19 should show a sizeable withdrawal, I think we will have to link a few large withdrawal weeks together to make a real difference in the supply picture and the futures market."

The broker added that the level of uncertainty in the futures market is elevated right now. "I think traders in the current market are wrestling with what is a high value and what is a low value. The dynamics are changed, so the market has to sort itself out. I think it is currently 'reasonably' priced."

Commenting on the wide trading range in recent days, Saal said traders have to expect a big range when news such as weather or storage values surrounding the market changes. "We saw the big trading days on the way down and are now seeing the same pattern on this jump higher," he said. Nailing down some parameters, the broker said he sees resistance at $7 and support at $6.730.

In its most recent six-to-10-day forecast, the National Weather Service said the country will look to get a little colder late this week. While Thursday's forecast covering Jan. 24-28 showed colder-than-normal temperatures running east and south of a line from northwest Indiana to central Texas to eastern Arizona, Friday's six-to-10-day outlook covering Jan. 25-29 showed the colder-than-normal temperature line migrating farther west. Now all of Texas is expected to be below normal along with most of New Mexico, Wisconsin and Missouri. An incursion of warmer-than-normal air is still expected in the Great Plains, while the Southwest region will also receive warmer than normal conditions.

Following a frigid weekend for the Northeast, complete with as much as a foot of snowfall, AccuWeather meteorologist Bob Tarr said much about the Jan. 22-26 work week is still unclear. "Once this storm departs, we'll turn our focus to what lies ahead," he said. "Right now, it looks as though the high pressure that will be located over the Northeast by Sunday afternoon will hold the storm over the southern Plains at bay, keeping the Northeast mainly snow-free. It is looking less likely that another storm on its heels will have much of an impact on the Northeast. However, there may be an Alberta Clipper that could bring a little snow to the region at some point in the latter half of [this] week."

Traders are skeptical of any long-term impact from the cold snap. "On a trade basis, we could very well get a weather-related rally here, but it will most likely be short-lived and we will most likely see lower prices in the weeks to come," said Mike DeVooght of DEVO Capital.

Citigroup analyst Tim Evans said the current cold streak doesn't excite him that much. "The natural gas market is pushing higher, encouraged by the steadier tone on the petroleum side and the relatively stable weather outlook," he said. "We're not sure it warrants much more than a sideways-to-higher chop we've been seeing, given that storage remains high and the National Weather Service longer-range forecasts still point to warmer than normal temperatures for the balance of the winter."

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