After trying to break below $7.10 for the last couple of weeks, natural gas futures traders were finally successful Friday as the prompt month notched a low of $7.060 before closing at $7.083, down 15.6 cents on the day and 16 cents lower than the previous Friday's close. Traders on Friday continued to battle entrenched support, but unlike previous attempts that sparked rallies, the bulls were not able to answer the call this time.
"The action all day was pretty weak; we were really working lower most of the day with a few small pauses and no meaningful rallies," said a Washington, DC-based broker. "Nobody could really step in and buy this thing and change the direction of the market as most of the country is looking at 50-60-degree temperatures in the near term. We held and held and held and finally broke down here, so our moderately bearish stance moves to a more medium bearish level. The $7.050 number is still the most important technical support level out there, because it is the low on the perpetual chart."
The broker noted that unless some drastic switch in the weather forecast occurs over the weekend, he expects the market to test and break that $7.050 level during the week. Beyond that, he sees a methodical move lower.
"The aggressive shorts would like to see this thing get back down to $6.30 or $6, but I am not sure they are going to be able to gain enough momentum to grind it all of the way down there," the broker said. "We stair-stepped our way up in that rally from December through the end of January, so I think there are some decent pullback points on the way down. After $7.050, $6.820 comes in. So I don't think we are going to free-fall to the lows we made back right before Christmas; I think we are going to grind our way lower. However, if we break $7.050, I think the bears will have firm control. If I'm wrong, then the bulls are going to need to get back up and rally first thing Monday."
The broker said that while the market has priced in a season-ending storage level of 1,400 Bcf, the very bearish potential of a hearty surplus that was in place six weeks ago has now been taken off of the table. "Now we have to wait and see if we have a La Nina event and what the forecasters see in the way of temperatures for the extended summer. That is all still ahead of us," he said.
Prior to Friday's trade, Citigroup analyst Tim Evans said natural gas futures support holds the key. "The intermediate-term fundamentals may be relatively neutral, but if the well defined technical support under this market gives way, we'd certainly want to go with that flow."
Dissecting the 102 Bcf withdrawal from storage for the week ended March 2, Evans said it appears that storage levels remain on track to finish the withdrawal season on March 31 with approximately 1,400 Bcf underground. "If precisely at this round figure, inventories would be 296 Bcf less than in 2006, but still 168 Bcf above the five-year average," he said. "We see this level of storage as offering no firm floor for prices over the intermediate term, possibly allowing nearby futures to fall back to the $6.50-6.70 area in the weeks ahead. With a smaller carryover toward next winter than a year ago, we would not expect to see a full retest of the May 2006 spot low of $5.75 or the July 2006 trough at $5.39 as longer-term benchmarks."
He added that once the downside limit is probed and flushed out, the market could then give way to a rally into the summer as the industry sets its sights on summer temperatures and hurricane outlooks.
Some weather bulls are hanging their hats on recent changes in the long-term forecast indicating below normal temperatures late in the week. MDA EarthSat in its Friday morning forecast showed a change in the six- to 10-day forecast with colder temperatures migrating into the Midwest and Northeast. "The latest forecast models appear to be making a faster and stronger transition back to the colder side for a significant part of the six- to 10-day in the East," the forecaster said.
"Cooling is now forecast to drop into the Midwest and then East for the second half of next week with some much below normal spikes possible as well." MDA Earthsat also said that confidence in the 11- to 15-day period, which showed a greater expansion of warm temperatures into the Midwest, was lessened.
Other forecasting firms see the return to cold for the East as coming a little later. Looking at the March 14-18 period, Frontier Weather is calling for above normal temperatures for the continental U.S. west of the Mississippi with normal readings in the East. From March 19-23, the weather forecasting service sees above-normal temperatures through California and the Rockies into the Midwest, while the Northeast will once again experience some cooler-than-normal temperatures.
Even the National Weather Service's (NWS) six- to 10-day forecast Friday began to look a little more bullish. In its outlook for March 15-19, the NWS forecasts much above-normal temperatures for the Southwest and above-normal temperatures all of the way east to Mississippi, Illinois and Minnesota. Th Northeast and Southeast are expected to exhibit below normal temperatures while the Mid-Atlantic sees normal conditions for the time of year.
If the bears prevail and the market continues lower, bulls may end up stampeding for the exit. Prior to Friday's trade, one New York floor trader said support levels remain key. "As natural gas prices approach support at $7.15 and $7.10, there is the likelihood of some large [sell] stop loss orders going off," he said. He observed that if prices continued their slide and made it that much further down, "a lot of people would be expected to make some moves to protect themselves."
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