After breaking the April natural gas futures contract below support at $7.100 late last week, the bears cleared another hurdle on Monday in penetrating the $7 level and settling the contract at $6.912, down 17.1 cents on the day. Whether or not it retains a $6 handle depends on what kind of weather rolls in over the next week, which is still open to debate.
After falling to sub-$7 levels in overnight Globex trading, the April contract during Monday's regular session traded in a slim $6.880 to $6.970 range before coming to a close.
"We've been trading this $7 handle for quite some time, but it finally gave way to the downside on Monday. Whether we stay below $7 has a lot to do with the weather and which forecast comes to fruition," said Steve Blair, a broker with Rafferty Technical Research in New York. "There is some talk that colder weather could come into the Midwest on Thursday and move into the East over the weekend, but there isn't any talk of it being an arctic blast. Right now I think the market is kind of ignoring it, just like I think the market is choosing not to recognize the likelihood of a fairly large withdrawal in Thursday's natural gas storage report."
Blair said the break below $7 is significant because it broke the $7-8 trading range. However, he pins $6.80 as the real test. "Unless we break beneath $6.80, I don't think it will signal a large breakdown," he said. "Whether we break that level depends on whether or not the market wants to acknowledge this upcoming weather, which is not solidly forecast to begin with. It really depends on which weather service you listen to. One independent forecaster is only calling for slightly lower-than-normal temperatures with New York displaying temperatures in the 20s. Another independent was forecasting New York to see a high of around 20, so there is some varying information out there that the market is torn between."
Even if there was another colder than normal snap, Blair said it might be a case of "too little too late" as the days left in winter tick down. "Some people are pointing to the storage levels falling significantly below last year, but I am in the camp of the five-year average comparison being a better measuring stick," the broker said. "Current stocks are still almost 200 Bcf higher than the five-year average at this point. Once again, I think we are in one of those too little too late scenarios. I'd have to say I am more bearish than bullish here. If we get below $6.800, I think we could easily see another 30 cents to the downside if not more. I don't anticipate prices shooting to the upside in any big way in the near term. However, we could rebound into the $7.00 to $7.50 range for a little while until we get some direction on what the summer season is likely to bring in the way of temperatures."
April natural gas futures are groping for technical support levels that continue to work lower, and traders believe there is the possibility of "some large (sell) stop loss orders going off, and a lot of people would be expected to make some moves to protect themselves," a New York floor trader said. On Thursday traders put support at the $7.10-7.15 area, but Friday's 15-cent loss ratcheted support downward. "Once the buying dried up, prices started falling at the end of [Friday's] session." Prior to Monday's session, the trader said a break below support in the $7.00-7.05 area would call for a test of $6.85 and $6.51.
The weather outlook for the Northeast has something for both bulls and bears. Forecasters point out that March is a month of high variability as winter transitions into spring and cold air clashes with warmer air rising northward. "After a nice day Monday, winds from the southwest will flow over the Northeast, nicely warming temperatures Tuesday and Wednesday, before colder air returns," said AccuWeather meteorologist Kristina Baker. She added that during both of these days, the warming will be more pronounced across the Mid-Atlantic states with temperatures in Philadelphia flirting with the 70-degree mark. Temperatures will come down a bit Thursday followed by colder air for the weekend.
According to AccuWeather figures, the normal high in Philadelphia this time of year is 50. Chicago is forecast to see a high Tuesday of 68 and reach 56 on Wednesday. Chicago's normal mid-March high is 45.
Looking towards the weekend and early next week, the National Weather Service (NWS) is calling for the western half of the United States to experience above normal temperatures while most of the eastern half of the country will see seasonal conditions. During that time frame, the NWS said the Northeast through to the Great Lakes region is expected to see below-normal conditions, as is Alaska.
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