Even though the market was forced to digest a rather bullish 2007 Atlantic hurricane forecast on Tuesday, May natural gas traded to a low of $7.390 on the day before finishing up the regular session at $7.426, down 24.5 cents from Monday's close.
The Colorado State University (CSU) hurricane forecast team led by Phil Klotzbach and William Gray upped their December 2006 forecast on Tuesday, noting that the U.S. Atlantic Basin will likely experience a very active hurricane season in 2007 with an increased probability of a major hurricane making U.S. landfall (see related story). However, it appeared that natural gas chose to follow crude futures instead.
As tensions surrounding the Iranian hostage issue eased Monday night into Tuesday morning, so too did the geopolitical premium in energy prices. May crude on Tuesday recorded a low of $64/bbl before closing out the day at $64.64/bbl, down $1.30 from Monday's close.
Taking petroleum influence out of the equation for a moment, one broker noted that the market rightfully did not respond bullishly to the hurricane forecast. "Let's not get carried away here," said Tom Saal with Commercial Brokerage Corp. in Miami. "We are in a shoulder period and the prices are still higher than they were at the beginning of the year. January futures went off the board at $5.838 and February settled at $6.917, so we are pretty strong compared to the beginning of the year. Some of the hurricane concerns are already built into the market and you have to remember we are still literally months away from the first hurricane. It's too early to really focus on that too much. Last year when the forecasts came out we saw a little rally in natural gas futures, but we ended up eventually grinding lower."
Saal added that the market has currently carved out a little range for itself. "Don't get me wrong, the down move Tuesday was impressive, but the market really seems like it has found a home here between $7.400 and $7.800," he said. "We've expired in between those numbers for two months in a row, so we might stick around here until something either happens or doesn't happen. We have had trouble getting below the $6.800 level over the last couple of months and now we can't seem to break above $7.800, so it's a matter of which gives first. The market is definitely waiting here for something."
As for what division of traders was behind the push lower Tuesday, Saal said it is a lot harder to tell in the current market. He said "fragmentation of liquidity" also makes it difficult to sort out whether it was a decisive move or not. "In today's market, liquidity is spread between the Nymex [New York Mercantile Exchange] pit, Globex and ICE [IntercontinentalExchange]," Saal said. "With this kind of diversity, you are going to get these kinds of daily swings in prices. I think Tuesday's move had more to do with liquidity than pure market direction. The move may have been a little more exaggerated to the downside than first expected. The move back up will likely have the same momentum. We should see a rebound off of this."
Some traders said the Iranian crisis is certainly impacting the natural gas market, especially since it is the beginning of the shoulder season when the market sometimes exhibits a lack of direction. "At this early stage of the shoulder period, geopolitical developments may have a larger impact on gas prices than other factors," said Jim Ritterbusch of Ritterbusch and Associates. He added that breakthroughs in the UK-Iran dispute could "weigh considerably on the natural gas market," but he looked for prices to fall no lower than the $7.00 area.
Others expect a slide to $7. "Overall, I think the market backs off. Once it's confirmed that warmer weather comes in next week, and unless crude oil is off to the races, which is always the disclaimer, then I think natural gas falls to the low $7 area," said a New York floor trader. He admitted that Monday he did notice light fund buying, but "whatever buying was coming into the market was getting absorbed [by sellers]." The trader looks for the market to advance no higher than last week's $7.83 posted by the May contact.
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