After reaching a high of $8.010 in trading last week, May natural gas futures were pushed lower Monday to explore the other end of the spectrum. The prompt month put in a low of $7.500 on the day before settling at $7.530, down 27.1 cents from Friday's close.
Many in the industry still believe the market has been lacking direction and is using crude futures as a surrogate compass. May crude dipped down to a low of $62.58/bbl on Monday before rallying to close at $63.61/bbl, down two pennies from Friday's close.
"We saw a pretty significant drop today in natural gas futures and guess what? Look at crude. For lack of [their] own direction, natural gas prices are following crude prices," said Steve Blair, a broker with Rafferty Technical Research in New York. "They followed them higher and are now following them back down."
The broker noted that natural gas futures are definitely still range trading. "I am very curious to see how traders handle themselves this week ahead of Thursday's potentially surprising storage withdrawal," he said. "One source last week was talking about a record withdrawal for the month of April, so we will have to see how that plays out. Will it be anticlimactic if we get a big withdrawal? I currently think so. No matter what the report this Thursday for the week ended April 13 reveals, I think the reaction is going to be relative to where the market is at that time."
Talking about the overall natural gas futures price situation, Blair noted that pretty strong support and resistance levels have the market boxed in here. "When we got up to $8.010 last week, we got up through two of our three major resistance numbers, but we failed at penetrating the third one at $8.050. If we had gotten through there, the next major resistance level is up around $8.400. A lot of that failure last week after reaching $8.010 can be attributed to a lack of direction, following the crude market and bouncing between technical numbers again. Our first major support number is $7.380, so I think we are just playing the technical game back and forth here with a little influence from crude."
Traders anticipate futures to continue trading in a broad range and look for selling opportunities. Risk managers anticipate using market rallies to hedge downside price risk. "We are going to continue to trade the range (mid-$5 level to mid-$8 level) until the market breaks out," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm.
In the short term DeVooght sees cold weather and sky-high petroleum prices as supporting natural gas, but is not looking for a concerted move higher. "On a trading basis, we did reenter the short side more aggressively this past week. We would use rallies approaching the $8 level on the spot (or wherever the backs are trading when the spot is approaching $8) market as a selling opportunity," he suggested.
Currently DeVooght advises end-users to stand aside and producers to hold short a May-October strip established earlier at $8.50 for 75% of production and maintain a short winter 2007-2008 strip at $9 for 15% of production.
Weather bulls counting on continued cool weather need to be on their toes. MDA EarthSat forecasts cool temperatures in the one- to five-day period but the six- to 10-day interval is expected to warm significantly. "Generally good model agreement evolved over the weekend to support the warmer look to the eastern U.S., this period following a cool to cool one- to five-day," the forecaster said in its Monday report. It added that the model output statistics suggest mainly above-normal temperature anomalies this period. MDA Earthsat shows above-average to much-above-average temperatures north of a broad arc extending from North Dakota to southern New Mexico to New Jersey.
Prior to Monday's action, Phil Flynn of Alaron suggested buying June natural gas at $7.700 with a stop loss order at $7.350.
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