Following a topsy-turvy day of rallies and recesses, May natural gas futures on Monday ultimately recorded a high of $7.590 before settling at $7.562, up 18.1 cents on the day. In commenting on the significant up-day, Commercial Brokerage Corp.'s Tom Saal said the move higher was actually the result of two failed attempts to break below support lines.
"Local traders kept selling into this thing, which was probably part of the early weakness. They couldn't pound it below that $7.250 area, so they were forced to cover," said Saal. "The first initial rally took May into the $7.30s, but then they attempted to sell it again. However, the market did not go down. The momentum started going against them a second time so they had to cover again, which explains the rally late in the session."
Saal noted that the May contract's expiration on Thursday could factor into the market's direction for the rest of this week. "With expiration right around the corner, we have both longs and shorts that have to get out of the market before the end of Thursday," he said. "We heard it was 'trade at settlement' [TAS] orders -- buyers over. TAS is a method for traders to get out of their positions as they approach expiration. They are kind of 'market on close' orders, only you can guarantee the settlement price. When you call down to the floor they can tell you whether it is buyers over or sellers over. On Monday it was buyers over, so as the market approached the end of the day's trading, those people turned those TAS orders into market orders, which helped push up the price."
While noting that the market continues to pinball between $7 and $8, the broker said it is important to not lose focus on comparisons. "We settled the April contract at $7.558 and voila, here we are," he said. "Earlier in the month we had some cold weather and we pushed $8. Now we have more moderate temps and we are kind of where we started when April expired."
While noting that the relationship between crude and natural gas futures is much debated and sometimes nonexistent, Saal said the strength in crude Monday could have also helped support natural gas prices. "I hate to even mention the relationship because sometimes it works and sometimes it doesn't."
With continued violence in Nigeria stemming from weekend elections, crude traders were not taking any chances Monday. In its regular session debut as front month, June crude soared north of $65/bbl to close at $65.89/bbl, up $1.78 over Friday's close.
Other traders agree that the crude/natural gas relationship is dubious at best. Despite Friday's $1.55 rise in the expiring May crude oil futures contract, May natural gas futures ended up dropping 11.1 cents to close at $7.381.
"Crude oil rallied Friday, but natural gas' tendency to follow crude oil comes and goes," said a New York floor trader. "You can't take it as gospel. It's just one of the factors you consider, and you put it in the mixer with everything else."
Prior to Monday's trading, some technical traders suggested that May's close on the day could provide important clues about the near-term direction of prices. "On a decisive close below $7.270 we see relatively clear sailing to the $6.793-6.787 zone," said Walter Zimmerman of United Energy. The $6.793 and $6.787 targets are derived from what technicians call an "ABC correction" where the A and C moves are in the dominant direction (downward in this case) and the B move is an interim move in the opposite direction. In such a pattern the A and C legs are assumed to be equal in magnitude. "So while last week held key support, dire consequences are indicated should that key $7.270 support break this week," Zimmerman added.
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