After venturing north of $8 and failing for the third time in recent trade on Monday, June natural gas futures responded like clockwork Tuesday, dropping lower to test out the ever-rising support lines. The prompt month put in a low of $7.815 before settling at $7.864, down 8.8 cents on the day.
"There was nothing really out of the ordinary in Tuesday's trade. It sold off because we zoomed higher on Friday, with follow-through on Monday," said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. "Trading on Monday was key because we actually saw some follow-through, even though we ended up failing to stay above $8.
"We are going to break through the $8 resistance level eventually; it's just a matter of time. With Monday's failure to the upside, I think we will now test these lower levels and see how successful we are. However, $7 is no longer the low end of the range. Support has been creeping higher and now lies near $7.600 to $7.700."
As with much of the industry, Saal said once futures meaningfully break above the $8 level, there will likely be fireworks as the funds cover short positions. "We've seen this movie before...and for buyers it does not have a happy ending," the broker emphasized. "We've been basing since January 2006, which is a long time in this market. With the volatility shrinking, a lot of what I heard at GasMart in Chicago last week in terms of sentiment is that a lot of people are currently lulled into a false sense of security in this current marketplace. There might be some whiplash when this thing finally lets go to the upside."
Following Monday's failure to stay above $8, traders remain skeptical of the market's ability to break out of an uninspired trading range.
Analysts suggest that the main drivers of natural gas prices are currently not having any impact. The summer temperature outlook is still mostly unknown and forecasts for an active tropical storm/hurricane season have lost much of their luster following missed predictions for an active 2006 season. Petroleum prices, although lofty, are consolidating and the storage outlook has offered few surprises.
Jim Ritterbusch of Ritterbusch and Associates sees "a sideways trade in which price follow-through in either direction will likely prove limited." He admitted that he is "slowly gearing up" for a longer-term price advance, but he is being selective in initiating any scale-down buying program following price pullbacks. "Our bullish longer-term views are based largely on the premise that stronger oil values during the summer months will provide an important upward pull on gas prices."
Long-term weather forecasts may help the bullish cause. The National Weather Service in its most recent long-term outlook shows above-normal temperatures throughout eastern energy markets. East of a broad arc extending from central Texas to Missouri to northern Wisconsin is expected to endure above-normal temperatures. West of the Continental Divide is forecast to also be above normal, and only portions of the Great Plains are foreseen to have equal chances of below- or above-normal temperatures.
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