With some of Friday's downward momentum sliding over into the new week, July natural gas futures bounced between a $7.560 low and a $7.705 high before closing out Monday's regular trading session at $7.608, down 5.5 cents from last week's close on Friday. While the bears were still having their way, most industry veterans are expecting yet another rebound off support in keeping with the market's routine of the last several months.
Traders continue to pay close attention to summer heat, while also monitoring the Caribbean for signs of any storm disturbances. While temperatures are expected to be above normal in a number of regions of the United States over the next couple of weeks, some of the forecasts have softened somewhat over the past week.
Frontier Weather's six- to 10-day outlook for June 16-20 calls for above normal temperatures in most of the West as well as from the Midwest through the Northeast. Normal temperatures are expected elsewhere, notably in the Southeast. However, the 11- to -15-day outlook covering June 21-25 calls for above normal temperatures in the West and normal conditions in the East.
"The natural gas market continues to probe the downside, with the fresh weather forecasts over the weekend showing some moderation in cooling demand relative to last week's outlook," said Tim Evans, an analyst with Citigroup in New York. "The tropics are quiet at the moment too, allowing tensions to ease. Current conditions may be soft enough for prices to attempt breaking the equilibrium of the past four months to the downside, but we think the market will fail to sustain a lower price level, much as it has been unable to hold above $8 in attempts to trend higher."
Some traders are taking a broader view of the energy and financial landscape and see natural gas and commodity prices as vulnerable. Some suggest a linkage between commodity markets such as natural gas and the stock market. The rationale is that the equity markets are early indications of the health of the economy and ultimately the consumption of economic goods. Should the economy stumble, demand, and eventually prices, should weaken. Thus last week's fall of the Dow Jones Industrial Average by 244 points to 13,424 bears watching.
"We feel this was the big news because it is our feeling that commodities were going to rise until the rising cost of doing business (due to rising input costs) and the decline in disposable income would eventually cause a contraction in demand. We feel the markets to watch for an early indication of weakness to come in the commodity markets are the equity markets," says Mike DeVooght of DEVO Capital, a Colorado trading and risk management firm.
DeVooght contends that as long as equities continue to move higher, firm commodity prices (i.e., crude oil, natural gas, et al.) will result. "If any cracks develop on the demand side (weak equities are often a leading indicator of economic weakness), we could see a tremendous break in the commodity markets," he said. He added that such a break in commodity markets was just a matter of time and "unlike the financial markets, where products can be cheaply and easily stored for the future, commodities are quite expensive to store and many have a shelf life. In other words, when you get the speculators and short-term investors heading for the door, we are going to see some serious breaks in the commodity markets."
In the meantime, however, DeVooght recommends that natural gas accounts hold current positions. Trading accounts should remain short the July contract at $7.850, he said, and end-users should stand aside. He recommended that producers should continue to hold short a July/October strip at $8.500 for 75% of production and stay short a winter 2007/2008 strip at $9 for 15% of production.
Some traders might find it useful to heed DeVooght's advice. Phil Flynn of Alaron suggested Friday to buy July natural gas at $7.800 with a stop loss order at $7.300. July natural gas settled Friday at $7.663, down 16.2 cents.
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