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Futures Slip Lower on Moderating Weather Forecasts

Continuing the recent string of small moves in either direction within the current trading range, July natural gas futures dropped 13.7 cents on Monday to close at $3.731. Moderating temperature forecasts and some signs of weakness from crude futures were seen as contributing factors to the drop. July crude shed another 35 cents to close Monday's regular session at $68.09/bbl.

"The natural gas market is falling back toward the lower end of its recent trading range...after Monday weather updates failed to provide support," said Tim Evans, an analyst with Citi Futures Perspective in New York. "There is an area of disturbed weather in the western Caribbean, but chances for tropical storm development look limited. Temperatures look even more moderate than in Friday's forecast. Overall, we can now safely extend our storage forecast through the week ending June 19, with below-average degree day accumulations translating into above-average storage injections week by week."

The National Weather Service's latest six- to 10-day forecast covering June 14-18 calls for the Northeast and much of the West to see below-normal temperatures for this time of year. Texas, parts of the Southeast and a majority of North Dakota are expected to see above-normal temperatures for the period.

Looking at the storage report to be released Thursday for the week ending June 5, Evans said his early prediction is for a 110 Bcf injection, which would be significantly larger than last year's 84 Bcf addition and the five-year average build of 91 Bcf.

In spite of further contraction in the rig count, analysts are wary that there may not be many remedies to cure the current oversupplied natural gas market. "Natural gas continues to be weighed down by lowering demand and increased onshore production that remains strong even as drilling activity is being cut," said Mike DeVooght of DEVO Capital, a Colorado trading and risk management firm. According to DeVooght, a shift in the fundamentals will be necessary to halt, if not reverse, the current downtrend.

"Unless we see some big changes in market conditions, such as hot weather, a hurricane or a sizeable draw from storage numbers, we will anticipate lower prices in the natural gas market. On a trading basis we will continue to hold an October $4.50/6.00 collar [buying $4.50 put option, selling $6.00 call option]." DeVooght advises trading accounts and end-users to stand aside.

Giant oilfield services company Baker Hughes reported Friday that the number of rigs drilling for natural gas in the U.S. continues to dwindle. For the week ended June 5, 700 rigs were drilling for gas, three fewer than the week before. The count is down a stout 793 from a year ago.

Not all share DeVooght's outlook. According to a Bloomberg survey, analysts see contracting supplies at a time when the economy is showing signs of improvement. The survey revealed that natural gas prices may rise in the second half of 2009 by 38%, with oil prices rising by 22% during that time.

For those who insist on buying natural gas futures, they might want to heed the observations of a New York floor trader. "With the cash market being significantly below the screen and with the strength of crude oil, people are putting more stock in the November-March section of the board for next winter," he said. "If you are doing anything, you are selling the front end of the curve and buying something else [more deferred contracts]."

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