November natural gas futures continued to retreat as traders noted that much of the direction of the market was determined as much by spread trading as the trading of outright positions. At the close November futures fell 5.0 cents to $3.601 and December shed 3.6 cents to $4.010. November crude oil skidded 45 cents to $82.21/bbl.
"It's a function of the selling of the front [November] contract and the buying of everything else," observed a New York floor trader. He noted that technical support in the $3.60 area was imminent, but "it was mostly spread trading today and less flat price. People were selling November and buying December and January. No one is actively selling and trying to trigger stops or anything like that. It looks like positioning."
It would be a curious mix indeed if technical support were to be broken at the same time a potential tropical storm forms in the Gulf of Mexico. At 2 p.m.EDT the National Hurricane Center reported that a tropical storm could be forming along the northeast coast of Honduras. It said there was a high probability, near 100%, that the current system could develop into a tropical cyclone in the next 48 hours as it moves to the northwest at approximately 10 mph.
AccuWeather.com meteorologist Joe Bastardi says the storm "should reach hurricane intensity before getting to the Yucatan [Tuesday] night and Wednesday. The idea I have now is a turn east later this week and a milling around in the western Caribbean in a weakened state. However, early next week the pattern will grow ripe for reintensification and move at Florida [and] a tropical storm or hurricane is in the cards next week."
Perhaps the storm could be the catalyst that top analysts have been looking for to counteract soft fundamentals and give a short-term boost to prices. "The negative fundamental outlook we have been discussing in recent months is still very much in place," said Mike DeVooght, president of DEVO Capital. DeVooght has been looking for a short-covering rally. "We still feel that is a good possibility. But this [last] week was rather disappointing for the bulls (or for those of us that have been looking for a short-covering rally). When you see strong alternative products, rising commodities in general and firm equity markets and natural gas cannot even hold its own, you have to be concerned if you are exposed if the gas market moves lower. It seems like the gas market has to go lower before it's going to get better. On a trading basis, we are going to continue to hold our short producer collar. We are hoping for some type of fall short-covering rally to give us an opportunity to add to our short hedges," he said in a weekend note to clients.
Directional traders seem to have given up on any kind of price advance and have continued to favor the short side of the market, according to the latest Commodity Futures Trading Commission Commitments of Traders Report. For the five trading days ended Oct. 5 long futures and options held by managed money (2,500 MMBtu) at IntercontinentalExchange fell 33,661 to 285,085 and short holdings rose by 19,527 to 92,264. At the New York Mercantile Exchange long contracts (10,000 MMBtu) rose by 4,582 to 138,312 and short futures and options added 11,054 to 241,211. When adjusted for contract size, long futures and options at both exchanges fell 3,833 and shorts rose by 15,953. For the five trading days ended Oct. 5, November futures shed 20.8 cents to $3.743.
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