After recording its third consecutive low for the downtrend in as many days, natural gas futures staged a meager rebound on Tuesday as the November contract reached a high of $3.530 before closing the regular session at $3.513, up 8.2 cents from Monday.
Tuesday's low of $3.395 stands as the new 13-month prompt-month contract low. The last time front-month futures traded lower was back on Sept. 16, 2009, when the October 2009 contract traded down to $3.355.
Despite Tuesday's rally, some market watchers said current fundamentals and chart patterns put them still firmly in the bearish camp for at least another week or so.
"Yes, we had a little bit of a gain Tuesday, but the overall direction still points to chopping around and drifting lower," said a Washington, DC-based broker. "We broke through $3.610 support, so we think we are in the fifth and last wave of an Elliot Wave decline. Normally the seasonal rally begins in September, so it looks like we've pushed it back a bit, but I would suspect we will start to see a rally in prices after this last round of selling. I think we could drift lower for another week or so."
As for whether futures could duck below $3, the broker said he wasn't expecting it. "I don't think we'll see a $2 handle. Some research says the floor for coal comes in around $2.800 and I'm not sure gas has enough momentum to get there," he told NGI. "There is a lot of fuel switching from coal to gas if you have a period of weak demand and a low gas price. Right now industrial demand -- while it has bounced up a little bit -- is still pretty weak, so I would think the people who have the ability to switch from coal to gas might take the option if the gas price gets close to the coal floor. I would think that element would support gas prices before we got into the twos."
Some traders hope a deeply oversold market will at some point rally and generate hedging opportunities.
Analysts continue to expect the large number of funds and managed accounts holding short positions to make a run for the exits at some point. "We are still looking for a short-covering rally, but the possibilities of that happening anytime soon are very slim; however, we feel the possibility is still there," said Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm. "If we do get some sort of short-covering rally, we will be looking to add to our current short hedges. On a trade basis, we continue to hold our short collar position."
DeVooght currently counsels trading accounts as well as end-users to stand aside. Producers are advised to hold on to what's left of a 12-month $5.50 put option held against the sale of a $7.50 call that was initiated in December of 2009.
Weather bulls may yet have their day, but according to forecasters they may have to wait a while for it. "The overnight American operational [weather model] offered a starkly colder picture for the 11- to 15-day with wide-spread 'much' and even 'strong below' normal temperatures, especially focused in the Midwest," said Matt Rogers, president of Commodity Weather Group, a Bethesda, MD weather forecasting firm.
He added that "the European operational [model] also shows stronger cold invading the Midwest by day 10. We took a cautious approach to the cooling potential again, but progression of the forecast does shift the bulk of warming toward the East Coast for the six- to 10-day (we also intensified it). With reduced tropical Pacific [activity], we have a chance for Arctic and North Atlantic blocking to deliver more significant late-month cooling to the Midwest, South and East."
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