December natural gas futures managed a small gain Monday as some traders attributed favorable weather forecasts to giving the market a modest lift. December futures rose 4.6 cents to $3.845 and January also added 4.6 cents to settle at $4.028. December crude oil eased 2 cents to $84.86/bbl.
"The market has been under pressure, but firmed up today on reports of some cooler weather," said an Oklahoma City trader.
Cooler weather is forecast for much of the country, but in its six- to 10-day forecast WSI Corp. of Andover, MA, predicts a split temperature regime divided along a northeast-southwest line running from Michigan to New Mexico. "Below- and much below-normal temperatures are forecast over the western and north-central U.S. Above- and much above-normal readings are anticipated over the eastern and south-central U.S. Anomalies are expected to average between 3-8 degrees below or above normal."
WSI cautions that there are risks to any forecast and that "temperatures may trend colder over most of the country than currently forecast. Medium-range models all advertise the PNA [Pacific North American weather pattern] will transition to neutral to positive phase next week and suggest the troughing and cold weather in the West to start next week will shift east of the Front Range during the middle and latter half of next week."
The Oklahoma City trader uses a mathematically-based moving average model to guide his buy/sell decisions and he sees little change in the dominant downtrend, however recent price action in the December contract caused something of a head fake.
"Nothing has really changed, but for a couple of times last week," said an Oklahoma City trader. He demonstrated that there was a false breakout when December futures briefly closed over the moving average, but then fell below it the next trading session. "That was when the December contract hit about $4.30 or so." December futures traded as high as $4.228 on Nov. 9 but quickly retreated from there.
"The trendline is coming down and at one point the model would have exited its short trade and gone neutral if December had closed above $5.20. That number is now about $4.15 and that is where you would start covering shorts. A buy signal I don't know. You are probably looking at something like $4.50. What is going to get the market there I have no idea.
"If you were an [aggressive] short term trader you could go short up against the trend line and try to scalp the market for 10 to 15 cents," he added.
Risk managers counsel producers and physical market longs to be vigilant and look for selling opportunities as natural gas and energy markets continue to be buffeted by crosswinds from the other commodity markets and the financial sector.
Mike DeVooght of DEVO Capital notes that although natural gas was slightly lower for last week overall, it rallied early in the week "in sympathy with soaring commodity prices in general. But when key resistance levels ($4.25) held and commodities in general started to break, natural gas quickly gave back the early week gains," he said in a weekend note to clients.
DeVooght has been anticipating a short-covering rally but admits "the fundamental news flow continues to be negative...But, if the break that started in many of the commodities on Friday continues [this] week, the rally in the gas market could take the form of a relative strength rally, prices not going up, just going down less than the other commodities. There is still a considerable amount of pressure for producers to hedge their gas on the rallies. On a trade basis we have probed the long side for speculators (we will keep a tight stop) and are anxiously awaiting a more significant rally to add to our short position."
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