March natural gas futures gained Monday as traders surmised that it would be difficult for natural gas to ignore gains made in the rest of the complex resulting from political unrest in Egypt. At the close of trading March futures rose 9.7 cents to $4.420 and April added 9.1 cents to $4.431. March crude oil followed its $3.70/bbl gain from Friday with another jump of $2.85 to $92.19/bbl.
"We sat around $4.30 and were able to make a nice recovery at the end of the day, but it is difficult for natural gas to ignore the rest of the complex screaming north," said a New York floor trader. He didn't see a lot of activity from the algorithmic-type traders. "We are stuck in a $4.30 to $4.60 range, and many traders are sitting on their hands waiting for an opportunity to strike," he said.
He added that nobody was talking about the huge winter storm forecast to bring snow and cold from the Panhandle of Texas to New England but admitted, "We are supposed to get hit Tuesday through Wednesday."
According to the trader, any rise in prices due to the storm may be nothing more than "a day trade blip, for this market has so many people ready to sell the pops." He added that the market was well supported between $4.25 and $4.30 and "with so many traders already short it was probably more vulnerable to the upside."
According to data from the Commodity Futures Trading Commission (CFTC), many directional traders attempted to limit their vulnerability to the upside for the five trading days ended Jan. 25. In its weekly Commitments of Traders Report the CFTC reported that managed money covered short positions relative to entering new long positions at a ratio of better than 2.5 to 1.
At IntercontinentalExchange long futures and options (2,500 MMBtu per contract) rose 32,516 to 489,624 and short holdings decreased 22,346 to 22,617. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by a minuscule 214 contracts to 151,827 and short positions fell by 15,286 to 221,911. When adjusted for contract size the number of long contracts at both exchanges rose by 8,343 but short positions fell 20,872. For the five trading days ended Jan. 25 February futures rose 4.8 cents to $4.473.
Forecasters are saying that it's now the Midwest's turn to endure an onslaught of cold and storms. "After several East Coast storms this winter, this week is going to now feature a more La Nina-type storm track with significant snows in the Midwest," said Matt Rogers, president of Commodity Weather Group (CWG) in Bethesda, MD.
The CWG six- to 10-day forecast calls for a north-south fairway of below-normal temperatures west of Pennsylvania and east of Utah. "The East Coast has trended warmer from expectations last Friday with mixed precipitation shifting to all rain in many areas (staying more frozen in New England, though). Very cold weather behind the storm is seen dropping through the Midcontinent, but less so now into the East. Instead, next week seems to be the big week for a stronger, more widespread cold outbreak. Deeper snowpack in the Midwest could amplify the cold severity with next week's event."
The recent rise and fall of futures prices has gotten the attention of risk managers. Extremely cold temperatures in the eastern half of the U.S. have been giving gas some support over the past couple of weeks, said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. "But the weather was not enough to offset the hedge selling that we have seen enter the market as we approach the $5 level on the forward curve."
DeVooght has been looking for a spot to sell forward for producer clients and said, "On a trade basis we did reach our first sell level for producers early [last] week. We still feel that the gas market is mending and building a large base. But because of the overhang of physical gas, the gas market is unlikely to go straight up from here. Most likely we will see a continuation of the trading range with brief spikes to new highs."
DeVooght advocates a relatively short time frame for his hedge positions. "We will use those spikes to add to our short positions. Because we are not long-term bears, we will concentrate on three- to six-month hedges, rather than long-dated short positions. We will also take positions primarily with collars, puts and covered call selling rather than fixed price contracts," he said in a weekend note to clients.
Currently, DeVooght has taken profits for trading accounts on his long February futures positions and suggests selling March $4.20 puts. End-users should stand aside, and producers and physical market longs are advised to hold a $4.50 put against the sale of $5.50 calls for the April-October period at even money for 10% of their position.
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