March natural gas futures fell in uninspired trading Tuesday on the New York Mercantile Exchange. Significant changes to the 11- to 15-day weather forecast prompted selling as weather models abruptly shifted to a warmer outlook at key eastern points. Cold Canadian air was predicted to exit much of the central U.S. during that period.
At the end of the day March futures fell 7.3 cents to $4.347 and April shed 6.5 cents to $4.366. March crude oil retreated $1.42 to $90.77/bbl.
Although the March contract recorded a significant decline, prices during the day session were confined to just over a 6-cent range. Such a narrow trading range is characteristic of a low-volatility trading environment and has traders and risk managers adjusting their strategies accordingly. "The only way I would protect the downside is with the use of put options. If you are a producer, you don't want to lock in current low prices with a fixed-price vehicle," said Ed Kennedy, vice president of Hencorp Futures in Miami.
According to Kennedy, the combination of low prices and low volatility has utilities and other end-users content to use fixed-price instruments and not resort to risk management techniques such as the use of call options. "One of the reasons the implied volatility is so low is that if you dovetail the implied volatility and open interest figures of the options with the Commitments of Traders report, you see that the utilities are feeling very comfortable with the futures prices. They are using fixed-price vehicles and not using options at all."
Market technicians see the market as rangebound and needing to break higher of lower. "Bears need a decisive close below $4.061. Bulls need a decisive close above $4.802. In between these support and resistance levels is a big slab of neutral territory," said Brian LaRose, analyst with United-ICAP. "Take out support and a test of the $3.212 low would be anticipated. To maintain the upward trajectory, resistance must be exceeded before support can be broken. Accomplish this and $5.500 would be our next target."
Forecasters are calling for a return to normal temperatures for much of the country. MDA EarthSat in its Tuesday morning 11- to 15-day forecast showed below-normal temperatures confined to Montana and North Dakota with the remainder of the country at normal readings. Above-normal temperatures are limited to Arizona, New Mexico and West Texas. The previous 11- to 15-day forecast showed a ridge of much-below-normal temperatures plunging from Canada as far south as southern Illinois.
"While some of the cold has progressed forward, the warmer change to this period was still quite large," the forecaster said. "The combination of a positive (increasing) EPO [Eastern Pacific Oscillation] and negative (decreasing) PNA [Pacific North American pattern], along with a lack of blocking should allow the pattern to turn substantially warmer on the backside of the exiting cold air mass. The East Coast still has some chill to deal with early before turning to above normal by late period. The Midwest should turn warmer sooner, with aboves encroaching by mid period. There should still be some cold in play, though this should stay towards Western Canada in a La Nina-like pattern."
Analysts aren't looking for another price plunge similar to that of last week. "While a continued strong pace of onshore production remains as a significant obstacle to sustainable price advances, we can still easily build a case for a complete reversal of last week's sharp 50-cent price decline," said Jim Ritterbusch of Ritterbusch and Associates. "All in all, we would prefer the long side of this market with an eye toward another 10-20 cents on the upside looking out over the balance of this week. But we still view this as a range-bound trade between about the $4 and $5 levels when extending a view out across the month of February."
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