March natural gas futures suffered double-digit losses Monday as traders noted a change in the weather forecasts to above-normal temperatures for much of the country in the six-to 10-day period, and the short-term price outlook remains soft. At the close March futures fell 20.6 cents to $4.104 and April shed 20.2 cents to $4.140. March crude oil tumbled $1.55 to $87.48/bbl.
"Even with the market falling back, it is relatively quiet. It was an expected failure," said a New York floor trader. He added that as steep as Monday's decline was, he expected the day's close to hold, trade in a range, trade back up to the mid $4.20s to $4.30s and fail again. "We are heading into the end of the winter now. I don't know if we go back to $4.50," he said.
"I would say that we see a $3 handle by March. Maybe sooner if the weather turns around. That may be wishful thinking for us here in New York [the weather turning]. I think any market rally will fail up against $4.30 and then take out $4. Monday was just a slow grind lower, traders bailing on long positions. It's kind of amusing; it gets a little warmer in New York City so people are selling."
He thought it was a little difficult to tell where the funds and managed accounts stood, but "I don't get the feel that they are active," he said.
The most recent data from the Commodity Futures Trading Commission (CFTC) shows directional traders, those concerned with the market's next price move and not concerned about managing the risk of a physical position, exited long positions and piled on the shorts. For the five trading days ended Feb. 1, the CFTC in its most recent Commitments of Traders Report disclosed that at the IntercontinentalExchange holders of long futures and options (2,500 MMBtu per contract) reduced their contracts by 45,293 to 444,331 and short futures and options rose by 1,578 to 24,195. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) fell by 478 to 151,349 and holders of short positions increased their positions by a whopping 17,665 to 239,576. When adjusted for contract size long futures and options at both exchanges fell by 11,801 and short futures and options rose by 18,509. For the five trading days ended Feb. 1 March natural gas futures fell 14.3 cents to $4.347.
Top risk managers had already advised clients with exposure to lower prices to sell. "The gas market continues to be pressured by flat demand and more-than-adequate supplies. On a trade basis we did reach our first sell level for producers two weeks ago," said Mike DeVooght, president of DEVO Capital.
Contrary to the New York floor trader, DeVooght does not see the market in an ongoing downtrend. "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. We will use those spikes to add to our short positions," he said in a morning note to clients. "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."
For trading accounts DeVooght recently took profits on a long futures position initiated with the February contract, and he currently advises selling the March $4.20 puts should March futures trade that low. End-users are counseled to stand aside, and producers should hold an April-October option position consisting of long the $4.50 put and a sale of the $5.50 call at even money for 10% of their production.
Near-term forecasts call for above-normal temperatures across a broad portion of the central U.S. MDA EarthSat in its six- to 10-day forecast shows a broad ridge of above-normal to much-above-normal temperatures extending from Montana to New England and as far south as Arkansas.
"Compared to Friday's forecast, [Monday's] forecast is warmer across the eastern two-thirds of the U.S., but the forecast has not changed much from the Sunday Update. The PNA [Pacific North American oscillation] will lead to widespread warmth from the Plains eastward, with the strongest warmth expected across the northern Plains and Upper Midwest early and mid-period. Aboves are expected to reach the Mid-Atlantic and most of New England, with the warmest temperatures mid and late period. The warmth will struggle to reach the Southeast until late in the period. The West will turn cooler late," the forecaster said in its morning energy update.
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