April natural gas futures managed an end-of-week rise Friday although short-term traders cited no change in market fundamentals and hinted that they were simply playing well defined trading ranges. Longer-term bulls point to a storage deficit, and bears contend that a decline in horizontal drilling will be necessary for the market to post a bottom.
At the closing bell April had gained 3.1 cents from Thursday to $3.809, which was still 19.6 cents lower than the contract's settle the previous week. May natural gas rose 2.8 cents from Thursday to $3.887, while April crude oil continued its meteoric rise, adding $2.51 to $104.42/bbl on continued geopolitical chaos.
"Today was pretty much a nonevent and nothing has changed, but I'm looking at $3.70 to $3.71 support with $3.85 resistance. You can trade the bananas out of those numbers and they have been traded a bunch, so you are not really going out on a limb," said John Woods, a senior trader at McNamara Options in New York.
"Nobody is talking any weather at all. You see these reports come out, and if anything the latest report was for a little warmer than usual. If it's colder than normal here, it's warmer someplace else. There certainly haven't been any hurricanes. They just go up the East Coast and make the surfers happy."
April natural gas futures posted a new contract low overnight of $3.731 and some analysts are citing the lack of any market connection to Middle East turbulence as a bearish factor for natural gas. "Granted, the U.S. does not import gas from the Middle East in any significant way (yet). It may some day, but it does not right now. But traders seem to be putting too fine a point on this one factor," said Peter Beutel, president of Cameron Hanover. Beutel contends that there is not enough trader focus on the reduction of the storage surplus. "As a result, traders are now ignoring all of the work done so far this winter on eating away at storage surpluses available, but we used a good amount from storage this winter."
Beutel contends that Thursday's inventory report perhaps gives the bears an unwarranted level of comfort. "It still leaves us with a deficit against levels seen a year ago and against the five-year average for this time of year. Stocks are now 0.51% lower than a year ago. Against the five-year average, they are 15 Bcf (0.85%) lower than a year ago. These comparisons are not as positive [as influences] as they were a week ago, but traders seem very comfortable that we have more than enough in storage and through daily production to meet demand. And there is no strong market sentiment that baseload demand is getting ready to make any move higher based on economic recovery."
Higher baseload demand may be just around the corner. The all-important employment report showed gains in non-farm payrolls about in line with expectations. The 8:30 a.m. EST release of employment figures by the Labor Department showed that February non-farm payrolls increased by 192,000, which was about equal to the 200,000 economists had predicted, and well ahead of the paltry 36,000 increase recorded for January. The unemployment rate came in at 8.9%, down slightly from the 9.0% seen for January.
Friday's modest gains in April futures didn't resonate much with seasoned analysts. "Notwithstanding today's price recovery, we still anticipate an eventual price down move capable of carrying to the $3.50-3.60 zone within about a one- to two-week time frame," said Jim Ritterbusch in a closing note to clients. In his view, "The overriding bearish fundamental item continues to be a strong pace of production that is still finding reflection in a high level of horizontal drilling rig counts. Although total gas rigs fell to a one-year low today, dropping seven units from a week ago, total horizontal rig counts remain high at 970. This market appears to be sending off some clear signals that a downtrend in the gas rigs will be required prior to the market establishing a longer-term price bottom."
Tom Saal of Hencorp Futures in Miami in his work with Market Profile was right on target with Friday's trading in the April contract. During the day session April traded as high as $3.826 and posted a low of $3.750. Prior to the open Saal said April futures should test Thursday's value area at $3.820 to $3.777. Saal eventually expects a test of $4.083 to $4.046.
The value area is a key component of Market Profile methodology and is the pricing range of one standard deviation about the mode of the trades that took place in that given time period. One standard deviation is approximately 70% of the period's trades. "The market has a tendency to want to test prior value areas, especially the prior day's value area," said Saal.
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