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June Settles Lower, Yet Fund Longs Lining Up

June natural gas futures eased, although a major contingent -- funds and managed accounts -- now appears to be aligned on the long side of the market and technical support remains intact. At the close June futures had fallen 2.3 cents to $4.670 and July was lower by 2.5 cents to $4.738. June crude oil cascaded lower giving up $2.47 to $111.05/bbl.

"It was mentioned that funds are now playing the market from the long side since May expired last week," said Eric Bentley, CEO of VKNG Energy LLC in New York. "They will try to keep the market propped up and are in a pretty strong 'buy dips' mentality."

Bentley added that short-term traders were viewing market support in the $4.60 to $4.65 area and said, "Hopefully we'll take out last week's high [$4.698]. A settlement below $4.60 would be a serious cause for concern."

"I think you are coming into the hurricane season and that usually keeps the market pretty propped up. Traders are looking to load up prior to that and sell into it later," Bentley said.

If Bentley's observations are correct, newly minted market longs may be in the right place at the right time. Forecasters at WSI Corp., an Andover, MA-based weather forecasting firm, said last Tuesday the 2011 Atlantic hurricane season may not be as active as previously predicted, producing only as many tropical storms as the 1995-2010 average (15 named storms, including eight hurricanes, four of them Category Three or greater), but the United States can expect two or three hurricanes to make landfall this year.

The WSI forecast numbers remain above the longer-term 1950-2010 average of 12 named storms, including seven hurricanes, three of them intense. A total of 19 named storms formed in 2010, with 12 of them becoming hurricanes, including five intense hurricanes (see Daily GPI, Dec. 1, 2010).

In its initial forecast for the 2011 Atlantic hurricane season, which begins June 1, WSI called for 17 named storms, including nine hurricanes, five of them intense, to form in the Atlantic Basin (see Daily GPI, Dec. 9, 2010).

Students of the economy were pleasantly surprised by the release of April factory orders by the Commerce Department. It showed deep strength in March and included convincing upward revisions to February. February's earlier 0.1% decline was adjusted to a 0.7% rise. Analysts were expecting an April gain of 2.0%, but the actual figure was a robust 3.0%. According to Bloomberg, analysts noted that gains were evenly distributed between durable and non-durable goods and across many industries with the automobile sector showing special strength. Quarter-to-quarter factory shipments picked up 5.4% in the first quarter, which is a tough pace to keep up, though Monday's April report from the Institute for Supply Management, where backlogs and inventories were especially strong, points to a good start for the second quarter.

Top traders see the market moving higher, then lower. "This market has thus far spent this new week digesting last week's strong price gains, and we would look for this consolidation process to continue into Thursday's weekly storage report with fresh highs unlikely in the interim," said Jim Ritterbusch of Ritterbusch and Associates.

He added that he expected "another leg up in this market by week's end that could carry nearby futures to a run at this year's late-January highs of about $4.85 on the June charts. An advance to this area would fully discount some recent signs of slowed production growth, in our opinion, and could easily provide a setting for a renewed price downturn that would potentially carry back to below the $4.10 area depending upon temperature trends in the southern states, nuke maintenance, etc."

Forecasters are calling for above-normal temperatures in the six- to 10-day period across portions of the South, but major Midwest and eastern markets are expected to be close to normal.

"Above-normal temperatures are forecast over Texas and the Mississippi Valley. Anomalies as warm as 8 to 10 degrees above normal are expected to grip portions of Texas," said WSI. "Below-normal readings are anticipated in the Pacific Northwest.

"With the exception of the Eastern Seaboard, temperatures may trend warmer over most of the central and eastern U.S. than currently forecast." Medium-range models suggest that another round of early summer warmth will cover the southern tier of the country next week, the firm said.

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