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Traders See Further Gains; Forecast Warmth Prompts July Advance

July natural gas futures gained as traders noted a firm tone to the market as well as a supportive weather outlook. Negative news on the economy was shrugged off, and at the close July had gained 14.8 cents to $4.666 and August had risen 14.3 cents to $4.700. July crude oil surged $2.11 to $102.70/bbl.

The market looks pretty firm and may test $4.75, said a New York floor trader. He added that he thought there might be some resistance in the mid $4.60 area.

"We were 10 to 11 cents better this morning and some shorts might have been scared out overnight, but it feels firm here in the mid $4.60s and looks like it wants to move another 10 cents higher," he said.

Funds and managed accounts are still predominantly short, according to data from the Commodity Futures Trading Commission (CFTC), and the trader thought that an additional rise might be a spot from which fund traders might try to initiate further selling.

"We might also be stuck in this range of $4.40 to $4.80 for another week or two," he cautioned.

Long and short open interest held by managed money at the New York Mercantile Exchange (Nymex) dwarfs that of IntercontinentalExchange when adjusted for contract size. In its weekly Commitments of Traders Report for the five trading days ended May 24 the CFTC reported that long futures and options at Nymex (10,000 MMBtu per contract) were 129,079, down 1,881, and short futures and options were 197,341, down a hefty 15,757. At IntercontinentalExchange long futures and options (2,500 MMBtu per contract) were 413,079, up by 38,026, and short contracts were 44,824, higher by 6,275. When adjusted for contract size long positions at both exchanges rose by 7,625 and short holdings fell by 9,482.

The economic outlook took something of a hit with May figures on Consumer Confidence. The Conference Board reported that consumer confidence for May was 60.8, down sharply from what had been an upwardly revised April figure of 66.0. Traders were expecting 66.5. The greater than five point loss from April includes a period encompassing the spike in oil prices and the Japanese earthquake.

Natural gas bulls, however, can take solace in that forecasters are calling for warm temperatures to engulf more than half of the country. Commodity Weather Group in its six- to 10-day forecast predicts above- to much above-normal temperatures inside a wide arc extending from New York City to Minnesota to eastern Colorado to South Texas.

"While heat over the next day in the Midwest and East will be impressive and the strongest so far this season (widespread 90s), we are still not seeing hot ridging locking into place over the area," said Matt Rogers, president of Commodity Weather Group. "The models offer some pulses north into the Midwest and East in the six- to 10-day, but most of the time, it sits over the South, keeping areas from Texas to the Southeast hotter than normal most of the time. In the West a complicated pattern is trying to develop that is warmer for the Pacific Northwest, but mostly in the interior. California and even the Southwest frequently see cooler opportunities."

Top analysts see signs that the market is bottoming. Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management company, contends that there is adequate supply and demand remains stagnant.

"This view seems to be the entire market's view, [but] it has been our experience that when everyone agrees, things are about to change," he said. "We saw news that a few large end-user hedgers were thinking about throwing in the towel on their long hedge programs. They are considering doing so because of the belief that rally potential in the natural gas market is minimal. The more stories like this we see, the more our belief is reinforced that the gas market is in the process of bottoming out."

The market may be bottoming, but DeVooght isn't about to embark on an outright bullish stance. "On a trade basis we will continue to use rallies into the mid to high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profit on the short calls and sell put premium. Not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls if we trade back above $4.60 or sell puts if we break below $4.15," he said in a weekend note to clients.

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