December natural gas fell Monday as pervasive forecasts of near-term warming prompted traders to follow the course of funds and managed accounts and market bulls were kept on the defensive. At the close December had fallen 8.7 cents to $3.696 and January had dropped 8.9 cents to $3.803. December crude oil gained $1.26 to $95.52/bbl.
“There’s still no rhyme or reason or any weather to get this market moving to the upside,” said a New York floor trader.
“It’s supposed to be mild this week and we have had a couple of days of below-normal temperatures, but otherwise everything has been on target. It looks like every time the market makes a move to the upside, there is someone waiting [to sell] and keeps pushing this thing down.
“I thought last week we had a couple of up days and we might get this market moving higher with a shot at $4, but then a couple of days later we are back down and the market can’t pick its head back up.
“It looks like we are in this 30-cent range between $3.60 and $3.90, and it looks like we will head down before it heads back up again. I think the shorts are set and content to take a little bit off the table as the market comes off. I don’t know if there are any big stops right now. If we get back down to $3.57, maybe there is something [stop loss orders] down there. I look for the market to test down to $3.60 or $3.65 and then maybe bounce from there.”
Directional traders continue to favor the sell side of the market also. According to government figures, managed money added to short holdings by a 2:1 margin in the latest report. In the latest Commitments of Traders Report the Commodity Futures Trading Commission reported that for the five trading days ended Nov. 1 managed money at the IntercontinentalExchange added 39,307 long futures and options contracts (2,500 MMBtu per contract) to 294,734 and short positions rose by 46,271 to 212,715. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) fell by 3,844 to 119,673 and short holdings rose by 835 to 238,659.
When adjusted for contract size long positions at both exchanges rose by 5,983, but short futures and options increased by 12,403. For the five trading days ended Nov. 1 December futures fell 7.1 cents to $3.781.
Weather forecasts are calling for warmer temperatures than before. In its six- to 10-day outlook WSI Corp.of Andover, MA, predicts above- to much-above-normal temperatures east of a line from Arizona to western Montana. “Below-normal temperatures are forecast over most of the western third of the country. Above- and much-above-normal readings are anticipated over most of the central and eastern U.S. Anomalies as warm as 9-12 degrees above normal are expected over the Midwest and Great Lake States,” the firm said in a morning report.
Risks to the forecast include temperatures trending “colder in the West and warmer over most locations south and east of Chicago than currently forecast. The European ensemble model indicates the PNA [Pacific North American pattern] will turn almost three standard deviations negative next week.”
Fundamentals continue to suggest lower prices. “The gas market continues to be weak because of more-than-adequate supplies and mediocre demand. It is difficult to say under what set of circumstances the current fundamental situation will change,” said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. “Either drilling will have to be cut back or we need to see a major uptick in demand, neither of which look likely at this time. On a trade basis we will hold current positions.”
DeVooght counsels trading accounts and end-users to hold a short December $3.90 put at 20 cents, and those with exposure to falling prices should hold a strip consisting of $4.75 December-March put options offset by the sale of $7.00 calls for a 16- to 20-cent debit.
What could be the first signs that low prices have impacted supply came Friday when Baker Hughes reported a sharp drop in the number of rigs looking for gas. For the week ended Nov. 4, 907 gas-directed rigs were in operation, down a hefty 27 from the previous week. A year ago 955 rigs were drilling for gas. Total U.S. rigs were higher by five to 2,026, well above the 1,683 of a year ago, and horizontal rigs increased by two to 1,157, but that was 214 higher than a year earlier.
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