September natural gas futures rose a stout 11.8 cents to settle at $6.208 as traders touted the still hefty discount of natural gas to the petroleum complex and the idea that weather-driven higher prices would ultimately occur.
“One of the reasons we aren’t seeing natural gas prices fall further is the wide (Btu) differential between natural gas and heating oil and natural gas and crude oil,” said a New York broker analyst. He added that he had a number of clients who were buying the natural gas and selling the heating oil and some were short the natural gas outright.
The gains on that spread trade were magnanimous. September heating oil collapsed 9.47 cents per contract to settle at $1.9393. For one 42,000 gallon contract the gain would have been $3,977 on a short sale, and the gain on the natural gas side of the spread of 11.8 cents translates to $1,180 per 10,000 MMBtu contract.
One interesting development the broker described was the evolution of trading by managed accounts into ever more short-term trading. “We have one client we call a ‘speed fund’ that trades the market several times a day. They are not made up of oil traders but have tinkered with their black box trading rules to trade natural gas and other markets at a higher frequency. The problem is it’s hard to determine what their underlying market philosophy is,” he said.
The broker added that a number or traders are purchasing call options, for “they believe at some time there will be weather problems, and if you add to that the large number of contracts held short by funds you have an explosive situation to the upside.”
“There are weather issues out there,” said a New York floor trader. He added that there was nothing concrete, but “there is stuff out there with potential to move the market and you have to play on the side of the averages that says we will get a hurricane. It’s hard to believe at this point in the season that the market will not experience a hurricane.”
Joe Bastardi of AccuWeather notes that “two prominent tropical waves are evident this morning, one near 60 west, the other near 30 west. The front runner is coming into the area that we are concerned about given the pattern north of it this week and any development will be slow at best, but it will be moving into the Gulf later this week and into the weekend.” Bastardi observed that pressures are lower this week across the Gulf, Caribbean and Florida, though in a nonconcentrated fashion. “It does represent a buildup of heat and energy and with the heat wave to the north, such patterns do bear watching,” he said.
One factor that often gets lost in the intense focus on weather, storage and tropical developments is the long-term trend. The New York broker said “if you look at a monthly chart you see that every time natural gas makes a major move downward it establishes a higher low price. 2001-2002 we bottomed at $2, last year it was $4, and now we are down to $6.”
There is a lot of technical consolidation being done at current price levels. “A number of people believe that natural gas is so undervalued with crude oil at $73. The flip side of the argument we have with all our customers is that there is so much natural gas around and ending storage could be as high as 3.5 Tcf,” the broker admitted.
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