After nudging higher in back-to-back range-bound sessions Friday and Monday, the natural gas futures market sprang to life Tuesday as local and commercial traders used chilly weather forecasts as an excuse to bid the market higher. A brief, early afternoon sell-off was just a blip on bulls’ radar and ultimately proved to be an opportunity for them to add to their length at slightly lower levels.
The December contract went off the board at $4.86, up 17.8 cents for the session and nearly unchanged from the $4.858 level at which it began its tenure as prompt contract a month ago. January, which takes over as the spot contract, moved above key resistance at $5.00 by advancing 12 cents to close at $5.05 At 89,976, estimated volume was rather modest for expiration day in the gas pit.
Leading into Tuesday’s trading session, market-watchers had become increasingly uncomfortable with the lack of price movement. And though the market had also failed at rallying, trader’s biggest concern has been its inability to tumble lower in concert with undeniably bearish storage and weather over the past month.
“You’ve got to be very concerned with a market that should go lower and doesn’t,” a trader told NGI Tuesday. “Storage is (nearly) full heading into the withdrawal season and demand remains weak. Fundamentally, this market is a house of cards.”
“It is not always a case of what the market did, but sometimes what the market didn’t do,” said Tom Saal of Commercial Brokerage in Miami. “What this market didn’t do was go lower.”
Saal may have a point. In 11 out of 19 trading sessions as the prompt contract, December notched a low between $4.55 and 4.65. Each time the market tumbled down to that level but failed to break lower, it hardened as a barrier of support. In fact, so compelling was the market’s resistance to tumble lower that even dyed-in-the-wool fundamental analysts such as Citigroup’s Kyle Cooper took notice.
“We remain fundamentally bearish, but believe a rather dynamic short-covering rally may occur in the near term,” commented Cooper Monday evening. “A short crude and long natural gas position, as mentioned [Monday] morning, would indeed have been a very good thing. We do believe that position still has merit,” he wrote in a research note published prior to Tuesday’s rally.
Helping the market to rebound off stubborn support were colder-than-expected temperatures Tuesday. Packing more of a punch than expected, the arctic air seeping into the Northeast from Canada dropped temperatures to the freezing mark overnight across the entire Washington to Boston megalopolis. And while the longer-term outlook from the National Weather Service calls for temperatures to warm right back up, it was enough to goose the market higher Tuesday, traders agreed.
Having bested its first resistance hurdle at $5.00, January futures now has a relatively unobstructed path to the $5.20 high from last Thursday, offers Tim Evans of IFR Pegasus in New York. “While this does seem like a stretch given the overall bearish fundamental outlook, we note the market was capable of an even more dynamic rally from late September into early October with very little fundamental change as a catalyst,” he wrote Tuesday evening. To put his money where his mouth is, Evans is hypothetically long from $5.02 with a sell stop placed at $4.88 to minimize his losses should the market turn lower.
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