Following last week’s $1.582 increase in November natural gas futures to close on Friday at $7.241, traders on Monday launched a corrective action and pushed the contract back below the $7 level to $6.840 before settling at $6.881, down 36 cents on the day.
The winter contracts also came down Monday, albeit in smaller increments. December natural gas, which will take over prompt-month duties following the November contract’s expiration Friday, finished 33.5 cents lower Monday to close at $7.816, while January and February settled lower by 24 cents and 22 cents, respectively, at $8.231 and $8.261.
“I think what we saw Monday was confirmation that last week’s jump was a little bit overdone,” said Rich Bruskoff, a New York-based futures technician. “What happened was the cash market saw a 62% increase over the last seven days, which is unheard of. The colder weather is obviously driving the price up, but in reality, a 100 to 125 Bcf swing in consumption is not even 1% of total annual demand, which is around 22 Tcf. I think last week we saw a pretty major short squeeze. At this point, it really doesn’t make any sense for people to sell their front-month natural gas in storage for anything less than the winter price of January minus whatever the cost of cash is. I really think that is what we saw last week with the run-up.”
With differing winter weather pictures, Bruskoff warned that the futures market is currently even more unpredictable than usual. “It’s important to remember here that this market can change on a dime,” he said. “If we see some brutal cold weather come in here, then you are going to see another significant price increase. However, with near-term weather looking relatively mild and still a significant open interest short position held by the funds, I think we could see a move to the upside in November ahead of its expiration Friday. While November could go higher this week, I am still bearish this market for the next couple of weeks. Especially when December becomes spot month, I could definitely see that contract headed lower.”
The futures market’s near-term moves could also be impacted by what storage does these next few weeks. With storage sitting at 3,442 Bcf as of Oct. 13, stocks are fast approaching the all-time record of 3,472 Bcf, which was recorded at the end of November 1990. However, some industry experts argue that the report released this week for the week ended Oct. 20 could be the last injection of the season. According to consultant Stephen Smith, who’s predicting only a 17 Bcf injection for the report, the resulting 3,459 Bcf of working gas in storage as of Oct. 20 may end up being the peak level of working gas for the injection season because of the early cold weather (see related story).
Weather conditions in major Midwest energy markets remains supportive. Tom Skilling, meteorologist with WGNTV Chicago, says that a warming trend will see readings in the 50s at midweek. “However, the ‘warmer’ readings (still below normal) will signal the approach of another low pressure system and significant rainfall Wednesday and Thursday. Temperatures the next seven days should average about 10 degrees below normal,” he predicted.
Prior to Monday’s session, traders generally favored the long side of the market, but varied in their timing. “I am putting away long natural gas hedges,” said a California risk manager. He said that last week he was doing $9-10 December and January call spreads for about 22 cents, and had done a calendar 2009 strip for $7.920. “That was probably OK value, sub-$8,” he said. He wondered why a lot of traders were skeptical about the short-covering of last week asking, “Did anyone think that the November contract couldn’t advance or the November-December spread contract not narrow from $1.70 to $0.85?”
Others are looking for a major trend change. “If the market does not fail at current levels, we will start to book profits on our short winter hedges,” said Mike DeVooght of DEVO Capital, a Colorado trading and risk management firm. In a note to clients prior to Monday’s trade he said that the market would fall from current levels and “make another run at the lows, but we want to make sure we book our profits if the market is going to move up.” He suggested a “scale in and scale out approach” to catch the major moves.
Tom Saal of Commercial Brokerage in Miami, in his work with Market Profile, expected November futures to test last week’s “value area” between $7.005 and $6.188 “before moving higher.” Saal is not specific in his timing, but generally value areas are expected to fill quickly.
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