Riding momentum from the July contract’s bullish expiration Thursday, the August natural gas futures contract, in its first prompt-month action, broke the previous high for the up move with a $13.428 trade before a late round of short-covering forced a close of $13.198, down a nickel from Thursday’s close but 8.5 cents higher than the previous week’s finish.
After breaking below support widely believed to be in the $12.60s, but failing to settle there on Thursday, front-month futures did the opposite on Friday by soaring above resistance at the old high for the move at $13.350, but also failed to seal the deal with a close above that level.
Crude futures once again were given much of the credit for the early Friday run-up in natural gas values. August crude hit an afternoon record high of $142.99/bbl before closing out the regular session at $140.21/bbl, still good for a 57-cent gain on the day.
“Natural gas futures are really following crude’s lead here. It seems like we had a lot of news during the week to digest,” said a Washington, DC-based broker. “The [Federal Reserve] said it was keeping interest rates the same, but more importantly, they did not issue a stronger statement on inflation, which sent every commodity through the roof. I think natural gas went along for the ride until the end of the regular session Friday, where I think we saw some profit-taking come in.
“I wish there was more to it, but that was really what we were seeing out there. A lot of people were not happy with the fact that the Fed did not come out with stronger language on inflation. I think that lent a lot of support to commodities as the dollar sold off and the Dow dropped. We also had the problems in Libya and the OPEC president predicting $150-170/bbl oil this summer. Natural gas has gotten caught up in this bigger commodity rally and everyone is continuing to keep an eye on the crude price because on a comparison basis natural gas is still really cheap.”
The broker noted that the weather going forward in the short term looks pretty unspectacular. “The near-term weather picture doesn’t look like it will be supporting the bulls or the bears in any region,” she said. “No real hot spots or cool-offs that might tip demand in one direction or the other. That said, there is still a lot of concern in the market about refilling storage in time for winter. People believe if we do get a hot spell, storage injections will drop, which could justify even higher values. These are the kinds of things that are being talked about out there, and this is without factoring in any hurricanes. If we go through July and it is not extremely hot, maybe prices will pull back, but there is a lot of bullish sentiment out there that has to be conquered. For natural [gas] to really come down, we need a sell-off in all of the energies. I think we also need intervention on the dollar. The bottom line is natural gas is no longer immune from some of these bigger commodity issues.”
Following Thursday’s action, some traders are asking what would happen if there were hot weather and tropical storms to deal with. “We are viewing the ongoing strength in natural gas futures as impressive given the fact that it is developing without significant assistance from the temperature or storm factors,” said Jim Ritterbusch of Ritterbusch and Associates. At present there was little in the way of a weather premium contained in futures prices and “significant price spikes could be forthcoming on first evidence of a sustained warming spell or a significant storm development in the Atlantic. This market will need some contraction in the supply deficit in order to achieve a better balance between buyers and sellers,” he said in a note to clients.
One forecaster’s outlook shows that a weather premium may not be far off. According to MDA EarthSat’s most recent six- to 10-day forecast, the East Coast may be subject to warming late in the week “as the Bermuda high backs westward into the East Coast once again and makes for conditions more conducive for high cooling demand.” Matt Rogers, director at MDA EarthSat, added that when Friday’s computer runs were analyzed “the Mid-Atlantic trended warmer with this in mind.”
If August futures prices should ever retreat, buyers are ready. “Buy August natural gas at $12.20 — stop $12.00,” said Phil Flynn of Alaron.
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