Despite a spring-like warm-up in a number of regions across the country, February natural gas futures traders on Monday continued to follow last week’s script of attempting to break above $8. Much like last week, the contract did not make it, peaking at $7.940 before closing out the day at $7.879, up 3.8 cents from Friday.
After seeing temperatures in the teens as recently as late last week, mid-January treated certain Northeast and Mid-Atlantic areas on Monday to temperatures in the high 60s to low 70s. Early trading on Monday appeared to reflect the change in temperatures as the prompt-month contract dipped to a low of $7.705 in morning trade. However, February rallied from there.
“I am a little surprised that we continue to attack the $8 resistance, especially when you take a look at the weather picture,” said Steve Blair, a broker with Rafferty Technical Research in New York. “Even the six- to 10-day and eight- to 14-day forecasts out of the National Weather Service are still showing above-normal temps in a number of high gas demand regions.
“On top of the warmer weather, we have the storage situation, which could be bearish following this week. While we could see a sizable withdrawal for the week ended Jan. 4, the following reports could reveal much smaller draws due to warmer-than-normal temps. I don’t really understand why this market is trying to assault $8. I still think we have pretty much seen the lows for now, but it is pretty tough to formulate a bullish case when it is in the hight 60s in New York City. The only thing I can think of to explain this price firmness is that maybe it is some short-covering by some of these funds.”
Even more surprising is the disconnect between crude futures and natural gas futures, Blair said. While allowing that the two commodities have no real relation to one another, the broker said weather is a universal driver. “February crude dropped $2.82 Monday to close at $95.09/bbl,” he said. “Crude is reacting to the warm-up, but natural gas really doesn’t seem to want to follow suit.”
Some top traders are beginning to pay as much attention to the economy as the weather. “We have been getting some cold temperatures, but industrial demand has been lackluster,” says Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm. He added that industrial demand is the key. “If the U.S. economy continues to contract, we feel it will be difficult for the gas market to have a significant rally,” he said in a note to clients.
The upcoming week’s weather doesn’t look conducive to a significant rally either. Although a stout winter storm continues to pound the West, major energy markets are expected to enjoy below-normal accumulations of heating degree days (HDD) during the upcoming week. The National Weather Service reports that for the week ending Jan. 12 New England should have 170 HDD, or 111 fewer than normal, and New York, New Jersey and Pennsylvania will “bask” under 153 HDD, or 107 fewer than normal. The industrialized Midwest, consisting of Ohio, Indiana, Michigan, Illinois and Wisconsin, is expected to have just 163 HDD, or 132 fewer than normal.
Like many traders leaning to the sell side, DeVooght is looking for that elusive rally to initiate sales. “On a trading basis, we have been looking for a significant rally to add to and take a more significant short position. We feel rallies approaching and exceeding $8 on the spot and above $8.100 -8.500 in the summer strip is a selling opportunity.”
More specifically, DeVooght advises trading accounts to sell April futures at $8 and end-users to stand aside. Producers should hold short a winter strip at $9 established earlier for 65% of production as well as a short summer strip at $7.900 to $8 for a small position, he said. Should the opportunity arise he advises selling a summer strip at $8.100 to $8.500.
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