Futures rose Monday as traders looked to cover existing short positions prior to expiration of October futures and options. At the close October had risen 8.1 cents to $3.782 and November was up 7.9 cents to $3.845. November crude oil added 39 cents to $80.24/bbl.
“It looked like a short-covering rally, but there was little in the way of any size trading,” said a New York floor trader. He added that rallies such as Monday’s were inevitable. “You’re bound to have them. We have been really depressed day in and day out on these numbers, and we have been trading steadily below the $4 mark.”
“There is no indication that prices can get above $4 since we have had some good [storage] builds coming in and we’ll have builds for another six weeks or so, so there’s no reason for people to be buying this market. I don’t see much potential on the upside.
“It seems that whenever we get to near $4, you always get a retraction back to the mid $3.70s or mid $3.80s. Options expiration is Tuesday, and I expect October to go off the board Wednesday under $4.”
Funds and managed accounts also seem to have their sights set on lower prices. According to data from the Commodity Futures Trading Commission (CFTC), managed money exited the long side of the market and increased exposure to the short side.
In its Sept. 20 Commitments of Traders Report the CFTC said there was liquidation of long positions by traders at both the IntercontinentalExchange (ICE) and the New York Mercantile Exchange (Nymex). Holders of short positions at ICE, however, also reduced their holdings of futures and options, but at Nymex traders elected to increase their short contracts. At ICE long futures and options (2,500 MMBtu per contract) fell by 27,228 to 286,617 and short futures and options fell by 23,369 to 184,746. At Nymex long futures and options (10,000 MMBtu per contract) fell by 12,005 to 126,474 but short futures and options rose by 14,769 to 253,880.
When adjusted for contract size, long positions at both exchanges fell 18,812, and short holdings rose by 8,926. For the five trading days ended Sept. 20 October futures fell 18.2 cents to $3.798.
Top traders sense that a change may be in order from the recent pattern of playing the range. “Natural gas closed lower on the week and at new contract lows. September is often a weak month for the gas market, and this September has been no exception,” said Mike DeVooght, president of DEVO Capital, a trading and risk management firm in Colorado.
“This past week the gas market ground lower for most of the week. The weekly gas storage number came in close to expectations and failed to be a market mover,” he added. “On a trade basis we have been trading the range by selling calls and the puts” depending on timing. “At this time we are short the puts. Normally we roll the puts down if they trade in the money by the amount we sold the option for. But at this time, if we trade below $3.60 on the spot month, we are going to cover the short puts and sit on the side for a bit. For hedgers we will continue to hold our short positions.”
DeVooght currently advises trading accounts and end-users to hold a short November $3.85 put option. Producers and other physical market longs should maintain current hedges consisting of long an October $4.50 put offset by the sale of a $5.50 call at even money. They should also hold a November-March strip consisting of long $4.75 puts countered by the sale of $7 calls for a 16- to 20-cent debit.
Weather bulls can take heart in a near-term weather forecast that calls for a warm West and cool East. In its six- to 10-day outlook, MDA EarthSat predicts a broad ridge of above- to much-above-normal temperatures extending from Canada to Arizona and Oregon to Kansas. Below-normal temperatures are expected from Maine to Florida and Illinois to Louisiana. “The forecast has turned colder across the eastern third of the nation, where widespread belows appear likely. A positive spike in the PNA [Pacific North American pattern] will help trigger a chilly area of surface high pressure southward early,” the forecaster said in its morning energy update.
“This should provide a couple days of much-belows through parts of the Midwest and East and several other [areas] within the below-normal range. Progression of the MJO [Madden Julian Oscillation] should limit stability within the pattern, however, and allow for a return of warmth to the central U.S. by the late period. While some details still differ, the bigger themes are fairly consistent, resulting in a higher confidence.”
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