Swelling concerns surrounding the U.S. and global economy turmoil led to slumping stock and energy markets Monday. The Dow Jones Industrial Average — which was down as much as 800 points earlier in the day — finished Monday down 369 points, while November crude futures shaved $6.07 to close at $87.81/bbl and November natural gas futures broke below support just above $7 to close at $6.835, down 52.3 cents.
It also turned into a day for records. The Dow Jones Industrial Average closed beneath the pivotal 10,000 level for the first time since October 2004. The crude futures settle Monday was the first time a prompt-month contract closed below $90/bbl in eight months. On Feb. 7 the March 2008 crude contract closed at $88.11/bbl. Over in natural gas, the November settle well under $7 broke the recent $7 to $8 trading range, which had dominated for the entire month of September.
“It is very apparent that people do not have a whole lot of faith that the Wall Street bailout will be able to rescue the entire economy,” said a Washington, DC-based broker. “The effects could be seen everywhere, not just on the stock market. November natural gas futures broke below support at $7.028 and continued to punch below $7 pretty convincingly. Tie that together with another big down day in crude and I think what we are seeing on the whole is a liquidation of anything that can be turned into cash. People are not even asking for a price. Instead, they are just asking if they can just get all 100 [orders] done.”
The broker took issue with the idea that crashing energy futures values were a result of demand reduction fears due to the economy crisis. “Who has money to bet on the prediction that demand will go down?” he asked. “Who is left with risk capital to spare? Some of the funds that are left might be doing that, but there are a lot of funds that have gone under with this economy turmoil. I think most of what we are seeing is a whole lot of people in a lot of pain just trying to figure out how to get out of their positions. We’ve seen open interest plummeting, so while there might be somebody who is putting on shorts advantageously, there are not a lot of people who can still play.”
Predicting the market’s next move, the broker said the break of $7 opens the door. “We could definitely see yet lower prices here,” he said. “One Elliot Wave count has the possibility of getting below $5. I don’t think we’ll get there [Tuesday], but it is certainly on the table. We broke through support Monday and we did it convincingly, so the day’s news was decidedly bearish.”
With little in the way of weather developments on the horizon, analysts are assessing the impact of the financial rescue package passed last week by Congress. “Congress has just passed the bailout bill. The energy markets are selling off and the stock markets are failing to move higher,” observed Mike DeVooght of DEVO Capital. The way DeVooght sees it, there is little likelihood that the financial package is going to increase energy demand — and by extension firming, if not higher, prices.
“The fact is, this bailout is unlikely to generate any new demand for the energy markets. It is, in fact, reinforcing just how weak the world economies are. Before we see any significant rebound in demand, we will have to see significantly lower prices. Once you turn off demand and change consumer buying habits, it usually takes a considerable amount of time and sharply lower prices to bring buyers back. OPEC discovered this the hard way in the mid-90s,” he said Monday.
Others echo the concern of DeVooght. “I think the [natural gas] market is in a period of change. Nobody knows what that’s going to look like, yet and there is a lot to be determined in this market,” said George Ellis, director, Bank of Montreal. “I think you cannot accurately predict price direction until we get the financial markets squared away. There is so much going on right now that it is impossible to determine what the state of the industry is going to be on the back end of all this.”
Currently DeVooght is looking for an opportunity to initiate sell hedges. At present he counsels trading accounts and end-users to stand aside, and producers to hold a long winter 2008 $10 put position established earlier at 65 cents.
©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |