Continued equity market uncertainty, a weather outlook that is neutral at best and comfortable natural gas storage levels teamed up on Monday to help the November natural gas futures contract to plunge below $6 for the first time since Sept. 24, 2007. The prompt-month contract on Monday traded mostly between $6.050 and $6.200 in the regular session before closing at $6.121, down 11.8 cents from Friday’s finish.
November natural gas got as low as $5.990 in the overnight Sunday electronic Globex session before trading a fairly tight range in the low $6 area during Monday’s regular session. Other commodities also took a hit on Monday. December crude shaved off 93 cents to $63.22/bbl. Equity markets continued to decline. The Dow Jones Industrial Average dropped 203 points Monday to close at 8,175.
“The petroleum markets continue to probe the downside as global equity markets continue to express worries that world demand will be soft for some time to come,” said Tim Evans, an analyst with Citi Futures Perspective in New York. Noting that the oil price has now fallen almost 60% since its July peak, Evans said he believes crude is undervalued “to at least some degree” and that natural gas may be as well.
“The natural gas market may be somewhat undervalued too, but it may continue to have trouble organizing much of a rally while the short-term weather outlook includes warmer-than-normal temperatures,” said Evans. “As we’ve been noting, the warmer-than-normal temperatures in the first half of November [are] problematic since it tends to extend the storage injection season and shorten the period for winter withdrawals, as well as resulting in a somewhat higher peak level of storage. A seasonal rally will have to wait for more seasonal temperatures in order to take hold.”
Risk managers view equity markets and a broader outlook for the world economy as the dominant price driver in the short term. “The gas market, similar to crude oil, is being influenced more by the slide in the world equity markets and expectations that future demand will continue to slide than today’s short-term fundamentals,” said Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm. “On a trading basis, we will hold current short positions, and we are looking for any significant rally to add to our short positions,” he said.
DeVooght suggests that trading and end-user accounts stand aside and producers hold on to the previously established winter $10 put strip established earlier at 65 cents.
Some short-term weather fundamentals may give the bulls hope in the near term. Some weather forecasters predict a quick shot of cool air early in the six- to 10-day forecast followed by a warming trend for eastern and Midwest markets. “After the strong cooling in the near term across the East, the secondary push of colder conditions shown on the models off and on last week holds with broad model support [Monday] morning. This cooling primarily affects areas from the Upper Midwest to the East Coast early, and would, at least briefly, increase heating demand in these areas,” said Matt Rogers of MDAEarthsat. He noted that warmer temperatures were confined to the West early in the forecast period and did move eastward throughout the period. “Though it is delayed in reaching the East with the cooling there early, it does arrive for the East Coast cities for days nine and 10,” he said in a morning forecast.
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