Helped lower by sagging crude oil futures and doubts surrounding just how cold the coming “cold front” will be, March natural gas futures started Tuesday’s session more than 10 cents lower than Monday’s close and continued lower into territory not seen since last summer. The prompt month put in a new front-month low before settling at $7.858, down 13.7 cents from Monday’s finish.
Before noon, March natural gas put in a low of $7.700, which is the lowest a prompt month has been in more than six months. The last time a prompt month traded lower, or settled lower than Tuesday’s settle, was on July 28, 2005, when front month futures put in a low on the day of $7.500 before closing at $7.694.
March crude plummeted $2.02 to close Tuesday at $63.09/bbl. With crude down more than $2 and natural gas down only a slim 13.7 cents, some market experts argued whether gas futures could be looking for a bottom in the near term.
“The market has a chance of finding a bottom in this area by exhausting the flow of selling, collecting itself for a run back to the upside off the forecasted colder temperatures, if or when they ever get here,” said Tim Evans, an analyst with IFR Energy Services. “There is a chance that this market could turn this break to a new low into a little bit of a momentum failure, allowing futures to kick higher through some nearby resistance levels while funds cover their short positions.
“While it could set up that way, the problem this market faces is that it has failed at a number of these attempts over the past three weeks. Ultimately, in the back of everyone’s mind is the reality of bearish fundamentals. Everyone seems to understand that the glut in storage is not just going to go away.”
Evans said the storage situation is key in this case. Predicting that the next storage report will likely reveal a bearish withdrawal and that the following report will likely still be “south of the average,” the analyst said the first chance of supportive storage news won’t be until the Feb. 23 report, which covers the week ended Feb. 17. “The first potential bullish storage number that we are going to see is still weeks away, which really is not going to leave much of the heating season left,” Evans said. “At that point we could be looking at a warming trend in temperatures, so it is real hard to come up with a true bullish scenario that doesn’t involve Category Five hurricanes in March.”
Looking at Thursday’s storage report for the week ended Feb. 3, Evans said he is “guessing we will see about a 50 Bcf withdrawal…and that is allowing the absence of 10-15 Bcf of production from producers throttling back output because they don’t have anyone who really wants to buy it.”
Top analysts suggest that the bark of the cold may be worse than its bite. There is “a growing perception that this month’s expected cold temperature patterns will prove insufficient to significantly dent the current supply overhang,” said Jim Ritterbusch of Ritterbusch and Associates. He added that temperature forecasts appear to be moderating with below normal patterns now being erased from a large portion of the Mid-Continent within next week’s outlook. “Even short-term patterns are proving to be less cold than previously expected with this week’s [heating degree days] likely to fall close to normal levels across the U.S. as a whole,” he noted.
Opinions vary. The National Weather Service in its most recent six-to-10-day forecast shows below normal temperatures across a vast swath of important energy markets. The entire U.S., south and east of a line from northern Michigan to southeast Arizona is forecast to be below normal, including the Pacific Northwest. Only a small area of North Dakota and Montana is forecast to exhibit above normal temperatures.
The Commodity Futures Trading Commission reported Friday that as of Jan.31, noncommericals had reduced their net short (futures only) holdings from 47,932 contracts to 36,429. On Monday Jan. 30, March futures shot higher by $0.882 to $9.389 prompting discussion in some circles of short covering in advance of colder weather. The real culprit appears to have been fund short-covering.
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