Traders were at a little bit of a loss trying to explain the September natural gas futures contract’s 37.8-cent gain on Monday to close at $4.031. However, those same traders were mostly unimpressed with the day’s gains, noting that the price would have to move back above the old highs near $4.600 to elicit much talk of a momentum swing in the market.
“I heard the morning’s run-up was due to a large market order triggering stops, but that doesn’t explain why we came off again and then made another run higher,” said a Washington, DC-based broker. “I don’t know who those stops were at the end of the day that were running things up yet again. I think they were probably fresh buyers, but there is no real explanation.”
The broker noted that it was highly unlikely that the gains were tied to the announcement last week that United States Natural Gas Fund (UNG) is moving to reduce its holdings of natural gas futures contracts (see Daily GPI, July 30). “If UNG was getting out of exchange-traded futures, they would be selling, not buying, so that rules them out.”
The broker also said crude was likely only partially responsible for the 37.8-cent rise in natural gas. “Sure, crude was up, which I’m sure helped push gas higher, but the percentage gain in crude was nowhere near as large as in gas.” September natural gas futures gained 10% on the day while September crude gained only 3% by adding $2.13 to $71.58/bbl.
As for any real resurgence by the bulls, the broker said he wouldn’t be growing hooves and horns just yet. “Sure $4 is a psychological pivot point, but we would need to get back above the old highs to really start talking about a shift in the market,” he told NGI. “If we get above $4.300, the threat then becomes real, but we would need to get above $4.600 to really start talking. The bulls still need to make their bones on this.”
A break above $4.600 would trump the $4.575 front-month high set back on May 13. Heading further back, prompt-month futures notched a high of $4.631 on Feb. 12.
Recently traders have been walking the high wire by trying to balance the lack of weather support against the risk and reward of additional sales. Short-term traders see the market with bids at lower prices supporting the market and question the risk/reward of additional selling at these levels. “There were a lot of funds that rolled their short positions to September when August went off the board,” said a New York floor trader. He added that many of those short positions covered on Friday before the close, but “there were a lot of scale-down bids from $3.50 on down, but September never quite got there, so they moved their bids up on the close. How much lower can the market go? $3.50 seems like a good level for traders to reset their book. There is limited downside, and the risk/reward favors the long side of the market.”
Analysts see mild weather in eastern and Midwest energy markets along with a lack of tropical activity confining prices. “The cool weather coupled with the lack of storm activity in the Gulf is starting to weigh on prices. Chicago is seeing its coldest July in over 65 years with the average temperature below 70 degrees,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. DeVooght points out that as a result, gas utilization for air conditioning and electricity generation has dropped off, but he continues to hold his current positions.
DeVooght counsels end-users and trading accounts to stand aside, but producers should hold an October $4.50-6.00 collar as well as a 12-month $5-8 collar at 35 cents.
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