Choosing to travel their own road Wednesday, July natural gas futures dismissed August crude’s near $1.00 decline and settled 3.2 cents lower at $7.442. Trading was relatively quiet as the prompt month kept within a thin range from $7.39 to $7.53 and traders noted that there did not seem to be any motivation in either direction.
On the petroleum side, crude racked up its second straight day of significant losses. On Wednesday, the Department of Energy said that weekly data showed a decline in overall crude stocks of 1.6 million barrels, paring stocks to 327.4 million barrels. Despite the fact that the draw was within industry expectations, August crude dropped 95 cents on the day to close at $58.09/bbl.
“The natural gas futures complex was dead in the water Wednesday,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “Even the movement in crude isn’t affecting it right now. This market isn’t going to do anything until we see [Thursday’s storage] number. In addition, some forecasters have started calling for hot temperatures moving into the central part of the country and moving east, starting on Monday. One would assume that gas is going to stay firm.”
Kennedy said he would advise his clients to initiate an “options strangle,” where you would buy an out-of-the-money put and an out-of-the-money call. “You would buy an $8.50 call and a $6.50 put right now in September or October options to take advantage of the time value and the hurricane season,” Kennedy said. “You would be essentially betting on the implied volatility going up. At about 40% right now, the implied volatility is relatively low. If the implied volatility increases, its premiums will increase and you can sell the options for a profit.”
IFR Energy Services’ Tim Evans said that with the $7.39 low on Wednesday, the natural gas futures complex has entered what could be a very interesting decision area. While saying the situation is not “as stark as bounce or die,” Evans said, “Wednesday’s decline “left the market looking a little vulnerable, despite the fact that it held up well in light of the $1.00 drop in crude.”
Evans said because trading on Wednesday was “light, within a narrow range and closed slightly below where it opened,” the market could really pivot either way. “It wasn’t like we were working all that hard in whatever we were doing Wednesday.”
Market technicians are more concerned with price movements alone and anticipate that the recent rocket-like trajectory of the natural gas futures will at least momentarily come to a halt. “I expect the July contract to undergo something on the order of a 50% retracement of the recent advance,” said Craig Coberly, an analyst with GSC Energy in Atlanta.
Retracement or retracement analysis is one of a broad family of analytical techniques such as the Dow theory, Elliot Wave, Fibonacci, and others that rely on the matching of observed price trends with predetermined cycles which adherents claim can be used for market timing and price projection.
Thus a 50% retracement of the recent advance of the July contract would comprise half of the move from the May 26 low of $6.13 to the June 20 high of $7.80 or 83 cents. If Coberly’s call on the retracement is correct, the July futures should trade down to $6.97. Other commonly utilized retracements are the 38% and 62% levels.
Looking towards the Energy Information Administration’s (EIA) natural gas storage report Thursday morning for the week ended June 17, Evans said he is looking for a 90 Bcf injection, although he knows the industry is looking for something lower. According to a Reuters survey of 18 industry players, a 75 Bcf injection is expected for the week. Coming in well below all other estimates, the ICAP-Nymex storage options auction on Wednesday revealed a consensus forecast of a 67.1 Bcf build.
The number reported by the EIA Thursday morning at 10:30 a.m. EDT will be compared to last year’s 86 Bcf build and a five-year average injection of 92 Bcf.
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