With natural gas futures recording a small rebound Tuesday, traders were debating whether the market had seen a bottom on the charts or just another round of short-covering before testing even lower depths. As expiration loomed one day away, the September contract on Tuesday traded between $5.425 and $5.720 before closing at $5.593, up 21.3 cents from Monday.
The 20-cent-plus gain Tuesday would have been impressive under most market conditions. However, the rebound barely dented the $1.63 drop from Aug. 17 through Monday. While unable to agree on what the small bounce meant, most traders could agree that weather and storm still hold the key to which direction the market will move next.
“This is not a bottoming formation. What you are seeing is a bout of short-covering, sparked in part by a wave approaching the Lesser Antilles that forecasters say is going to start heading up the Bahama chain,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “However, after it gets there this weekend or the beginning of next week, none of the models have any idea where it is going to go after that because it depends on how strong the high pressure builds in the western Atlantic. While the details were still obviously vague, news of the wave was enough to get people to cover shorts.”
Kennedy added that one forecaster is also predicting that another storm might take form in the Gulf of Mexico. “AccuWeather’s Joe Bastardi is saying that there is the chance for a home brew type of system in the Gulf this weekend, but he is the only one currently saying it, so it just bears monitoring. People keep getting the idea that the hurricane season is over, but we haven’t even reached the peak yet, folks.”
Commenting on Monday’s $5.230 low, the broker noted that there is no shortage of supply so one would expect to see some pressure on prices. “Temperatures are mostly moderating and nothing is directly lurking in the tropics, which led to lower prices,” said Kennedy. “But you can see what happens. Even the possibility of a storm forming in the tropics and the shorts run for cover. Did the short-covering do any real damage? Not really. If they could get it above $5.760, then we might see some more follow-through.”
Kennedy said that as with every year at this time, the natural gas futures market is not a place for the weak of stomach. “This market is not for the timid,” he said. “The volatility right now is absurd, but it is the type of volatility you would expect this time of year. While options are kind of on the expensive side right now, if you needed to do something in this market, I would use them. Define up front what your risk is. If you can live with that, then that is the way to go.”
Some technical traders sense an end to the price free-fall. Traders who follow market cycles point out that September futures fell to a $5.192 low in overnight trading. “While Monday (day session) trading managed to avoid closing near the lows of the day, it was still a new low close on the decline. That is the bearish news,” says Walter Zimmerman of United Energy. Bulls can take heart. Zimmerman’s analysis shows that natural gas is just above the point where prices may put in a seasonal low and “is fast approaching the mid-September timing window for the seasonal cycle low. So while Monday was a new low close there are other considerations that suggest it might be more prudent to view the trend as ‘bottoming’ instead of ‘down,'” he said.
Market bears using the fall of 2006 as an analog point out that last year spot futures fell to $4.05 in late September, thus suggesting the market may slide as much as another $1.50. One school of thought suggests that an Amaranth-type collapse could drag prices that low again, according to Tom Orr at Weeden & Co. in Greenwich, CT. He says the Amaranth-led decline could be considered an aberration, “but the fact is it did happen, and people are starting to look at that.”
Amaranth and its investors lost $6.6 billion in a wrong-way bet that natural gas prices would rise (see Daily GPI, Sept. 27, 2006; Sept. 19, 2006). After prices began to decline in the fall of 2006, some analysts argued that Amaranth actually accelerated the decline as it unwound its positions (see related story).
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