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Futures Break Out, Stay Above $7 on Fund Buying
After sitting on the sidelines Friday to plot their next move, traders on Monday morning pushed April natural gas futures significantly higher, breaking through the psychological $7 level without flinching and recording a 36.6-cent gain (5.4% increase) on the day to settle at $7.138.
After spinning its wheels for the first 45 minutes of trading, the prompt month exploded higher beginning at 10:45 a.m. EST. April reached a high of $7.20 as of 1:30 p.m., a level not seen by the contract since Nov. 24, 2004.
“It’s fund buying,” said Commercial Brokerage Corp.’s Ed Kennedy, who noted that reports from of the natural gas trading floor also had two large local traders bidding the April contract up.
IFR Energy Services’ Tim Evans agreed that locals probably played a part. “It does seem logical that the locals would have helped run for buy-stops,” he told NGI. “It’s also clear that they got some. Not only are they buying, but it is most likely short-covering rather than fresh long accumulations.
“Seasonally, we do have some tendency for prices to move higher in March and April. The next big things are going to be summer heat reports and hurricane forecasts. At least in theory, there are reasons that might help to extend this trend to the upside.”
The surprising fact was that crude and heating oil futures were unsupportive at the time natural gas made its move Monday morning. After trading at at a loss for most of the day, April crude climbed in the afternoon to settle at $54.95/bbl, up 52 cents from Friday. April heating oil traded as low as $1.4980/gallon before rallying to close at $1.5360/gallon, down less than a cent for the session.
Evans said the action in natural gas futures Monday could be attributed to making up for its inaction on Friday as well as the current weather situation. “On Friday, we basically ignored the rebound in the petroleum complex,” he said. “I think what natural gas futures did on Monday was a little bit of a ‘catch-up move.'”
On the weather front, Evans said, “Last week’s cooler temperatures allowed natural gas demand to be a little stronger than was originally forecast. As a result, I believe we will see a 90-110 Bcf net withdrawal for Thursday’s Energy Information Administration storage report, which would be supportive when compared to the five-year average.”
In addition, Evans said it appears that this week will be even a little colder than the previous one, allowing for at least one more bullish storage report next week before moderating temperatures arrive.
“While it is not like we are in a deep freeze here, we are cold relative to March,” Evans said. “It’s enough to get us supportive storage reports and it is enough for us to squeeze out any remaining [speculative trader] shorts. As of last Friday’s Commitments of Traders report, there were still a few of those around.”
According to the latest Commitments of Traders Report released by the CFTC Friday, noncommercial traders were net short 14,003 as of March 8, down from the 16,105 level of a week prior.
Evans noted that the breakout to the upside is within striking distance of the April contract’s Nov. 24 high at $7.25. “Further opposition is seen in the $7.45-7.50 zone too, where some of the market’s congestion and the 50% upward correction from the October spot high at $9.20 overlap,” he said. “The $7.75 Oct. 27 peak for April futures could also become of interest if the advance gets thoroughly carried away. At this stage though, we don’t see the cold as that intense or the funds that short to make those extreme levels viable.”
Evans added that if this rally fails to win much follow-through buying, he believes it will at least be successful in buying the market a bit more time before it becomes vulnerable to selling once again.
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