October futures managed a modest gain Monday as traders grapple with a sense of seasonality but are forced to recognize the ongoing trend lower. At the close October had risen 2.0 cents to $3.829 and November was higher by 1.0 cents to $3.932. October crude oil plunged $2.26 to $85.70/bbl as Euro-worried equity markets fell.
Systematic traders continue to see the market in an ongoing downtrend. “My program shows the trend has been lower for the last two months. The trend is now at $4.18 and the strategy is to sell rallies up against that downtrend line,” said an Oklahoma City trader.
“It has been selling rallies since mid-July, and the relatively low volatility makes it easier to trade. It just doesn’t have the swings it used to and you stay in the market longer without getting stopped out. With the model you would be continuously short and rolling a short position from one month to the next, assuming you wanted to be in the spot contract.
“About the only thing that’s going to change the trend is a forecast for very cold weather. The tropics are not active, and there is not much on the horizon.” The trader acknowledged that the market may be close to a seasonal low, but he was not ready to buy into any advance just yet. “Seasonality is a strong factor in a lot of commodities and natural gas has shown a tendency to advance this time of year. I’m not buying though until $4.18 or the trend line is taken out,” though.
Seasonality or not, in what might be a sign of things to come directional traders gravitated to the long side of the market and made significant reductions in their short holdings, according to the latest government figures. The Commodity Futures Trading Commission in its Sept. 13 report on the Commitments of Traders showed increases in long futures and options and a big drop in short contracts.
At the IntercontinentalExchange long contracts (2,500 MMBtu per contract) rose by 3,821 to 313,845 and short positions rose by 15,273 to 208,115. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) increased by a slim 665 to 138,479 and short holdings contracted 13,049 to 239,111. When adjusted for contract size long futures and options at both exchanges rose by 1,620 and short futures and options contracts fell by 9,231. For the five trading days ended Sept. 13 October futures rose 4.2 cents to $3.980.
November futures recorded a new low, but market bulls may be able to take solace in that the darkest hours are just before dawn. “If there is ever a month that tends to be weak, it is the trade month September for the October contract,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. “Even though we have been selling put premium recently, we would not be surprised considering how the market is acting that we break to new lows. On a trading basis, we will hold our short hedge positions.”
The recent market weakness has prompted DeVooght to roll short put options. He advises both trading accounts and end-users to roll short October $4.00-4.10 put options to November $3.85 puts. Producers and those with exposure to lower prices are counseled to hold October $4.50 puts and sell $5.50 calls at even money for 40% of physical requirements. He also advises holding a long $4.75 November-March put strip offset by the sale of $7.00 calls for a 16- to 20-cent debit.
From the standpoint of near-term weather, it couldn’t get too much better for the bulls with hot weather in the West and cool temperatures in the East. Forecaster WSI Corp. of Andover, MA ,in its six- to 10-day forecast predicts normal to below-normal temperatures east of a sinuous line from central Texas to northern Wisconsin. To the west above-normal temperatures are anticipated, but they are mostly confined to the northern Plains and northern Rockies.
“Above- and much-above-normal temperatures are forecast over the interior western U.S. and the High Plains. Anomalies as warm as eight to 16 degrees above normal are expected to encompass the northern Rockies and the northern Plains,” the firm said. WSI added that Monday’s forecast is “cooler over most locations south and east of Chicago than it was [Friday].
“Temperatures may not be as warm over the southwestern U.S. as currently forecast if the American models come to fruition. The 00Z [midnight, Greenwich Mean Time] American operational model depicts a weak trough/closed low over the southwestern U.S. and is not as warm over the region next week as the European models.”
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