After the long holiday weekend, natural gas futures rebounded Tuesday, taking back some of last week’s losses. The October contract traded within a 23-cent range between $5.850 and $6.080 before settling at $6.039, up 16.2 cents from last Friday’s close.
Traders also were watching the strengthening of Tropical Depression 6, which became Tropical Storm Florence Tuesday afternoon. Some forecasters had predicted that strengthening wasn’t a possibility until later in the week. The storm, which was located 960 miles east of the northern Leeward Islands as of late Tuesday afternoon, was moving toward west-northwest at 12 mph with sustained wind speeds of 45 mph. The National Hurricane Center said Florence is “getting a little stronger” over the open Atlantic.
“I think Tuesday’s price increase was a result of last week’s weakness,” said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. “I think it was part of a technical rally. The price level is still pretty low compared to where we started out at the beginning of September.”
Saal added that Florence could also have been in the back of traders’ minds. “I think most of the experts so far have Florence not going into the Gulf of Mexico, but it is still too far out there to really tell yet,” he said. “Barring any weather to speak of, I think we could see a little more price erosion. Based off Friday’s trading action, $5.71 could be potential support, along with [Tuesday’s] low of $5.85. On the upside, resistance could reside around $6.20.”
After the long holiday weekend, top traders were looking for continued price weakness. “Although this market has thus far managed to hold support at around the $5.70-5.75 area, we are viewing this support as vulnerable with additional price declines to the $5.30 area likely unless a tropical storm takes aim at the offshore production infrastructure,” said Jim Ritterbusch of Ritterbusch and Associates. He anticipates increasing difficulty during the next seven to eight weeks matching storage availability with recent production and import levels, and this increases the possibility of a weak cash trading environment, “especially with [electric generation] demand quickly subsiding as a market influence.”
Prior to becoming Tropical Storm Florence, AccuWeather.com reported that Tropical Depression 6 was having a hard time getting its act together. “An upper-level trough to the north of the depression continues to exert wind shear on the system, creating an environment where the upper-level winds are unfavorable for development,” meteorologist Chris Stalcheski said. He added that later on in the week an area of high pressure will move eastward, and this will allow for an environment where the upper-levels winds are lighter, and thus wind shear could be weak or nonexistent. “This will be an area where the system will stand a better chance to strengthen.”
Physical natural gas traders noted an uncharacteristic widening in basis relationships. Normally as futures fall, the difference between futures and physical gas prices will narrow, i.e., the physical gas price will not fall as fast as futures, but that was not the case last week. “In the past, we have recommended that producers lock in basis when prices push down to the low levels, but with basis levels relatively wide, we would not recommend this,” said Mike DeVooght, president of DEVO Capital. With the steady to widening basis, however, “the levels are looking advantageous for end-users to lock in with winter Rockies basis numbers below $2.00/MMBtu. On a trade basis we will hold current positions and look for gas prices to trade sideways to lower and Btu spreads to continue to tighten.”
DeVooght currently recommends trading accounts stay short October crude oil and long October natural gas. End-users are advised to stand aside, and producers are advised to stay short October futures at $8.45 and to hold short 30% to 50% of winter 2005-06 production at $13.95.
October natural gas futures settled at $5.877 Friday, down $0.171, and according to NGI’s Daily Gas Price Index, Rocky Mountain gas that was traded Friday for weekend delivery on Kern River Pipeline finished at $3.98, Opal ended at $3.98 and Questar averaged $3.82.
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