Energy traders still recovering from the October crude contract’s blowout expiration Monday were treated to a small corrective action Tuesday, while October natural gas futures tested the upper parameters of the recent trading range. November crude dropped $2.76 to close at $106.61/bbl and October natural gas ventured temporarily above $8 before finishing at $7.931, up 27.3 cents from Monday’s close.
“I have been warning people that higher prices in natural gas were on the way. We are getting to the end of the storage injection cycle,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “While there is not much demand right now, the forecast is for a below-normal winter. There is nothing in the tropics that is expected to hit the Gulf of Mexico, but things change. The current system is expected to go toward the New York area, but let me remind you Hurricane Gustav was heading due north on a Saturday, but due south the very next day. Prices are headed higher; it’s that time of year.”
Others noted that recent production pullback comments from Chesapeake Energy CEO Aubrey McClendon were certainly helping the bulls’ cause (see related story). “The only thing I can see out there that is bullish is McClendon saying that 200-400 rigs might be taken out of operation by the end of the year due to falling prices,” said a Washington, DC-based broker. “We have a different take on that situation. We have found that producers have been pretty well hedged this year and think they will be able to ride this thing out. Our biggest producer has wonderful levels of puts. He’s not crying at all in this market. The idea is, if you’re well hedged, you’ll have money coming in from the hedges and can continue drilling at your current pace. Eventually prices will come back.”
The broker said he thought McClendon’s comments likely jolted the market Tuesday morning. “Natural gas just moved higher on the day,” he said. “When the largest player in the United States says something about rig withdrawal, that means something. Now if a little guy says they are removing one of their four rigs in East Texas, it wouldn’t quite be the same situation.”
Rafferty Technical Research’s Steve Blair said he still believes natural gas futures are stuck in the $7 to $8.320 trading range. “I think we are going to go back above $8 here and try to make another run at that $8.320 high from last week, which is also our first major resistance number. If we hang around in this $7.900 area for long, I think we’ll try to get back up there. I don’t know whether we will be able to, but if crude begins to move back up, then it could happen for natural gas.”
Blair added that he was completely in awe over Monday’s late-afternoon spike in crude, which saw the October contract jump by more than $25/bbl before expiring $16.37/bbl higher than last Friday’s finish. “After 23-plus years in energy, I’ve never seen an expiration like that ever,” Blair said. “While I’m sure the extreme weakness in the dollar had something to do with all commodities jumping on Monday, interestingly enough, I had some stuff to do in crude over the last half hour and the volume wasn’t very high. Even if it was a short squeeze like everyone is saying and someone got caught, it may not have been as big as everyone thinks because the liquidity just wasn’t there.”
Kennedy said it looked like someone got into a typical short squeeze situation. “It happens all of the time,” he said. “Somebody obviously stayed too long at the fair.”
Addressing the explosion in crude futures, the Washington, DC-based broker said people in the market kept blaming a fund that was short. “I don’t know which fund is short…most of them seem to be pretty long to me,” he said. “I could see how a producer sold futures against their production, but Hurricane Ike took his production off-line and then he miscalculates when he’ll get his barrels back.”
Traders note that for all the turbulence in the financial markets as well as two damaging Gulf of Mexico (GOM) storms, natural gas trading has been confined to about a $7 to $8.320 range and perhaps positioned itself to move higher. “Interestingly, this sideways trading pattern has been limited to about a $1.25 trading range and has proceeded amidst two major storms that have significantly disrupted production activities in the Gulf of Mexico. This price consolidation has also developed amidst some of the most dramatic financial developments in the history of the U.S. economy,” said Jim Ritterbusch of Ritterbusch and Associates.
From Ritterbusch’s perspective, the ability of the gas market to remain “subdued” given the weather and economic forces in play “attests to a market that is currently building a base for a longer-term price up-move,” he said in a Tuesday morning note to clients.
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