May options expiration on Tuesday saw the prompt-month natural gas futures contract continue its recent stretch of sideways trading as May futures bounced between $4.191 and $4.293 before closing out the day’s regular session at $4.216, down 4.6 cents from Monday’s finish. The contract expires Wednesday.
“While we gave back a few pennies on Tuesday, we remain on the mildly bullish side of things,” a Washington, DC-based broker told NGI. “Our indicator couldn’t have turned more accurately. We basically bottom-ticked it in terms of where we were looking. We had targeted $3.830 as where the last down wave would likely finish out and we ended up getting to $3.810 on the first day of the month. Since then we’ve been in correction mode and some of our momentum indicators have gotten bullish and stayed bullish despite the recent gyrations.
“I can’t say we’re a raging bull here because there are still some important price levels above us that are intact. Getting up through $4.300 is key, followed by the $4.500 to $4.700 range. For the moment, we appear trapped in the high end of the range that runs from $3.830 to $4.330. We think when we break out it will be to the upside, but we don’t expect any real explosion. I still think we are seeing a correction with the possibility of another down leg to go. Whether we’ll make a new low for the larger downtrend is up for debate, but I can tell you the longer we move horizontally the less likely that is.”
The broker noted that there are some interesting things currently unfolding. “Due to where we are on the calendar, we’ll likely continue to see the lack of weather-driven gas demand. However, industrial demand has gotten a little bit better and it appears that producers removed some natural gas rigs last week for the first time in a long while,” he said. “At these prices, E&P [exploration and production] companies are saying they can’t spend that much money going forward because they can’t lock in a good return. If the rig decline continues, which some market experts believe will happen, then supply will decline at some point.”
Industry experts were also continuing to debate the ramifications of the methodology revision to the Energy Information Administration’s (EIA) 914 production survey (see Daily GPI, April 27). The government agency’s Thursday release of February 2010 production estimates will include recalculations for all of 2009 using the new methodology, which is expected to reveal lower-than-expected production levels
“We’re expecting [a] 1 Bcf/d downward revision to 2H’09/Jan’10…anything greater [is] generally bullish,” said analysts with Tudor, Pickering, Holt & Co. Securities Inc. “Market expectations [are] low/nonexistent with recent bearish storage data and high gas rig count.”
Some short-term traders had a bullish take on the market following Monday even though the lackluster gain of half a penny in the spot May contract to $4.262 continued to fuel expectations that the market remains stuck in a trading range with no immediate event likely to push prices higher or lower. “A break over $4.370 to $4.380 gives it some legs to the upside and could get it up to $4.490, but a break below $4.120 will bring about a test to the low $4 area. If that happens, buy the dips,” said a New York floor trader. In his view last week’s rally “cleaned out some short positions, and [added] some new [long] positions.”
Other traders also sense a positive tone to the market in that the flow of earnings data and economic reports augurs well for natural gas industrial demand. “We feel that this market is becoming cognizant of a potential sizable upswing in industrial demand this year given the increasing flow of positive earnings reports and most economic releases that continue to exceed most street expectations,” said Jim Ritterbusch of Ritterbusch and Associates.
Much like the New York floor trader, Ritterbusch is not advocating stepping into the market on either the long or short side but awaits a breakout higher. “We are maintaining a neutral trading posture for now in anticipation of some gradual rotation back down toward the $4 area. However, a close above the $4.330 level ahead of Wednesday’s expiry would force us to shift from a neutral to a near-term supportive market stance.”
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