With strength in Sunday’s overnight Access trade session prompted by forecasts for midweek cold, natural gas futures observers were expecting more of the same on Monday. However, after the December contract notched a high of $11.90 in morning trade, it plummeted just before 11 a.m. EST to carve out an $11.37 low before settling at $11.607, down 10.5 cents on the day.
The quick decline in the morning had market watchers searching for news that could have initiated the drop. “Prior to the regular session’s open and in the first hour of regular trading, the strength in the futures market was definitely based on weather forecasts for midweek cold,” said a Washington, DC-based broker. “The drop around 11 a.m. really seemed like technical news hit the market, especially the way the market dropped like a waterfall.”
She noted that the cooler weather is actually going to have to prove itself this time before there is much reaction. “We’ve had a couple of false starts with cooler weather forecasts and no corresponding weather,” the broker said. “You also have to remember that it is still fall. The weather has been so darn warm, to move this market, we are going to have to get some more gas demand and some bullish storage numbers.”
The broker noted that in any market such as natural gas, when it turns, it will turn violently, and then it will follow through. “There definitely wasn’t any follow through on Monday,” she said.
As for near-term direction, the broker said the market is running out of time to check much lower. “I think the downside is somewhat limited given the fact that there are still so many issues with Gulf of Mexico production and the time of year,” she said. “You could make a case that we could get back down to that $11 level on a continuation chart, but I think we are going to be hard-pressed to get much below that with the uncertainty of winter still ahead of us.
“If we were to go into Siberian express weather territory, where we got cold and stay cold, the gas in storage would be used up pretty quickly because we don’t have full strength production in the wake of Hurricanes Katrina and Rita. I believe that fact is in the back of everyone’s mind.”
IFR Energy Services analyst Tim Evans had a different take on the 11 a.m. slump. “Basically this market spent the first hour of the session taking attendance, with an eye toward answering the question of whether we could get through resistance up at $12.06, which was the December high from Nov. 8,” he said. “Following that first hour, traders concluded that the answer was ‘no’ or ‘not yet.’ We have basically been chopping sideways under that $12.06 high for nine full sessions.”
Evans said it was a little bit disappointing that the market couldn’t take out that resistance level, especially with Tropical Depression 27 in the Caribbean and the expected cold to settle in at midweek. However, he noted that New York traders walking to work Monday morning in 62 degree temperatures were probably having a hard time buying the cold forecasts.
AccuWeather.com reports that the jet stream will make a dramatic change in the coming days, dipping far south over the eastern half of the country by midweek and remaining in the pattern trough this weekend. Until recently the jet stream has been in a west east or zonal flow pattern and the change will allow cold air over northern Canada to plunge southward and shift the warm air to the west. The forecasting firm added that at the same time, storm systems from the west will ride over the top of the western jet stream and quickly drop south through the Great Lakes and across the Northeast. This will mean a repeated shot of cold, wintry weather across the northern United States over this time period, it said.
Cold wintry weather is relative. The National Weather Service (NWS) forecasts below normal accumulations of heating degree days (HDD) for major energy consuming markets. For the week ending Nov. 19, the NWS predicts that the populous states of Pennsylvania, New York, and New Jersey will receive 128 HDD, or 28 below normal. The Midwest states of Ohio, Indiana, Michigan, Illinois, and Wisconsin are forecast to endure 169 HDD, or nine below normal.
If the cold weather weren’t enough to whet the bulls’ whistles, the National Hurricane Center (NHC) reported late Monday afternoon that Tropical Depression 27 is centered 235 miles west of St. Lucia. If it were to become a named storm it would be Tropical Storm Gamma, the 27th of the season. At 5 p.m. AST, Tropical Depression 27 was heading west northwest at 8 mph away from the Windward Islands. Wind speed was clocked at 35 mph. If the NHC projections are correct, it would approach Honduras by the weekend.
While weather factors appear to be turning bullish, natural gas bulls will have to prevail over petroleum market bears. In a Bloomberg survey taken last week, thirty-four of 64 analysts surveyed, or 53%, said oil prices will fall this week. Nineteen, or 30%, said oil will be little changed and 11, or 17%, forecast a gain.
However, December crude finished Monday 16 cents higher at $57.69/bbl, while December unleaded gasoline closed higher by 1.11 cents at $1.4961/gallon.
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