With temperatures remaining frigid Tuesday in a number of regions of the country, including the Mid-Atlantic and Northeast, March natural gas futures for a second consecutive day reached a high of $8.620, which much like Monday’s session ended up triggering a round of selling. The prompt-month contract on Tuesday closed at $8.436, down 9.5 cents on the day.
While the recent cold snap and the promise of more to come has buoyed futures above the top of the well documented $7.500 to $8.500 trading range, some traders still see the prompt-month as largely range-bound, albeit in a little larger range.
“There is no question it is cold out there, but I still think we are only testing the upper reaches of the trading range,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “I believe it is likely that we will see a pullback before the end of the week, possibly to below $8. I think we are trading a range between roughly $7.500 and $8.740.”
Kennedy noted that the weather will continue to call the shots for the next month or so and that some of the forecasts see a pretty cold stretch. “The thing that disturbs me is that some of the independent weather forecasters are calling for a return of very cold temperatures towards the end of the month of March. If that comes to fruition, then we might get something going to the upside yet,” he said.
Looking at potential strategies to navigate the current natural gas futures market, Kennedy advised simply trading the range. “In addition to playing the range, it is important to note that the implied volatility on the options is currently cheap,” he noted. “If you need to protect a position, use options and create a win-win.”
Some traders are looking beyond near-term weather forecasts and are trying to determine if the recent strength in natural gas prices has any staying power. “The reality is natural gas is still a bargain relative to the [petroleum] complex on a Btu basis, which continues to support gas prices,” said Mike DeVooght of DEVO Capital Management.
DeVooght said that going forward, industrial demand should be the driving force for the gas market, but currently the U.S. economy looks like it is moving toward further contraction and possibly a recession. “If we do slip into recession, it is difficult to make the case for strong natural gas prices,” he said in a note to clients. On a trading basis, DeVooght is standing pat.
He advises trading accounts to stay short April futures at $8 and end-users to continue to stand aside. Producer accounts are advised to hold short the remainder of a winter 2007-2008 strip at $9 for 65% of production, hold short a summer strip at $7.900 to $8 for a small position, and also hold short a second summer strip at $8.250 to $8.350 for 50% of production.
In the near term, however, weather bulls remain in the driver’s seat. In its Tuesday morning six- to 10-day forecast MDA EarthSat is looking for cool temperatures in the East and warmth in the West. The area of cold encompasses the entire eastern 60% of the country east of a line from West Texas to North Dakota.
“Though the much belows [temperatures] have shrunk today, they remain across the Eastern Midwest and Great Lakes. That area is likely the region most out on a limb,” said Matt Rogers, MDA EarthSat meteorologist. He added that in spite of the uncertainty regarding the duration and intensity of the cold, confidence increased in Tuesday’s analysis “based on the relative agreement and consistency among the models with cold in the East and warmth in the West.” Weather forecasts, like trades, always contain a degree of risk, and Rogers noted that the risk in the forecast lies in possible migration of warm temperatures eastward and into the Midwest.
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