Natural gas futures joined the rest of the energy complex’s slump on Tuesday over renewed U.S. economy recession fears and moderating temperatures. February natural gas shed 32.3 cents on Tuesday to close at $7.670.
February natural gas futures opened lower Tuesday morning at $7.800 as traders attempted to digest big losses in oil trading and overseas equity markets. The prompt month traded between $7.635 and $7.870 during the regular session. Concern over the state of the U.S. economy increased on the day as the Federal Reserve cut the federal funds rate by three-quarters of a percentage point to 3.5%. With more proof of an ailing economy, energy demand could see a reduction. The theory was also evident in crude futures as the February contract dropped 72 cents to $89.85/bbl.
Much of the damage may already be in. Floor trading in natural gas was closed in observance of the Martin Luther King holiday Monday, but in electronic Globex exchanges February natural gas traded as low as $7.807 by late afternoon Monday before the start of Tuesday electronic trading that evening.
U.S. equity markets were also closed for the holiday, but that didn’t keep overseas investors from heavy selling. Much of the weakness in petroleum markets (and by extension natural gas) is attributed to fears of economic weakness and doubts about the ability of any U.S. economic stimulus package to alleviate a downturn.
Traders see a shift in gas market dynamics. Traders were playing the huge Btu differential between crude oil and natural gas (selling natural gas and buying crude oil), but last week’s cold prompted traders to exit that spread, thus causing a rise in natural gas prices.
“Over the past two weeks we have seen a significant rally caused by significant cold snap-buying tied to the unwinding [of] the short natural gas/long crude oil Btu spread trades (in our opinion) that have been so popular over the past year,” said Mike DeVooght, president of DEVO Capital Management. He added that in his view the gains in natural gas prices have now ended and the market will trade lower.
“We feel the rally has run its course (in outright gas prices, not the Btu spreads). We will now see the gas market test the bottom side of the range ($7.000-$7.200) in the next few weeks. The big negative for the gas market at this time is the continuation of a weakening of the U.S. economy,” he said in a note to clients.
It also appears that weather won’t be adding too much support for the bulls and their case. According to Frontier Weather’s six- to 10-day outlook for January 27-31, below-normal temperatures will be prevalent along the West Coast and in Montana, while above-normal conditions will span from Texas and the central Plains through the East Coast. In the 11- to 15-day forecast covering Feb. 1-5, temperatures are expected to average colder than normal in the West and across the northern Plains into the Upper Midwest. Normal readings are expected elsewhere, the forecasting firm said.
“The weather outlook is also bearish for both heating oil and natural gas, with the coldest temperatures now past and a warming trend in the cards, especially for the eastern U.S.,” said Tim Evans, an analyst with Citigroup in New York. “We remain concerned about the larger speculative short positions resident in the natural gas market, but it is going to take another cycle of cold in order to chase the bears away.”
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