Questions surrounding the duration of the nation’s near-term cold snap continued to unravel the recent strength in natural gas futures trading on Tuesday as the December contract dropped 16.6 cents on the day to close at $7.557. The January contract, which will take over prompt-month status in overnight Wednesday trading, shaved 20.4 cents on Tuesday to finish at $7.817.
“We saw another weak market day on Tuesday,” said a Washington, DC-based broker. “My read on the weather situation is we are only looking at a week’s worth of real cold before returning to seasonal or moderate temperatures. I think prices jumped higher Monday on cold forecasts, but when it became evident that it wasn’t expected to be an extended period of cold, the market came off. I believe we continued to see that play out during Tuesday’s session.”
With the December contract going off the board Wednesday, the broker said January deserves the focus now. “Looking at the January chart, it would appear our old friend the trading range is still in effect, albeit with slightly different numbers,” he said. “I suspect $7.750 sits at the bottom of the range with $8.500 acting as the top. We definitely are exploring the lower end of the range here and I think the bears are gaining a little bit of momentum. If we bust through $7.750, then we might have something here. The next support level likely sits down at $7.550. We are guardedly bearish here. The recent trading range has proved quite ironclad, but it will eventually break. Currently, we are early in the week and have already gotten past a bullish weather story, so maybe the market finally decides to take a shot at breaking on the downside this time.”
Addressing the recent lack of a relationship between crude futures and natural gas futures, the broker said he believes only significant moves in crude prices will be able to sway natural gas prices in one way or the other. “The linkage between the two markets just hasn’t been there as of late,” he said. “However, a washout in crude where the next round number we are talking about is $90/bbl instead of $100/bbl may help to clear some downside room for natural gas as well. I think a drop to $90/bbl instead of a run-up to $100/bbl is more likely at this point.”
The January crude contract on Tuesday continued its recent retreat, dropping $3.28 to close the day at $94.42/bbl.
Other top natural gas traders look for a weak expiration Wednesday of the December futures contract but otherwise see futures meandering within its recent trading range. “The December contract has been strong relative to the winter portion of the curve recently and we would not be surprised to see the front month shed some value against the deferred contracts ahead of [Wednesday’s] close,” said Jim Ritterbusch of Ritterbusch and Associates. He added that his firm looks for “continued choppy, sideways trading conditions as the market attempts to discount changes in the temperature forecasts.”
In Monday’s trading the December contract zoomed to an open 22 cents higher at $7.920 but faded as traders realized that earlier forecasts of cool weather were not immediately aimed at densely populated Midwest and eastern energy markets. “The Canadian air was forecast to creep into the Plains, and the whole south of the nation was forecast normal. The cold was forecast to hit Minnesota, but no one lives there,” a New York floor trader wryly admitted.
Forecasters are calling for arctic air to impact the East near the end of the week. “The cold will continue to slip to the south and east, with departures in the Midwest going from around 1-4 [degrees] above average to around 4-8 [degrees] below average for the second half of the week,” said meteorologist John Dee. He went on to say the eastern one-third of the U.S. will see temperatures around 2-6 degrees above average for most of the week ahead and then the cold air will find its way east and send temperatures tumbling to around 3-6 degrees below average.
However, temperatures appear to be moderating a little further down the road. According to the National Oceanic and Atmospheric Administration’s latest six- to 10-day forecast covering Dec. 3-7, the colder-than-normal longitudinal line continues to migrate East. Colder-than-normal conditions are expected east of a diagonal line from western North Dakota down through central Louisiana. Western states are expected to see above-normal temperatures and a thin area including Texas up through Oklahoma to Montana is expected to see normal conditions.
The government agency’s six- to 10-day forecast for Dec. 1-5 told a different story. That forecast called for colder-than-normal to much colder-than-normal conditions throughout the entire nation with the exception of the Florida Peninsula, which was expected to see above-normal temperatures.
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