Despite venturing above psychological resistance at $8 for the second time in as many days, October natural gas futures once again retreated as traders have recently shown a fair amount of comfort with prices between $7 and $8. The front-month contract, which expires Friday, traded between $7.605 and $8.093 during Wednesday’s regular session before closing out at $7.679, down 25.2 cents from Tuesday’s finish.
Some market watchers said Monday’s October crude expiration wildness might have caused some nervousness in natural gas futures over the last few sessions. On Monday October crude jumped by more than $25/bbl before expiring $16.37/bbl higher than the previous session’s finish.
“I think Tuesday’s trade in October natural gas, which saw a 27.3-cent climb to close at $7.931, included a little bit of worry that natural gas could be next,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “October natgas was the strongest on the board, and we saw a bigger percentage of the trade on the floor, rather than electronically. That typically means people are working spreads and looking to roll things over. We saw 69,377 contracts on the floor on Tuesday. The last time we had a larger number of contracts done on the floor was on Feb. 12. People saw what happened with crude expiration on Monday, so I think the fear factor is playing out here for natural gas.”
All in all, Evans said he believes natural gas futures prices are pretty comfortable in the $7-8 area. “People wonder whether to be a buyer or seller in natural gas right now, and my answer is ‘I don’t know.’ Current natural gas storage levels are slightly above the five-year average storage level and the five-year average price for this week of the year is $7.250. So basically, we have near-average storage and a near-average price. What is wrong with that picture? The answer is, not too much. There is no slam-dunk trade here.”
As traders await the latest Gulf of Mexico shut-in updates, Evans said he is paying attention to a different region of the country. “While maybe 80% of the market is staring out into the Gulf of Mexico to look for a sign on the natural gas storage situation, the Chicago citygate has been trading $1 to $1.50 under near-month futures all week,” he told NGI. “This does not tell me that supply to Chicago is tight. This tells me there is a lot of physical gas that is available in the northern U.S. that could go into storage and get hedged out at a nice number. There is an opportunity to buy storage gas at $6.500 and hedge it out on the January [contract] at $8.500. This is why I want to own a storage facility.”
Looking at Thursday morning’s storage report for the week ended Sept. 19, Evans predicted that the Energy Information Administration would report a bearish 85 Bcf injection. “The pattern has been to buy the storage report rumor and sell the storage report news,” he said. “There are a number of estimates that are out there that are significantly lower than mine. Depending on which Bentek Energy number you go with, they are looking for an injection just over or under 50 Bcf. The Reuters survey is looking for a 62 or 63 Bcf build. While my estimate is bearish, the market dropped Wednesday, so I think I’ll stick with my number.”
The number revealed Thursday morning at 10:35 a.m. EDT will be compared to last year’s 71 Bcf build for the week and the five-year average injection of 77 Bcf.
Traders have been hard-pressed to ignore the wild swings on Wall Street. Mike DeVooght of DEVO Capital said his firm believed last week’s 63.1-cent rally “was caused by exchange-traded short-covering tied to the collapse of AIG [American International Group] and Lehman [Brothers Holdings Inc.] and the concerns that other OTC [over-the-counter] market makers could be on the verge of collapse.”
DeVooght concedes that “on a fundamental basis natural gas continues to look weak. But like the complex, fundamentals are taking a back seat to the other factors at this time. On a trading basis we will hold current short positions and would view any rallies above $8 on the spot market as a selling opportunity.”
DeVooght counsels trading and end-user accounts to stand aside and producers to hold a long position of winter 2008 put options at 65 cents. He also advises holding a long October $11.50 put strip at 75 cents.
Others see the market coming under some upward pressure in the near term as Gulf production creeps back on-line. “Storm problems will still be with us for another couple of weeks and we are still 100-plus Bcf behind last year’s [storage],” said a manager for a prominent Southern California trading and marketing firm. “I would have to believe that we will have to deal with that going into October and likely November as well, but I would like to think in 60 days that most of those problems have gone away and the issue that was dominating traders before Gustav and Ike, increasing production, will prevail.”
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