After sailing 27.5 cents higher in a three-day price advance last week, natural gas futures hit the buying doldrums Friday as traders elected to liquidate new positions rather than go home for the weekend long and risk an adverse price move Monday. The dissipation of Tropical Depression 2 prompted a mammoth 4-cent gap lower open and the August contract never recovered, closing 17.8 cents lower for the day at $3.25. Estimated volume was relatively light as only 52,913 contracts changed hands.
Tim Evans of New York-based IFR Pegasus was quick to point to moderating temperature forecasts for this week on both East and West Coasts as well as the downgrading of TD2 Thursday as reasons for the late week price slide. “Mother Nature does not appear to be cooperating, as the storm system has weakened to the extent that the National Hurricane Center will stop issuing advisories. This, combined with weather forecasts for next week showing below normal readings on the coasts to offset heat in the central U.S., seems to put the natural gas market right back into the bearish fundamental box it has been consigned to since April: mixed weather and strong supply yielding bearish storage data,” he said.
Tom Saal of Miami-based Pioneer Futures, meanwhile, takes a slightly less fundamental approach to analyzing the gas market. “We have to look not at what the market did last week, but rather what the market failed to do. It failed to go lower. On a weekly chart, the August contract made a higher high, a higher low, and a higher settle. That is constructive. You always have to be a little wary of a market that should go lower and doesn’t,” he said.
Another support factor, continued Saal, is the behavior of the commercial traders during the price increase. According to the Commitments of Traders report released late Friday by the Commodity Futures Trading Commission, commercial traders increased their long positions by 8,681 from July 3 to July 10. During that period the August contract advanced 8.1 cents. “The commercial traders are said to be the ‘smart money’ in this market and they have been buyers. This market has digested every last bit of bearish news and still managed to move higher. I would expect the market to retest last week’s high at $3.44 at some point this week.”
The CFTC data corroborates reports by brokers earlier in the week that one very large marketing company had been a heavy buyer each of the two times the August contract has tried to break beneath the psychologically important $3.00 level (See Daily GPI, July 12).
In daily technicals, Evans sees support at last Wednesday’s and Friday’s lows of $3.205 and $3.23 respectively. Additional support is seen at the aforementioned $3.00 level, which corresponds with prior lows at $3.003 and $3.04. On the upside, resistance is seen at Thursday’s access session high of $3.45, ahead of further selling in the $3.48-50 area. Looking ahead, Evans believes resistance will outlast support and prices will ultimate fall. Accordingly, he looked to short the market at $3.33 Friday with a protective buy stop at $3.51 to limit risk. If August breaks beneath $3.20 he will snug down his buy stop to $3.38.
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