Traders were greeted with a nonsupportive weather picture in Sunday’s overnight trading session and the response was even lower natural gas futures prices. With the lack of real heat or tropical storm activity, the September contract gapped lower on Monday’s open and recorded a low of $5.230 during the day before closing at $5.380, down 14.3 cents from Friday’s close.
After closing at $5.523 on Friday, September futures opened Monday’s regular session at $5.270. Shortly after the open, the prompt month recorded the $5.230 low for the day, which was the lowest a front month has traveled since Sept. 27, 2006. Monday’s action also puts the September contract in a black hole of sorts for support due to a large gap in the charts last year from the transition of the October 2006 contract to the November 2006 contract. After October 2006 natural gas expired at $4.201 on Sept. 27, 2006, November 2006 opened the next day’s regular session at $5.550, a $1.349 premium.
Monday’s gap-down opening has at least one broker looking at futures in terms of good news-bad news scenarios depending on market psychology and whether a trader is a bull or bear.
“The bad news, if you’re a natural gas bull (although it’s good news if you’re a natural gas bear or a consumer) is yet another gap-down opening,” said Jay Levine, a broker with enerjay LLC. “The good news, if you’re a market bull (although it could be bad news if you’re a natural gas bear or a consumer), is yet another gap-down opening.”
Levine said recent market operations show that gap-down openings often signal the end of a down move. “I’m not saying this is the bottom of the natural gas downward cycle — down thanks to too much supply, not enough demand (i.e., heat), and clearly, up to this point, not enough concern (i.e., hurricanes) — but from a technical market perspective gap-openings are occasionally a sign of an impending market turn, just as crude oil making new all-time record highs quickly saw a rapid 10% drop shortly thereafter,” he said. “It’s sort of the market equivalent of Halloween’s trick or treat since there’s the trend within the trend and then there’s the trend reversal — and discerning between the two isn’t always so easy. Just keep an open mind is all I’m saying on this Monday before Labor Day and three-day weekend ahead.”
Looking ahead, Levine said he sees support levels at $5.245, $5.095 and $4.950. The broker said he sees resistance at $5.510, $5.750, $6.050 and then $6.500.
With natural gas storage at healthy levels and the moderate weather picture teaming to keep demand in check, the bulls’ case can’t seem to catch a break. AccuWeather reports that high pressure over the St. Lawrence River Valley will create a widespread area of sunny skies early in the week; however, there will be lingering clouds along the coast. “In addition to the abundant sunshine, the high pressure will bring comfortably dry and seasonable temperatures to the Northeast,” said AccuWeather’s Steve Penstone.
The forecaster predicted that Philadelphia’s Monday high of 84 will rise to 90 by Wednesday, and Pittsburgh’s expected high of 84 on Monday will rise to 88 by Wednesday.
Longer term, the National Weather Service (NWS) expects cool temperatures across major Midwest and eastern energy consuming regions. In its six- to 10-day forecast, the NWS expects below-normal temperatures east of a line from northern Wisconsin to southeast New Mexico to the Atlantic Seaboard. Louisiana, Mississippi, southern Alabama and Florida are expected to have normal temperatures. Out west from the Pacific Ocean to a line from northern Minnesota to southeast Arizona is forecast to have above-normal temperatures.
Top traders see the primary bullish forces as the deeply oversold condition of the market, and its price advantage relative to other fuels. “Natural gas continues to be pressured by flat domestic demand, adequate production and the lack of any significant weather-related support,” says Mike DeVooght of DEVO Capital Management, a trading and risk management firm in Colorado. He noted that last week’s smaller than anticipated storage injection failed to spark any buying interest. “The two factors that could be bullish for gas in the future are the extreme bearishness pervading the gas markets and the cheapness of the gas market relative to alternative fuels.”
As a case in point, while natural gas futures continued to plummet Monday, October crude futures gained another 88 cents to close the session at $71.97/bbl.
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