With near-term weather remaining supportive and speculative traders holding a record net short position, March natural gas futures continued to test higher price levels in Monday action. The contract recorded a $9.300 high in morning trade and a $9.090 low in the afternoon before settling at $9.186, up 4 pennies from Friday’s close.
Looking at Monday’s flight up to a $9.300 high, Citigroup analyst Tim Evans said the market appears to be in flux. “I think we have reached a stage where we are less stable than normal. That is consistent with some real divergent opinions on the market,” he said. “We are flailing about looking for some signs of vulnerability. As far as my own views are concerned, I definitely see room for a further short-covering spike because we have these big short positions on.
“Taking a peek at the other side of the coin, we are probably high by $2-plus on what might be justified as a valuation given our modest year-on-five-year average storage surplus. Roughly speaking, the five-year average for prices during this week is $6.860 and the highest price for this week was $8.100. I think that highlights the fact that we are at the top of the range, so you have to wonder if this price level is sustainable. I certainly think we are stretching the envelope on this one, but there is also no reason to short this thing at $9.200 if it is going to blow up to $11.500. You just don’t know.”
In dissecting the Commodity Futures Trading Commission’s (CFTC) Commitments of Traders report for natural gas last week, the analyst noted that the elevated futures prices might be a result of the funds sitting at a record short position. “I think this is what happens when the market collects a high level of speculative short positions,” Evans said. “Sometimes I view the positioning within the CFTC data as how optimistic or how pessimistic traders are about the market. I think the recent fresh record extreme in the reportable noncommercial cumulative net-short position shows a significant pessimism about the current price.”
Looking at the CFTC data, Evans noted that as of Feb. 19, futures and options combined revealed a 10,550 addition to the short side for a new record short position of 142,276. He added that the short side of the natural gas reportable noncommercials accounted for 19.3% of the total open interest, which is a pretty big position relative to the size of the market. “Although I do see the market as being overvalued here, I don’t think we are at a record overvaluing. This market currently is just not that remarkable from a fundamental point of view. It is almost like we are shocked by the ordinary.”
Traders continue to monitor near-term temperatures as well as the neighboring petroleum complex, which continues to look strong. Forecasters studying complex weather models see cooler temperatures on tap for eastern energy markets in the 11- to 15-day time frame.
“The American ensemble has remained consistent overnight and continues to show a cold outlook for the Eastern U.S. and is the favored model,” said Matt Rogers, meteorologist with MDA EarthSat. He noted that the European model showed normal temperatures over a substantial portion of the nation but said it was a forecast that rarely comes to pass. “The pattern with a ridge on the West Coast shown by the Euro (and the American and, at times, the Canadian for that matter), however, is conducive to cooling in the East and Midwest,” he said in an early morning forecast.
One word of caution, however; EarthSat ranks confidence in the prediction at just two out of five. Longer-term forecasts are often more difficult, and the six- to 10-day forecast, for example, has a confidence level of six out of 10.
Others are more focused on the cavernous Btu price differential between petroleum and natural gas. “There was a lot of talk this past week of buying natural gas and selling the complex on a Btu basis,” said Mike DeVooght of DEVO Capital Management. DeVooght is of the opinion that this is a significant fundamental factor supporting the price of natural gas, and “for those that feel crude oil is going to maintain the mid to high $80 level for the long haul, and there are a lot of people that feel this will be the case, buying natural gas in the deferred months makes a lot of sense. Natural gas is a bargain under $10/MMBtu if crude oil holds the plus $80 level,” he said in a note to clients.
In Monday’s trading, spot-month April crude oil reached a high of $99.65/bbl before closing at $99.23/bbl, up 42 cents from Friday’s close. The $99.23/bbl roughly equals $16.54/MMBtu, or a $7.35/MMBtu premium to the natural gas futures spot-month contract close on the day.
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