October natural gas futures exploded higher once again on Wednesday, and with the bearish fundamental picture remaining unchanged, market participants were attempting to identify a catalyst. While some were convinced that the recent activities of the United States Natural Gas Fund (UNG) played a role, others saw the extended rally as nothing more than a wave of fund short-covering.
Reaching a peak of $3.793 in afternoon trade, the October contract ended up closing out Wednesday’s regular session at $3.760, up 44 cents from Tuesday’s close and 93.1 cents higher than last Wednesday’s finish.
“I think we are seeing a large short-covering rally,” said Tom Saal, a broker with Hencorp Becstone Futures in Miami. “This move is the result of the funds being extremely net short — over 160,000 contracts — for a couple of months. I believe these funds have started to buy back their short positions to take some profits. Nobody wants to be the last buyer, which is why we’re seeing this frenzy of activity. I think this move will be proved out in the Commitments of Traders report that is coming out this Friday. The noncommercial net short position will drop, I believe.”
Looking ahead, Saal told NGI late Wednesday afternoon that resistance could come in at $3.880 followed by $4. “This rally could very easily break through both of those resistance lines. It’s just a matter of how far these funds want to take this.”
Some rumors swirling around the trading community hypothesized that UNG’s announcement late last week that it would begin to sell more units later this month has caused a short squeeze in the market, but not all traders were convinced. “I think it is hard to believe that UNG’s action alone could be behind this rally,” said a New York broker. “Sure, they could be playing a part, but I don’t think they are that big of a factor. The UNG fund is long only, so just because they are adding a few long contracts isn’t going to cause what we’re seeing. This is short-covering…and UNG isn’t short.”
Wednesday marked the third day of UNG’s roll from long October contracts into long November contracts.
Followers of Market Profile will be watching the next few days’ trading closely. Market Profile was developed by trader Peter Steidlmayer and applied to grain trading but has found wide application in other futures markets such as energies and natural gas. “According to the Steidlmayer methodology, you have a failed auction at $2.70 to $2.74 [October futures], the market moved away from it, and that should be tested within five days,” Saal said Wednesday morning. Other areas may be tested before any move to $2.70 to $2.74. “The first target would be Tuesday’s value area at $3.39 to $3.54, and the second target would be Monday’s value area, which is below at $3.18 to $3.30, and the third is the failed auction, ideally, in that sequence.”
The economy received small signs of recovery in Wednesday’s release of August industrial production and capacity utilization figures from the Federal Reserve. Industrial production increased by 0.8%, slightly above the expected 0.7% increase and July’s 0.5% rise. Capacity utilization rose to 69.6%, up from 69% in July. Despite the increase, the capacity utilization percentage is perilously close to the record low of 68.1% posted in June. In September 2008 capacity utilization was just under 75%, figures show.
Taking a closer look at Thursday morning’s natural gas storage report for the week ending Sept. 11, most industry expectations are for a build in the high 60s Bcf, while some addition estimates run as high as 86 Bcf.
Bentek Energy projects an injection of 68 Bcf, which would bring stocks to 3,460 Bcf. The research firm expects a 49 Bcf injection in the East region, an 8 Bcf addition in the Producing region and an 11 Bcf build in the West region.
“Only in the last three years have inventory levels ended the season above 3.4 Tcf,” said Bentek in its weekly storage note. “This usually occurs in late October or early November, but this year stocks crest 3.4 Tcf in the second week in September. With this week’s estimated injection of 68 Bcf, stocks will be within 85 Bcf of the previous end-of-season record of 3,545 Bcf.”
The number revealed by the Energy Information Administration at 10:30 a.m. EDT will be compared to last year’s 65 Bcf build for the similar week and the five-year average injection of 82 Bcf.
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