‘Playing it safe’ seemed to be the motto of natural gas futures traders again on Tuesday. After climbing as high as $11.860 in Tuesday morning trade, December natural gas began its search lower in the afternoon, putting in an $11.500 low before settling at $11.563, down 4.4 cents for the day.
Natural gas futures traders on Tuesday were attempting to sort out bullish weather forecasts and the path of Tropical Depression 27, hedged against healthy natural gas storage levels and a $2.50 futures premium over the cash market.
“Trading is really treacherous right now because the prompt month moves around 30 cents on air,” said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. “There are big gaps in the autoflow. On Monday, when we broke $12.68, there wasn’t another bid in the ring for 10 cents. The market lacks leadership on both the bull and bear sides. Nobody wants to touch this thing.”
Kennedy said that as is normally the case around this time of year, weather is going to spark the market’s next move. “This cold front that is currently moving through isn’t the one that has everyone’s attention, it is the front behind it that will come through the Great Lakes on Sunday that has people taking notice,” he said. “That one is supposed to bring significantly below normal temperatures and they are supposed to stick around for a while. While that is a nice long range forecast, I think the market is waiting for some verification that it is actually going to be that cold.”
Kennedy noted that AccuWeather.com is drawing an analog to the late November/early December period of 1989, when New York City was having highs of five degrees. “That’s worst case, but if it does happen, the cash market is going to take off like a bat out of hell,” Kennedy said. “This is the reason that the cash market is currently trading $2.50 below the futures market.
“We are currently pricing in the worst case scenario and if the forecast doesn’t happen then futures are in trouble,” he added. “If this forecast doesn’t verify and we end up only slightly below normal, futures are going to fall out of bed. This is why everyone is afraid to touch it. We have this $1 trading range from $11.00 to $12.06, and surprise, surprise, we are smack dab in the middle at $11.56. Nobody wants to do anything here.”
Adding to the murky picture is Tropical Depression 27, which on Tuesday was 265 miles south-southeast of Santo Domingo in the Dominican Republic. AccuWeather.com is currently forecasting TD 27 to turn into Hurricane Gamma by Friday, a Category Two or Three hurricane under Jamaica or the Cayman Islands.
“They are really only giving a position forecast out to Friday because of the time of year,” advised Kennedy. “At this point in the season, the weather waves going across the North American continent are very close together, not like the summertime when they are elongated. It could get picked up by one of these fronts, but it also might not, so it is a low probability forecast after Friday. It could go into Mexico and it could go up the U.S. East Coast, but there is no reliability in that forecast, so the unknown has added nervousness to the market.”
Weakness in the physical market may eventually work to the detriment of the bulls. Traders are doubtful that the wide gulf between the December futures and physical market price can continue much longer. Mike DeVooght of DEVO Capital, a Colorado trading and consulting firm senses “a major battle going on between the futures bulls and the physical bears. We are looking at some of the widest differentials ever in the natural gas market (physical prices sharply under Nymex prices).”
He noted that the financial traders in the gas market have not “thrown in the towel as we have seen in the (petroleum) complex.” He said that his preference is to be on the short side of the natural gas market, and although there might be some bullish news to support futures prices, there is a “huge vacuum under current prices if the (natural gas) bulls throw in the towel. On a trading basis, we will continue to hold current short positions.”
Wide differentials indeed exist. According to NGI’s Daily Gas Price Index, gas for delivery Tuesday into Transco Zone 6 New York was $8.67, approximately $2.93 under Monday’s December futures settle of $11.607. Likewise, Tuesday delivery gas at the Chicago citygate ($7.57) was a portly $4.03 under the screen. The Daily Gas Price Index at the Henry Hub Monday was $9.15, or $2.45 below Monday’s December futures settle.
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