In their first regular session as prompt month, April natural gas futures accomplished something the March contract failed to do its entire run at the front, which is break convincingly below entrenched support around the psychological $7.00 area. The prompt month ended up settling 52.4 cents lower than Friday at $6.789, setting a nine-month low. The July 2005 contract settled exactly at $6.789 on June 1, 2005.
After beginning the session lower following Access trading on Sunday night, the April contract put in a low of $6.700 just after 11 a.m. EST Monday. Over the past two weeks, the March contract was able to rebound back above $7 four separate times following intraday breaches into the $6.90s. Monday’s $7 break was different.
“We finally broke below that $7 level, which had held up pretty well in the past,” said Tom Saal of Commercial Brokerage Corp. in Miami. “I’ve heard that it was both trade-selling and speculators who pushed April lower. As I have said previously, I think that $7 level also had a lot of implications on the options market. I think that helped the market hold up pretty well, especially last Friday. I don’t know why they came in [Monday] and pounded it, but they did.”
As for the next target levels to the downside, Saal said “there aren’t a whole lot of numbers that stand out,” a belief held by much of the trading community. “This $6.85 area is really big on Market Profile, but you have to go back quite a while to find comparisons.” Saal utilizes the Market Profile technical trading system as one of his tools to understand the market. The system describes not just where the market trades, but for how long it trades at each level.
“We thought there might be a little more support at $7 but it did not materialize,” said Ed Kennedy, also a broker with Commercial Brokerage Corp. “I think there is some more room to the downside as well.”
Looking at the cash market equivalent Henry Hub bidweek, the $6-plus range is one that prevailed for the year previous to the late summer 2005 hurricane spikes, with a couple drops into $5-plus territory during shoulder months and several pops above $7 in the winter months.
Kennedy said the only place $7 will hold as support is on the April-October strip, which is sitting at $7.240. “On the injection strip basis, I think we are talking dimes, not dollars, on the downside,” he said. “Once that strip gets down to the $7 area, I bet we will start to see a lot of buying coming in from utilities. They are not going into the next hurricane season underhedged. That is just not going to happen. We are expecting to see another active hurricane season and everyone has already learned their lesson. The utilities and fertilizer and chemical companies are not going to get burned again. These numbers are profitable for them now, so they can start writing deals again. If it’s profitable, they will lock in prices…make no mistake about it.”
As for April natural gas, Kennedy said it is hard to say how much more downside exists due to the volatile nature of the month. “April is one of the lowest demand months,” he said. “I think we could see $6.25 or so.”
Natural gas bulls are receiving almost no support from the petroleum complex. With geopolitical tensions easing ever so slightly, April crude was able to drop $1.91 on Monday to close at $61/bbl.
Weather bears look to gain the upper hand this week. The National Weather Service reports that with the exception of New England and the Mid-Atlantic, all other areas of the country are forecast to experience below normal accumulations of heating degree days (HDD). For the week ended March 4, New England is expected to see 262 HDD, or 23 more than normal, and the Mid-Atlantic, New York, New Jersey and Pennsylvania, are forecast to endure 232 HDD, or 12 more than normal. Further west and south, the experience of the Midwest states of Ohio, Michigan, Indiana, Illinois and Wisconsin is more typical. Those five states are anticipated to “bask” in 208 HDD, or 25 below normal.
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