With the energy industry glued to storm forecasting models in the attempt to predict Hurricane Dean’s path early this week, the natural gas futures market had upward pressure on it throughout Friday’s session. After trading above $7 three times during the week, the September contract was actually able to settle above the psychologically important line for the first time on Friday at $7.010, up 13.5 cents on the day and 19 cents higher than the previous Friday’s close.
Friday’s close represented the first time a prompt-month contract finished above $7 since June 22, when the July contract closed at $7.130. Where the market turns next will likely be dictated by what path Dean follows during the week. Some forecasters have the storm entering the Gulf Tuesday as a Category 4 hurricane (see related story).
“This has been a week of the market trying to speculate on the first big hurricane of the season that may enter the Gulf,” said Tom Saal, a broker with Commercial Brokerage Corp. “What that usually produces is price volatility, and Dean is still pretty far away from the Gulf. If it does get into the Gulf, then I think we will see even more volatility.”
Saal said the anonymity of electronic Globex trading also factored into the volatility equation. “I really think Globex is also increasing volatility. You no longer have local floor traders buffering the intraday price moves,” he said. “There are more screen traders trading smaller volumes, but there are no larger speculators in there buffering the price moves because it’s hard to see who is active on an electronic exchange. The locals were providing liquidity before Globex and they don’t always have the same market opinion, so they would have the tendency to balance each other out within a certain price range. Now with Globex, the locals are gone, so the market moves dramatically in one direction or the other to where the larger volume is.”
Citigroup analyst Tim Evans said Dean will definitely steer the market in the near term. “The major story of the day, the week and maybe next week too remains Hurricane Dean, which demands more attention as it moves closer to the U.S. Gulf and gains strength,” he said Friday. “There may well be a sharp price drop to follow this rally if damage proves light, but it is not the time to sell now.
“The natural gas market is also benefiting from its share of Fed talk, but it pales in comparison with the hurricane risk. We continue to see potential for heavy fund short-covering to drive prices into the $7.500-$8.000 range and while Dean’s path is the key factor over the next few sessions, we note this drill may occur another time or two before the hurricane season is through. We certainly can’t rule out multiple shocks of this nature.”
The path of Hurricane Dean is uncertain, and according to Jim Ritterbusch of Ritterbusch and Associates, “Until these storm concerns dissipate, additional spread strength (nearby contracts gaining relative to the more distant ones) should not be ruled out. Wide price swings will continue to be driven by adjustments in the forecasted path of Hurricane Dean, particularly given the fact that this storm could eventually achieve Category 4 or 5 status, a stronger system than any that were seen last year.”
Given the uncertainty over Dean’s path and strength equity market turbulence, Ritterbusch expects trading “to remain volatile amidst the various crosscurrents of the oil price action and tropical storm updates. We may look to reestablish short January positions at a later date on storm updates or on evidence of a significant reduction in fund net short holdings. But it is beginning to appear that a price downturn into fresh low ground may be delayed until later this month and may require a subdued period of storm activity similar to that seen last year.”
Joe Bastardi of AccuWeather calls for Dean “to make landfall near where Emily did in 2005, which is south of the Texas-U.S. border. That is very close to the GFS (weather model), which has been cleaning up on this compared to the other models, which have been lousy compared to it.”
Mexico landfall or not, some traders are ready now. “We’re long September natural gas from approximately $6.700 with a stop loss order at $6.500,” said Phil Flynn of Alaron.
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