With low trading volume as a number of traders opted to extend their already long weekend, May natural gas futures traded well within a dime on Wednesday before closing out the lackluster regular session at $3.630, up 6.8 cents from Tuesday’s finish.
The prompt-month contract traded within a tight 8.2-cent range between $3.564 and $3.646, which left Tuesday’s $3.554 low for the move intact. Despite the higher close Wednesday, traders were not impressed.
“Wednesday’s action really did not show us anything. There was really light volume out there, which I think is a result of many traders extending the already long weekend,” said Ed Kennedy, a broker with Hencorp Becstone Futures LC in Miami. “There is nothing on the fundamentals to predicate a bullish move other than the price itself. They say the cure for low prices is low prices. If prices fall much lower, the rig count decline is going to accelerate and we are going to see rigs packing up shop all over the place, which could spark prices. Weather is obviously a big factor, but we are in the shoulder season right now.”
Kennedy said the bulls are not going to find much support from temperatures. “The long-range temperature forecast is for normal to below-normal temperatures from Chicago to Boston and down into the Southeast, which is most of the country’s demand. That is not bullish. Hurricane forecasts are basically meaningless to the market because it is not how many storms we get…it is where they end up going. I don’t think you can build any sort of a case off the hurricane forecasts.”
As for the near-term price direction, Kennedy said he does not see much changing. “We are range-trading with a downward bias for the time being,” he said. “Some of the bigger funds are pressing the short side, so the market very much resembles the carni game Whack-a-Mole. Every time the mole pops out of the hole, it gets whacked with a mallet. In futures, every time the price creeps higher, the funds hit it back down. A lot of the funds are still bearish and are pressing their point.”
The broker noted you’d have to be “silly” not to buy natural gas at this depressed price level. “We put out a ‘buy’ recommendation to end-users today to buy 10-20% of their forward burn for as far out as anybody will write them,” he said. “These are incredible prices to protect. The average cost of gas this winter was between $9 and $10. The injection month strip right now is $3.940. Hello folks, this is what hedging is all about, it is pure risk management. I would start buying my forward gas as far out as I could get it. 2013 sounds good, but if I could get longer, I probably would. People are responding. There is scaled-down buying under the injection months, which gives the market some bedrock support. It is not reason to make a bullish case, but end-users are a lot more proactive than producers.”
Taking a closer look at Thursday’s 10:30 a.m. EDT natural gas storage report for the week ended April 3, many in the industry believe the Energy Information Administration (EIA) will report a build in inventories of 15-25 Bcf. The number revealed Thursday will be compared to last year’s 16 Bcf draw and a five-year average build of 13 Bcf.
For the moment some see a lack of weather demand tugging prices lower. “I think natural gas will decline and being in a shoulder month, we are out of winter and talking about the May contract, which is before any heat arrives,” said a New York broker. “When the June, July and August period arrives, we will see if it is hotter than normal and whether natural gas will be heavily consumed for electricity generation. Also, give the market another couple of months and we will have a much better feel for industrial demand.”
Others are willing to look for bullish signs. “It has been our feeling that the gas market was searching for a bottom and we were starting to probe from the long side,” said Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm. DeVooght concedes that it will not be “up, up and away [and] the bottoming process will take time. At this time we are trading, not investing, in the gas market,” he said.
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