After September natural gas futures gained barely more than a dime on Monday, bullish traders were unable to produce any follow-through momentum on Tuesday as the front-month contract reached a high of $8.479 before ultimately closing out the day’s regular session at $8.330, down 1.9 cents from Monday’s finish.
While Tuesday was technically a down day, bulls might find some solace in the fact that the day’s low of $8.233 fell shy of Monday’s $8.160 low. That said, a number of market participants are targeting the $8.200 price level as a crucial pivot point.
“The action on Monday and Tuesday was very interesting to me because we have had a support level pegged at $8.200,” said Steve Blair, a broker with Rafferty Technical Research in New York. “We’ve tested that out a couple of times over the last few days and even penetrated it, but we have yet to settle below it. That price level is still a very dangerous support level that needs to be closed below if we are to head any lower. Our next number is down around $7.980 or $7.950, but we first have to get below $8.200. Unless we get a really big storage injection in this week’s storage report, I think the market will find itself very comfortable in its current price level.”
Looking at the front-month contract’s $5.534 drop from the $13.694 high on July 2 to Monday’s $8.160 low, Blair said that while no one was calling for it, the resulting price level makes pretty good sense. “While I was never in the ‘run-up to $15.780 camp,’ I can’t say that I predicted that this steep of a drop would happen,” he said. “It took everyone by surprise. However, it appears the natural gas market has come back to some semblance of reality. Having natural gas in August in the low to mid-$8 area is pretty acceptable on an economic basis. Even though we are still quite a bit below year-ago storage levels, it appears people are comfortable with the overall supply situation.”
One factor that could hinder further price cuts is storm formation in the tropics. A number of weather forecasting firms have their eyes currently on two potential formations in the Atlantic Basin. “Both areas threaten to grow stronger in the days ahead,” said John Kocet, a senior meteorologist with AccuWeather.com. “They will have to move through a large area of dry air and African dust before reaching an area of the Atlantic that would allow them to develop into tropical systems.”
The forecasting firm reported that the lead wave is moving to the west-northwest about 650 miles east of the Lesser Antilles and could become a tropical system later in the week, with any interaction with coastal areas of the southeastern United States not happening until at least early next week. AccuWeather.com noted that the second wave could also become a tropical depression within the next few days as it drifts through the central Atlantic more than 400 miles southeast of the Cape Verde Islands. The forecasting firm added that it is too early to accurately forecast a path for either system.
Forecasts of Atlantic hurricane activity aren’t playing too well these days. Early last week Colorado State University increased its estimates of Atlantic activity to 17 named storms, nine hurricanes and five intense storms (see Daily GPI, Aug. 6). “The market continues to discount these forecasts as they have come up dead wrong the past two seasons. They are becoming smaller news stories every year,” said Mike DeVooght of DEVO Capital.
DeVooght is counseling clients to hold current positions. Trading accounts are advised to hold a short October, long January spread position established earlier at 70 to 75 cents; end-users should stand aside, and producers should continue to hold a long put option position consisting of winter 2008 $10 puts at 65 cents and a September-October $11.50 put strip at 75 cents.
Whether the market opens significantly higher or lower Wednesday morning, there will be the potential for the market to snap back to center, says Tom Saal of Commercial Brokerage Corp. in Miami. “The market found good value Tuesday in the $8.330-8.440 area and that range now becomes a potential target for this marketplace.”
The concept of a value area is derived from the technical study called Market Profile, which was developed by legendary trader Peter Steidlmayer and originally applied to grain trading. Steidlmayer would plot trades as they took place in the grain pit and noted that they often formed a bell-shaped curve. His trading strategy would be to buy or sell the ends of the distribution with the idea that prices would return to the norm of the distribution, otherwise known as the “value area.”
Though he admits it is far from science, Saal boasts that each day since Friday the market has traded back into the previous day’s value area. “The last value area that we have yet to test is the $8.640 to $9.011 range from Aug. 7,” he said. “If this thing moves higher, look for traders to push it back to test that level.”
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