The bull move in natural gas futures looked to be alive and well in Friday morning trading before the prompt-month contract came tumbling back to earth in the afternoon. After reaching a high of $8.410 in early activity, the February contract plummeted to a low of $8.095 just after noon EST before closing out the day at $8.210, down 4.9 cents from Thursday but 36.9 cents higher than the previous week’s finish.
“We finally got above $8 and I think part of that was on the back of the changing weather forecasts. Add that large 171 Bcf draw from storage and I think you saw why we got up and through resistance at $8.280, which is a pretty important level because our next major resistance level doesn’t come in until $8.740,” said Steve Blair, a broker with Rafferty Technical Research in New York. “I am not really sure why the market failed Friday.
“The National Weather Service’s near-term forecasts got colder and colder almost every day of the week,” he added. “Looking out to the six- to 10-day and eight- to 14-day outlooks, there is now a lot of blue to be found. Slowly the maps are changing from the above-normal temperature readings that we had for so many weeks.”
Blair noted that the February contract is now in an interesting place after settling under that $8.280 resistance on Friday. “We now look to $8, which is a minor support number on our charts in addition to being a psychological support level. As I have previously stated, I think $7 is definitely in the rear-view mirror. The question now is whether $8 is similarly behind us. I think the market will likely test $8 a couple of times, but we’ll have to see what the weather forecasts are saying when we come in Monday.”
Natural gas bulls are taking a close look at the week-ahead weather and they like what they see. According to meteorologist John Dee, a surge of arctic air is on track to “invade the central U.S. on Wednesday and [move] into the eastern one-third of the U.S. by the end of the week.” He also noted that temperature differentials may be at least five to 10 degrees below average, and it is possible that differentials at some points could fall to more than 10 degrees below average.
Other analysts see a shrinking supply surplus continuing to elevate prices. “We also feel that the large erosion in the supply surplus against average levels has also been a supportive dynamic to this market,” said Jim Ritterbusch of Ritterbusch and Associates. He observed that as a result of the sizable 171 Bcf storage withdrawal for the week ended Jan. 4, the surplus against five-year averages dropped from around 8.2% to around 4.6%.
Higher prices are in the cards, according to Ritterbusch. He says the market’s advance above and beyond what at one time was resistance at $8 has now changed the futures price dynamic. “This level has now become a significant support level as validated in [Thursday’s] trade. From here, additional price advances to the $8.42-8.50 zone per nearby futures appear likely,” he said in a note to clients.
Looking a little closer at Thursday’s action, analysts said traders were pulled by conflicting forces as the morning gave way to the afternoon. Analysts with Barclays Capital said the consensus had pegged the week’s withdrawal at 165 Bcf, although the range was wider than normal.
“No doubt having observed the steady progression of surprise reports since December, market participants had braced for another potential surprise of greater-than-expected withdrawals, as some outliers even were looking for 176-178 Bcf,” the analysts said in a research note. “The print of 171 Bcf came closer to the mode of expectations (Barclays Capital 167 Bcf) and prices turned lower for the rest of the morning. However, with the release of the noon update to the two-week weather outlook, the pace of steady gains returned, as both the six- to 10-day and 11-to 15-day maps took on even colder appearances. The third week of January, statistically the coldest days for much of the eastern heating region, now takes on a much-below-normal pattern, although opinion is mixed as to how far east those cold temperatures stretch.”
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