Bouncing up and down throughout the day in Nymex’s shortened trading session, February natural gas futures finally settled lower on Friday heading into the Martin Luther King Jr. Day holiday weekend. On fairly low volume, the prompt month settled at $6.395, down 5 cents on the day, but up 39.4 cents on the week thanks to Thursday’s significant rally.
The lack of volume was also evident on the liquids side as February crude settled 34 cents higher at $48.38/bbl and February heating oil came in less than a penny above Thursday’s settle to close at $1.3509/gallon.
IFR Energy Services’ Tim Evans said natural gas futures trading on Friday was largely consolidation on lighter volume ahead of the long weekend.
“We think it’s inevitable that someone is going to be sorry they held their positions, but it is not sure just now who that will be,” he said. “The forecast for colder temperatures could finally deliver the one the bulls have been rooting for since the summer or it could prove yet another dud, turning the rally into retreat.”
The National Weather Service is still calling for below normal temperatures to impact the entire East, with warmer than normal temperatures expected in the West. However, the impact on the natural gas complex remains to be seen as the length and severity of the cold in the East is expected to dictate the market’s next move.
Evans added that the market will also have to absorb another bearish storage report for this past week before it might see a more consistent bullish picture going forward. “In other words, we may not have seen the last of the volatile chop,” he said. “A steady close followed by a new high on Tuesday, though, will squeeze the funds harder, with potential for a further spike that might make Thursday’s jump look small.”
Evans noted that the February contract’s overnight Thursday probe to $6.61 was not matched by the open outcry session, signaling a shift to consolidation mode. “Downtrend resistance at $6.71 steps down to $6.65 for Monday, so by the time trading resumes Tuesday, the trend and the high will be about the same, adding to the importance of a renewed breakout past that level. Psychological resistance at $7.00 and longer-term selling from $7.35 through the $7.62 high of Dec. 17 become possible targets under this bullish scenario.”
On the support side, Evans said he sees support for prices first at $6.30, but with more pivotal buying in the $6.19-6.22 zone. “If prices were to drop past that point, we see a short-term downtrend taking hold, putting pressure back on the major support at $5.71-5.83.”
Commenting on the Energy Information Administration’s report of an 88 Bcf withdrawal from gas storage, Evans said natural gas futures had three choices Thursday. “It could look at the storage number and be impressed that it was bearish, dwell on the fact that it was 60 degrees in New York City, or it could look ahead to the potential cold that has been forecast for the Midwest and East.” Evans said futures ended up choosing the third option on Thursday, as February natural gas shot up 50.2 cents.
Evans said that although some newswire commentary may try to spin the storage report as somehow supportive in an attempt to explain the price surge that followed, he said he sees the market rising in spite of the data, not because of it. He noted that the 88 Bcf net withdrawal was toward the low end of the broader range of expectations for the week ending Jan. 7.
“Thursday’s rally is a second effort to price in the coming cold spell and to exploit fund short vulnerability to higher levels, which we do see as considerable,” Evans said. “Prices may well spike further, as they did in November and December on prior cold snaps, but we doubt this will evolve into a true bull market.”
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