Buoyed by market psychology and supportive technicals, the natural gas futures market continued higher Tuesday as buyers spent another session quietly consolidating last week’s significant sell-off. The September contract received the biggest buying boost, climbing off its $4.87 afternoon low to rally in the last hour of trading. It finished at $4.964, up 8.1 cents for the session. At 53,447, estimated volume signified another light trading session at Nymex.
With weather forecasts largely unchanged and fresh storage data still a couple days away, traders were forced to scrounge for reasons to push the market around Tuesday. Bears made the first move as they pushed prices lower early Tuesday afternoon. However, that selling failed to push the market beneath Monday’s low at $4.865, and bulls used that as a springboard to higher prices. The rally increased as the closing bell neared with the market notching its $4.985 at 2:30 p.m. ET. By only sifting down to $4.87 and extending to $4.985 Tuesday, the September contract managed to notch a higher-high and higher-low on the daily chart.
But while the technical outlook remains positive, the fundamental picture is still a bit murky. Hurricane season is now in full swing with the likelihood of storms increasing from now through the beginning of September. However, storage remains bearish, with market-watchers looking for another 75-90 Bcf refill when fresh data is announced by the Energy Information Administration Thursday. For Tim Evans of IFR Pegasus in New York the storage data might be compelling enough to defeat even the most rosy of bullish market expectations. “At the recent rate of decline, [the 203 Bcf year-on-year] deficit should be gone in another eight weeks, brining inventories to normal prior to the start of the withdrawal season,” he wrote in a note to customers Tuesday.
Evans is not alone in predicting lower prices. Also skeptical of the market’s two-day advance is Ed Kennedy of Commercial Brokerage Corp. in Miami. “This consolidation has a decidedly bearish cast to it. We will likely continue higher, but a test of resistance above $5.00 would likely bring the sellers right back in,” he reasoned.
In the longer-run, the price level will be determined first by the forecasts for this winter and then by this winter’s actual weather. Because nothing is more unpredictable than the weather, Kennedy suggests that his end-user customers look to take advantage of the relatively low implied volatility in this market (48-51%) by using options. Specifically, Kennedy might endorse initiating the nearly costless strategy of buying a $5.30 call and selling a $4.40 put in September, October and November.
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