Coming off the holiday weekend, some not-often-seen weakness in crude futures and natural gas futures price resistance at $12 teamed to push June natural gas lower on Tuesday, one day ahead of the contract’s expiration. The prompt-month contract recorded a high of $12.034 just after noon EDT, which triggered a round of selling that left June to finish the day’s regular session at $11.801, down 5.6 cents from Friday’s close.
Traders took note of the significance of a $12/MMBtu print. The last time prompt-month natural gas traded at $12 was in the wake of Hurricane Katrina 29 months ago on Dec. 23, 2005. That date is also significant because just 10 days earlier natural gas futures recorded their all-time high of $15.780.
While the $12 visit was seen as important, the news maker on the day once again was crude futures, which saw the July contract open Tuesday’s regular session at $131.95/bbl and track lower from there. The prompt-month recorded a low of $128.18 before closing out the regular session at $128.85, down $3.34 from Friday’s close.
“The $12 strike price was of early interest before the crude oil market weakened, undermining some of the bullish sentiment,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “As we move into June, the above-normal temperatures in the forecast could translate into higher air conditioning demand for natural gas, although we also note some nuclear power plants ramping up following refueling. We continue to view the natural gas market as relatively closely balanced, with some risk of a more bearish surplus developing once the Independence Hub returns to service.”
On Friday June natural gas futures posted a strong advance to close at $11.857, up 16 cents, and market technicians were looking for further gains. “Friday’s solid advance created a bullish engulfing pattern for the weekly candlestick,” United Energy’s Walter Zimmerman said prior to Tuesday’s trading. “[We are] still targeting $12.120 minimum with any next step beyond $12.120 targeting $12.405 to $12.535 minimum, and based on the price action so far, $12.790 maximum.” Zimmerman pegs downside support at $11.665 and $11.510.
Short-term traders see the market as dominated by large managed accounts and funds and see little likelihood of prices turning lower. “There are a lot of big long positions in the market and crude oil [strength] and the weaker dollar is driving a lot of the movement in natural gas,” said a New York floor trader. He did say that there were shorts in the market but was ambivalent about whether he thought there might be buy stops above the $12 psychological resistance level. “The long players are just way too big, and what they did Friday was strategize a strong close.”
Risk managers are sitting tight. Mike DeVooght of DEVO Capital Management, a Colorado-based trading and risk management firm, is advising clients to hold on to current positions. He advises trading accounts to “hold short October-long January at a spread of 70-75 cents.” End-users are counseled to stand aside, and producers are advised to “hold June-October $11.500 put strip at 75 cents,” he said.
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