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Futures Soar Before Settling Near Unchanged
While it was a quiet holiday for much of the energy industry, natural gas futures trading on the New York Mercantile Exchange showed no corresponding slow down. Amid reports of colder temperatures, November natural gas pushed to a high of $6.800 before coming back down to close at $6.429, up less than a penny on the day.
Some analysts wonder whether the front month can retain its recent gains, noting that futures are still trading at a $2 premium to the cash market (see related story). According to NGI’s Daily Gas Price Index, gas for spot delivery to the Henry Hub Oct. 9 finished at $4.400, while November natural gas futures on Friday closed at $6.427.
That divide got a little bit smaller Monday as cash prices soared at all points in the East and most of the West as much of the U.S. braced for the first major cold snap of the fall season. Double-digit gains from nearly half a dollar to around 85 cents dominated eastern markets and the non-Rockies West (see related story).
“At some point the futures-over-cash premium will get sorted out, but the question is which moves in which direction,” said a Washington, DC-based broker. “Normally with cash this far under, that would be a sign of weakness. However, I think this one comes down to a divergence of opinions. The physical players are looking at a different universe with ample supplies of natural gas in storage while the futures traders have already discounted the supply overhang and are now trying to determine what is next for the market.”
The broker noted that trading appeared light Monday as some observed the Columbus Day holiday.
“Our commercial interests were not busy at all on Monday due to the holiday. We did a few things for a producer, but not a whole lot,” he added. “Maybe there wasn’t as much attention being paid to the market, which is why we saw one of those parabolic arcs where it took off higher and then returned basically to where it started from. I don’t think the day helped us much in terms of determining anything on a larger basis.”
The broker noted that he is fully in the bullish camp now. “We have had a nice run from the $5.350 low basis the November contract back on Sept. 28,” he said. “At some point I expect a little bit of a correction, but our momentum indicators are bullish now. A little bit of weakness here could be attributed to a corrective down move following the solid gains we have had.”
Jay Levine, a broker with enerjay LLC, said not much in the market has changed since last week. “The complex is attempting to shrug off underlying bearish fundamentals by working off the technically oversold conditions which have beset this market for so long, with a reminder (thanks, N. Korea) that the world is still a very precarious and potentially fragile place.”
Meanwhile, major Midwest energy markets will get an early taste of winter. The jet stream is situated over the U.S. Canada border, but by Wednesday it will shift south with high winds through the Dakotas and western Iowa.
“An Arctic-source high-pressure air mass will be steered directly south through Canada into the western Great Lakes and Midwest,” said Paul Dailey, meteorologist with the WGN Weather Center in Chicago. He added that by Thursday, there’s a good chance snow will blanket northern Wisconsin and upper Michigan, while the Chicago area will be hit with record cold for this time of year (highs in the 30s Thursday) with snow flurries.
Some aren’t buying the weather-driven rally. According to an Oct. 6 Bloomberg survey of 19 traders and analysts, 13, or 68% predicted natural gas prices will drop this week. Five said gas prices will rise and one expected little change. It’s the most bearish response since the first week of April, the news service said.
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