August natural gas futures limped higher for a third straight regular session on Tuesday as traders were having a hard time pinpointing a reason for a serious move in either direction. The front-month contract added 1.6 cents to close at $3.705.
After gaining an astounding 38.5 cents during last Thursday’s regular session alone, the August contract in the three days that followed has gone on to add a total of only 3.7 cents, leaving some market watchers less than assured of the staying power of the recent uptick.
“We didn’t really have any follow-through on Thursday’s big day up. From a technical perspective, we are seeing a little bit of a triangle pattern developing,” said a Washington, DC-based broker. “This thing would need to break out to the upside if it adheres to the normal triangle trading rules, which is that the market will resolve to the recent trend, which in this case is up. If we break out to the upside, we could see $3.900 to $4, but right now it doesn’t look like we are threatening that. The fundamentals are not there. We’ve had these little sharp up moves three times in the last four months and they are always followed by collapses. Call me skeptical that this is the beginning of a new rally.”
Now that the much-feared United States Natural Gas Fund (UNG) roll from the August contract to the September contract is over (July 15-July 20), traders found that the market-moving hype did not match the actual event (see Daily GPI, July 21).
“The one thing we do know is that the UNG roll is now over and we’ve seen almost no movement on that August-September spread,” the broker told NGI. “It has been less than a penny over the course of the last four days, so all this talk of volatility on the roll proved to be a major nonevent. Everyone was concerned there would be front-running as people set up the UNG guys for a fall during their roll, but the spread didn’t move. UNG’s strategy is not multidirectional. It just buys futures contracts. Yet we are still in a giant bear market in natural gas despite this massive increase in this position. Obviously other forces in this market — namely sellers — are selling with greater conviction than the buyers of UNG are buying. So yes, UNG is big in the market, but apparently not big enough to move the market.”
With fundamentals still weak, traders and analysts see tropical activity as the best antidote for low prices, but the Atlantic Basin remains quiet.
“There are a number of analysts that are desperately trying to pick the bottom of the natural gas market, but I have found hitting a top or bottom is more an element of luck than skill,” said Bill O’Grady, principal with Confluence Asset Management in St. Louis. He added that “bottoms are usually made when prices get hopelessly below the fundamentals, and we are really not there. It’s hard to get excited about natural gas when industrial demand is as weak as it is.
“My hunch is that you don’t get any significant [price] recovery barring a major hurricane disruption probably until Halloween, and then we’ll have to see what the winter brings. If it is cold, you will get a lift. As a guy who likes to see strongly trending markets, a [price] washout would make a buy a lot easier. You would like to see a classic selling climax, but what you have had is a long, broad-basing action, which can also be pretty bullish.”
O’Grady said there currently is not “enough fundamental conviction” to say the downward pressure is over. “I don’t see anything that will break the market out of the $3.50 to $4 trading range. Every time it gets up to $4 it is like it gets shot out of the sky.” He noted that a settlement above $4.500 could signal an end to the sideways movement that has been so frustrating to both bulls and bears, but “it depends on how it gets there. If it gets there in a deliberate manner, it probably does, but if it gets there on a hurricane, I would probably sell into it.”
AccuWeather.com reports no organized tropical systems, but it is following four tropical waves at 38W, 54W, 68W and 83W. Development is unlikely due to wind shear, the forecaster said.
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