Backed by bullish news and Thursday’s 26.6-cent gain, July natural gas futures on Friday reached a high of $4.977 before backing down a tad on profit-taking ahead of the weekend to close at $4.797, up 10.7 cents from Thursday’s close and 45.6 cents higher than the previous week’s finish.
While no one will disagree that current natural gas storage levels in the United States are plump for this time of year, factors such as Thursday’s bullish 88 Bcf build and the regulatory uncertainty surrounding drilling sparked by the Gulf of Mexico oil spill have given natural gas bulls the upper hand for the time being.
“We’ve certainly broken out of our trading range of the last three months. After we got above $4.500, my target was $4.960, which we tested Friday, so things are moving rather rapidly,” said a Washington, DC-based broker. “We believe this is an official breakout, even though we had a little bit of a sell-off on profit-taking to close trading. We are definitely still on the bullish bias.”
In addition to singling out the bullish storage injection, the news of some increased restrictions on Gulf drilling (see related story) and the regulatory uncertainty going forward as reasons for the move out of the roughly $3.800 to $4.400 trading range, the broker said he also believes it was about time.
“We’ve been trading in a range for so long, people begin playing the ‘buy the bottom, sell the top’ game. Traders would wait till the market got up to $4.400 before selling, hoping to make the 60 cents on the swing back down. People had done quite well doing that two or three times over the past three months,” he told NGI. “What happens, though, is if I sell at $4.400, I’m going to put my buy-stop to protect myself at $4.450 or $4.500. When a breakout happens, my stop gets hit and it’s a buy at the market like everyone else. Then you have the momentum traders who wait for a breakout of a range to act. When they see a new high over the last 20 days, they buy that bit of strength, so you have the short-coverings and the momentum traders all hitting at the same spot.”
With the Deepwater Horizon well crisis in the Gulf, the broker said the environmental front now has more traction, which could also be boosting prices here. “The environmental side of the equation is now much stronger and well armed to go and get legislation changed offshore and onshore,” he said. “I think the market is concerned that onshore hydrofracing could be regulated. Forget about the Gulf for a minute, I think all of those environmental groups who have concerns with hydrofracing — some of which might be valid — might be listened to now. Before they might not have been listened to because producers could say that ‘onshore shale gas is safe, domestic energy, that’s cleaner than oil.’ Prior to the Gulf crisis, industry could have said ‘tut, tut, don’t worry about that, I’ll take care of you.’ No state or federal legislature is going to buy that line now, so the concern is that some of these very productive shale plays may be given a new look, i.e., regulation, which equals higher costs. Higher costs will mean producers will need a higher price at the market to justify sinking the well.”
Looking at current resistance levels, the broker said $4.960 remains the first target, followed by $5.060 and then $6.108, which is the old high from a number of months ago. On the downside, he said $4.390 is the “critical support level.”
Economy watchers were not so pleased with the 8:30 a.m. EDT Friday release of May employment figures from the Labor Department. In April nonfarm payrolls grew by 290,000, and expectations for May were for a bountiful 540,000 addition. The actual figure came in at 431,000 with 411,000 of those being temporary census workers. April’s unemployment rate was anticipated to have declined to 9.8% from 9.9%, but it slipped lower to 9.7%. July natural gas futures fell 3.5 cents immediately after the release of the data.
Short-term traders saw Thursday’s gains as largely the result of short-covering but believe the tenor of the market has changed. “The [Energy Information Administration] number came out, and traders just nailed every short out there,” said John Woods, a senior trader at McNamara Options in New York. He noted that expectations were for a build in the upper 90s Bcf range and when the number came out at 88 Bcf, “traders just seized the market and ran it higher. All they did was run stops,” he said.
Woods believes “the tone of the market has changed over the last couple of days. It has been firming up, and before on a pullback you expected the market to get down to the $3.90 to $4 level, and now I think people are more comfortable with $4.05 to $4.15 as your dead bottom.”
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