Picking up right where they left off late last week, January natural gas futures continued to scout lower price levels on Monday, even as winter storms simultaneously brought chilly temperatures to the Northeast and Northwest. The prompt-month contract touched a low of $7.060 in the regular session Monday before rebounding to close at $7.214, down 8.8 cents from Friday.
“I was surprised that we probed so low on Monday given the weather in New York over the weekend,” said Steve Blair, a broker with Rafferty Technical Research in New York. “Following the first snowfall up here, no matter how little, we normally see a little bounce as traders look outside and realize that winter has arrived. Even though we had our first snow this weekend, the market disregarded that. It appears futures are only four or five months late in realizing we have a lot of gas on hand.”
While snow in New York did not spark any kind of bounce, that psychological support at $7 sparked a bit of a rebound Monday, the broker said.
“It looks like we got a little lift off of $7. Futures tried to get below $7 Monday morning, but it couldn’t get through. There is no technical reason for the market to stop at $7, but there is the psychological boundary that the market has to get past. Once it does get below that level, we see major support around $6.820. Even though we are going to have some cold here, it is going to be short-lived and it certainly is not going to be bitter cold. The market is definitely not concerned about being surprised by a 200 Bcf withdrawal from storage with these conditions.”
As for whether the bears or bulls are in charge, Blair said it is not as clear cut as it would seem. According to the Commodity Futures Trading Commission’s most recent Commitments of Traders report, the funds increased their longs more than their shorts. “While the funds are still pretty short on a net basis, it is still important to pay attention to the gross numbers,” he said. “The funds could be 70,000 net short, but if it is comprised of 71,000 shorts and only 1,000 longs, then it is pretty significant.” As of last Tuesday, the funds were 79,000 long and 153,000 short. “I don’t know if the shorts are in control or not because we have had a significant number of fund short positions for a while now, even when the market was moving to higher prices.”
As traders and analysts dissected last week’s drop in natural gas futures, some cited crude’s significant drop as being a contributing factor.
“It seems that the plummeting [petroleum] complex was the main culprit for pushing the gas market lower. Also contributing to the weakness was a lower-than-anticipated draw of stocks and continued concern about the U.S. economy,” said Mike DeVooght of DEVO Capital Management, a Colorado-based trading and risk management firm.
He added that from a fundamental perspective the primary supportive factors are the extreme discount of natural gas relative to petroleum on a Btu basis and a pervasive bearish mentality. “This has been the case for quite some time, and it has yet to spark any significant rally. On a trading basis, we will hold current short positions and look for any substantial weather-related rally as a selling opportunity,” he said in a note to clients.
DeVooght currently advises trading accounts to buy February natural gas and sell April if February trades at a 20 -ent or more discount to April and also to sell April if the opportunity arises to sell April at $8. End-users are counseled to stand aside, and producers are advised to hold short the winter strip at $9.00 for 65% of production. On Friday February natural gas futures settled at $7.371 and April finished at $7.202. On Monday, February closed at $7.294 and April finished at $7.161.
Weather bulls can take some comfort in the most recent heating degree day (HDD) tally issued by the National Weather Service (NWS). The NWS said that for the week ended Dec. 8 an estimated 245 HDD or 43 more than normal were predicted for New York, New Jersey and Pennsylvania. For the Midwest states of Ohio, Indiana, Illinois, Michigan and Wisconsin 245 HDD were also forecast, or 15 more than normal. For the seasonal tally, which began July 1, however, the Mid-Atlantic states have accumulated 1,001 HDD, or 219 fewer than normal, and the Midwest has garnered 1,182 HDD, or 186 fewer than normal.
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