After picking up 22.5 cents on Monday to break the $5 psychological resistance price level, the July natural gas futures contract added another 18.3 cents as an encore on Tuesday to close at $5.189. The move puts resistance tests at $5.250 and $5.500 now well within the realm of possibility.
Traders and analysts alike attribute the recent run-up in futures values to the realization that the 2010 Atlantic hurricane season is actually here.
“We closed above $5 resistance on Monday and Tuesday’s advance confirmed the bullish tone,” said Steve Blair, a broker with Rafferty Technical Research in New York. “The next major number doesn’t come in until $5.500. After that, the next number is not until $6.110, which is a very important number because it marks the price level we broke down from when we moved into the bear market a few months ago.”
Blair said he pins a lot of the recent price strength to traders waking up and acknowledging that hurricane season is here. “Even though this first tropical wave this week sort of fizzled on us, I think it had a major psychological impact on this market because it showed the season is truly upon us,” he said. “This has helped to propel this market higher…and I don’t think it is over yet. We might see a pullback to test what has now become support at $5 as early as Wednesday, but any pullback will most likely be a short-lived regrouping before this market attempts to venture even higher.”
The reality check of what time of year it is was delivered by a low-pressure system that was gaining steam over the weekend east of the Lesser Antilles. However, that changed overnight Tuesday. “The disturbance in the Atlantic Ocean, which had some potential to develop a day or two ago, is about to be sheared apart,” AccuWeather.com reported Tuesday afternoon.
Citi Futures Perspective analyst Tim Evans also sees the recent buying surge being tied in with the hurricane season getting under way. “Natural gas futures are motivated less by financial influences and more by the fear that an active hurricane season will translate into production losses from the Gulf of Mexico, if not with any current storm system, then later in the season,” Evans said.
He noted that the historical distribution of storms and hurricanes rises toward a Sept. 10 peak and then subsides, so the risk is currently on the upswing, especially with many forecasters noting that conditions are ripe for about double the storm activity experienced in the 2009 season.
“Almost regardless of the actual storms, we see a speculative cycle of buying under way that will eventually discount the risk,” Evans added.
Some market watchers were quick to point out that Monday’s settlement of the July contract (barely) over $5 was nonetheless auspicious for the bulls. The psychologically important level also triggered buy signals for those systems of traders using moving averages. “A close over $5 would put my model in a buy mode,” said an Oklahoma City analyst just prior to the posting of the July settlement. He added that there was a double bottom above $4.90 but he would use a stop loss set at $4.86. “That’s kind of a tight stop by natural gas standards, but if you are trading the market short term, that is what I would do.”
Market observers focused on the fundamentals aren’t quite so sure. “We still have plenty of natural gas in storage. But the year-to-year surplus has been slowly dissipating, and we could enter [the] next heating season without a surplus at all if we have any shut-in production because of tropical storm activity — or if we get extensive periods of excessively hot weather across large tracts of the country,” observed Peter Beutel, president of Cameron Hanover, a Connecticut-based energy consulting firm.
Beutel contends that “natural gas traders have also discounted surpluses in gas storage over the last two years, and it does now seem that the surplus was fully discounted at $3.81/MMBtu. During the latest reporting period (ended Tuesday, June 8), managed money accounts were actively covering short positions and were even getting long. They are still net short, but this could represent a new predilection on the part of natural gas managed money accounts. If the funds keep buying, it could push prices up dramatically.”
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