Monday’s 22.1-cent drop in December natural gas futures to $4.824 had traders debating whether the rally from Sept. 4 was now officially over or whether the pullback represented a mere pit stop on the way to yet higher values.
After reaching a high of $5.031 in early regular session trading Monday, the prompt-month contract plummeted for much of the rest of the day, notching a low of $4.817 just before the close.
“Obviously our rally from early September has stalled. The December contract got up near $6 during the middle of October and then died out,” a Washington, DC-based broker told NGI. “Things have been weak since then. In our view this is still the correction in a larger bullish move that we expected to see. If this drop is a two-wave from an Elliott Wave point of view, two-waves are often very violent and retrace much of — if not all of — the one-wave up. Basically, it is the return of all the people who knew this was an overpriced market. They were scared to death during the run-up of September and October, but now have returned with confidence to sell the hell out of it.”
The broker noted that people have reason for the return in confidence toward lower prices. “We are starting to see the return of some of the shut-in production,” he said. “Just the other day ConocoPhillips reported that 300,000 cubic feet per day of shut-in volumes were recently returned to the market. BP said recently that their North American natural gas business is cash flow positive at approximately $4 and that production growth would resume in a $6 market in 2010. These guys are basically mimicking the behavior of OPEC. When prices are low, everyone has good discipline and shuts in production. As prices rise, some of the producers say, ‘Well, I need to make a little bit here, so I’m going to start producing at $5.’ Everyone follows and produces a little bit as well. All those ‘little bits’ add up to a lot and then you have the increasing demand, which is creeping back, start to be offset by the resumption of supply coming back on the market.”
Reiterating and clarifying his bullish stance, the broker said prices will not trend higher unflinchingly. “While we are bullish on this thing, it is going to be very choppy back and forth for a good while,” he said. “We will not immediately shoot back up to $14. We’re back to a good old battle between supply and demand, but the X factor is what type of winter we end up seeing. In the near term, a key support number comes in around $4.750. Below that we’ve got $4.600 and $4. If we break those, then obviously the $2.409 low for the move from Sept. 4 becomes the ultimate support line. If we were to see a significant breach of that level, then we’re not looking at a corrective two-wave lower and we’ve got a whole new ball game.”
Some weekend updates to weather forecasts are calling for warmer temperatures throughout the Midwest in the near term. MDA EarthSat in its morning six- to 10-day forecast reports that “the forecast has trended warmer across the Midwest from [Sunday’s] update, particularly during the first half when strong aboves [normal temperatures] are expected in the north. After a cool start, the East should warm to above normal mid to late period as a strong upper ridge arrives.”
On Friday the Commodity Futures Trading Commission (CFTC) reported increased interest in the short side of the market by the managed money sector in its weekly Commitments of Traders Report. For the week ending Oct. 27, managed money held 126,937 long positions and 166,698 short positions, including both futures and options. The long holdings are lower by 2,382 contracts and the short positions are greater by 5,124. For the five trading days ending Oct. 27 the now-expired November futures contract fell 60.4 cents to $4.557. Total open interest in natural gas futures and options stands at 922,926 contracts.
The gain in short interest notwithstanding, fund traders see managed money looking for a spot to go long. “People are lining up to be bullish; they are trying to be bullish, but the rollover gap is keeping everyone cautious,” said a Texas fund trader. When the December contract became spot on Thursday, it left a large gap on the daily bar charts between the mid $4.60s and mid $4.90s.
The trader added that it was the sentiment of the managed money community that the market is looking for a pullback to buy, but “traders are worried that the rollover gap might be filled and thus any market support would be lost. To me when you are looking for a pullback, you often don’t get the entire move you were seeking, and the market gets away and starts to go up.”
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