After dropping 36 cents Monday and giving bulls pause, prompt-month natural gas futures resumed higher in trading on Tuesday. November natural gas, which goes off of the board Friday, popped back above $7 once again to record a high of $7.150 before settling at $7.091 — good for a 21-cent gain on the day.
The winter months put in less impressive gains with December settling 12 cents higher at $7.936, while the January and February contracts closed higher by 9.5 cents and 10 cents, respectively, at $8.326 and $8.361.
“Cash prices are hovering just above $7, and I think futures are trying to stay kind of close,” said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. “Let’s see what happens when and if the weather moderates.” According to NGI’s Daily Gas Price Index, the Henry Hub on Tuesday finished at $7.13 for Wednesday delivery.
Saal added that the market is historically difficult to predict during this time of year due to market dynamics and behavioral patterns. “You don’t really know what the behavior of storage operators is going to be in November,” he said. “They can either hoard inventories and keep prices firm or they could decide to start withdrawing heavily if the cold weather comes. It is a really tough call at this point because…what the storage operators decide to do could significantly impact the direction of prices.”
Addressing the expiration of the November contract on Friday, Saal said that during the summer the contract traded over $8, “so traders have pounded it pretty well here going into its last month. As a result, there may be some shorts out there in the bushes. I have also been told there is a large amount of open interest in puts at $7, which is more of a Thursday phenomenon because that is when they expire. The people who are long the options would want to have their options close in the money, so we could see a little push down on Thursday.”
Eyeing the recent price hike in natural gas futures, enerjay LLC broker Jay Levine warned that while supply fears for this winter may be in the rearview mirror for now, there are plenty of other frights out there for the market to face.
“Market observers and skeptics alike are eyeing the recent rally with dubious intent, if only because existing fundamentals haven’t changed even if prices have; counterintuitively to be sure,” Levine said. “The point I think worth mentioning, yet again, is that while we may have shed significant fear premiums over the last few months or, in the case of natural gas, the last year, fears of the unknown — in this instance fear of the upcoming winter along with a myriad of other global fears (quiet as that’s been lately) — are going to be with us, I suspect for a long time to come.
“If we also assume that demand, both globally and domestically, is on the rise — notwithstanding some demand destruction due to price — then it’s not so big a stretch to assume prices will not only remain historically high but, at times, histrionically high,” Levine quipped, alluding to the market’s overly dramatic reaction at times.
Weather continues on the side of the bulls. The National Weather Service (NWS) forecasts above normal accumulations of heating degree days (HDD) for populous energy markets of the Northeast and Midwest. For the week ended Oct. 28, the NWS predicts that New York, New Jersey and Pennsylvania will receive 139 HDD, or 28 above normal. Ohio, Indiana, Michigan, Illinois and Wisconsin will shiver under 163 HDD, or 44 above normal. For the season to date it’s a mixed bag. The Mid-Atlantic states listed above are below normal at 312 HDD, or 52 off the pace, but the Midwest has endured 457 HDD, or 53 higher than normal, the NWS said.
In Monday’s trading, floor brokers sensed that the weather-driven rally of last week, which sent the November contract $1.582 higher may have come to an abrupt halt. “The weather and technical rally all came to an end at the same time. There was a lot of technical activity when the market traded in a 50 cent range in 4 ½ hours,” a New York fund broker said Tuesday morning.
He noted that traders were bailing out, buying the high, getting squeezed and then resetting and reshorting once the market started to press the downside. “We saw several traders buy and reverse their position within [Monday’s] session. They donated several hundred thousand dollars to the market,” he quipped. November futures fell 36 cents Monday to settle at $6.881.
Others say to take the long side of the market. Phil Flynn of Alaron thinks that the natural gas market has now ended the long march lower. The natural gas market appears to “believe that the downtrend is over. The market seems to be looking beyond ample supplies and pricing in the possibility of a cold winter. Buy December natural gas at $7.50 with a stop loss order at $7.30,” he said in a note to clients.
If natural gas prices are going to continue to rise, it looks as though it will not be receiving much help from oil prices. Recent OPEC efforts to lower members’ production have yet to make any impact on the market. December crude oil fell 52 cents to $58.81/bbl Monday, but gained 54 cents on Tuesday to close at $59.35/bbl.
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