After opening lower, the natural gas futures market turned up Monday as traders bid prices higher in sympathy with stronger crude oil prices and ahead of what is expected to be a bullish storage report this Thursday. The March contract finished the session at $6.321, up 6.2 cents for the session and 20.1 cents above its morning low. By comparison, the natural gas 12-month strip, which was not as weak on the open, managed a 9.4-cent gain to average $6.682 Monday.
Heading into the trading session, market watchers were nearly unanimous in calling for a softer energy complex following the relatively quiet election day activities in Iraq and the OPEC decision not to cut production for the spring. March crude responded by gapping lower with a $46.10 opening trade, down more than a dollar from Friday’s $47.18 settle. However, there was little or no followthrough selling interest at that level and traders quickly turned to the formal announcement by OPEC that it would abandon its previously stated goal of a $22-28 per barrel price band. Though no new price band was given, traders had heard enough and responded by pushing March crude to a $48.20 close, up $1.02 for the session.
Natural gas traders also had a bevy of somewhat contra-indicative information on which to base their trading decisions Monday. While bears are banking on a warming weather trend, bulls were quick to point to the higher-than-forecast occurrence of heating degree days (hdd) tallied by last week’s chilly weather. According to the National Weather Service, there were an average of 235 hdd last week, 29 more than the original 206 hdd forecast.
A degree day is an index demonstrated to reflect demand for energy to heat or cool houses and businesses and is derived from daily temperature observations at nearly 200 major weather stations in the contiguous United States. It is computed from a 65 degree base, where each degree — per day — below 65 degrees adds to the heating degree day accumulation. At an average of 235 degree days last week, the nation was 13 degree days, or 5.5% above the norm (colder).
The revised degree day data from the National Weather Service has prompted market watchers to go back and recompute their expectations for this week’s EIA storage report release, which covers the week ending last Friday. While predictions announced last week were calling for a 200 Bcf or smaller draw, expectations this week have ratcheted up to as large as a 230 Bcf takeaway. If realized, a withdrawal in this range would likely fall neatly between the 182 Bcf five-year average pull and the year-ago withdrawal of 224 Bcf. Most market watchers feel a number of this magnitude would have modestly bullish implications, as it would narrow the surplus to the five-year average, which currently stands at 279 Bcf.
In daily technicals, traders expect a short term decline within the broader framework of a continued consolidation of prices. “I don’t see the earlier lows in the March contract being taken out, but the market is poised for a near-term sell-off,” says Craig Coberly, analyst with GSC Energy in Atlanta.
The March futures contract reached a low of $5.77 during trading on January 3. On Friday it traded as low as $6.15. Monday’s session notched a $6.12 low in the prompt month.
Coberly added that over the next two to three days he anticipates that prices would move lower, but the longer term uptrend is intact. Savvy traders like Coberly always have a point at which they are willing to call themselves wrong and reassess, in this case, the expected short term slide. “After Thursday’s EIA inventory report the March futures briefly poked above a long term downtrend line, but failed to settle above it. In order for me to think that prices would be ready to move any higher, a close of the March futures above Thursday’s high of $6.64 would make me believe we are off and running to the upside,” he said.
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