Taking a divergent path from crude, July natural gas futures explored lower on Friday, reaching a low of $7.28 before settling at $7.36, down 11.3 cents from Thursday’s settle and 33 cents lower than the prior Friday’s close.
The decline had some market watchers scratching their heads in confusion as crude and weather forecasts for heat continued to give strong bullish support. Once again, August crude reached $60/bbl in Access trading before settling Friday at $59.84/bbl, up 42 cents.
“I did not expect natural gas to be off 11 cents Friday, especially with August crude pushing through $60 again,” said Brad Florer, a broker with ICAP Energy. “I think both sides are very focused on the bad things that can happen to them right now. I think you have longs who are looking at where we are trading, but are also seeing storage, so they are having a difficult time reconciling the two. Then you have shorts who are looking at crude and heating oil go through the roof and are also looking at hot weather forecasts. So, both sides don’t really have a lot of confidence in what they are doing.”
A forecast earlier in the week from WSI Corp. called for intense summer heat to impact much of the country over the next few months (see Daily GPI, June 21).
Florer said that while he believes longs have felt fairly good about their position, he thinks they are having a hard time getting motivated to move further. “Maybe these guys are just running out of gas, so to speak, so they are taking profits,” the broker said. “I don’t think we have seen any real selling come in. I don’t think shorts are ready to place any big bet and wrestle away control of the market. They are pretty much held in check by what is happening in crude and with the weather.”
He said there appears to be a strong lack of confidence in the market right now where nobody wants to press either side at this point. He said he would equate the current position of natural gas futures to “limbo-land,” adding that he believes crude will ultimately break the tie.
“I think fear is the really big driver right now on both sides, but I still think the most pain rests on the upside of this move,” Florer noted. “If this thing gets away from one side or the other, it will most likely get away from the people who are short. That being the case, I would anticipate that this rally isn’t over yet.”
Florer added that in the past, when the natural gas futures market starts rolling, it’s not a long ride from $8 to $10. “What we haven’t yet seen from this rally is the big spike to the upside, which usually signals that it is done. I am still waiting for that before I will be convinced that the upside is over,” he said.
Citigroup’s Kyle Cooper said he agrees that natural gas is still tethered to crude’s actions. “The natural gas market’s just not going to come down until crude gets a bit of a break, and that’s not going to happen for a while yet,” he said.
Other market watchers agree. “Some traders are talking $8 in natural gas, but I think that is a long way away,” said a New York broker. “Seven dollars and seventy cents is the next area they are looking at on the floor.” He suggested that if the August crude oil trades at $60, it will help pull the natural gas contract higher. “I was buying crude oil all day [Thursday] for my fund accounts,” he said.
The latest futures price increases might not be over yet. Funds and managed accounts represent a potential reservoir of further buying inasmuch as they are still holders of a significant number of short futures contracts. The Commodity Futures Trading Commission (CFTC) reported Friday in its Commitment of Traders (COT) report that as of June 21, noncommercials were net short 28,911 contracts (futures only). This is only a small decrease from the 31,753 contracts held the previous week.
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