Lack of above-normal temperatures and tropical disturbance development tied with weakness in the petroleum arena allowed natural gas futures on Monday to continue to explore the downside. After reaching a low of $6.710, September natural gas wound up staging a minor rally in closing out the day at $6.913, still down 35.6 cents from Friday.
“There was a short-covering rally going into the close, but don’t read anything extra into that. It was really nothing more than a short-covering rally,” said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. “Looking at the weather forecasts, I really can’t get excited about any move to the upside. As far as temperatures from Chicago to Boston, we are still going to continue with more or less chamber of commerce weather for the near-term. In addition, there are no disturbances in the topics that are of any concern.”
Looking at the market’s overall direction, Kennedy said he wouldn’t bet against the bears here. “If I had to pick a direction, I would say the market’s tendency is lower,” the broker said. “Nobody could say the weather market was strong last week. People were injecting gas into storage, unlike two of the previous three weeks, where we saw withdrawals. Now we are back into a more normal injection cycle…aka a normal price structure. So I think we will see a little more downside.”
As for support and resistance lines, Kennedy said he sees support at $6.45 and resistance up at $7.06.
According to MarketWatch, a UN brokered cease-fire between Israel and the Lebanese group Hezbollah appeared to be holding Monday. The cease-fire came into effect at 1 a.m. EDT Monday, potentially marking the end of a month-long conflict in which more than 1,000 people have died. The cease-fire should be seen as bearish for petroleum markets, analysts say.
Top weather forecasters see few developments in the Northeast encouraging to the bulls. AccuWeather notes that after a pleasant weekend, the start of the week was bringing some changes. With high pressure now offshore, a southwesterly flow will bring a return to summer weather to the region with warmer and more humid conditions; yet “this will not last long because a cold front will arrive from the Midwest…with showers and thunderstorms,” said AccuWeather meteorologist Chris Stachelski. He noted that once the front heads offshore Tuesday morning, another high-pressure system will build into the region, allowing for dry weather through the end of the workweek.
Top analysts see burdensome natural gas supplies but suggest the petroleum complex may be more vulnerable to price declines than natural gas. “The bottom line for the gas market is that there is a lot of gas out there and if it wasn’t for the fuel-switching chewing up the record storage, gas prices would be considerably lower,” said Mike DeVooght, president of DEVO Capital, a Colorado trading and consulting firm. “We feel the Btu spreads are going to continue to tighten, but it will most likely be because of lower (petroleum) complex prices rather than higher natural gas prices.” DeVooght advises clients to continue to hold present positions.
As of Monday morning, DeVooght advised trading accounts to hold short September crude and long September natural gas futures, and for end-users, he advised standing aside. Producers are counseled to hold light positions of short September natural gas futures at $6.15 and short October contracts established between $8 and $8.45. He also advises to hold on to earlier short positions of 30% to 50% of winter 2006 -2007 production established earlier at $13.95 and to add to short September and October holdings Monday morning.
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