With Hurricane Florence spinning harmlessly off the East Coast and moderate temperatures engulfing large regions of the country, October natural gas futures on Monday continued to explore lower price levels. The prompt month put in a low for the day of $5.440 before settling at $5.670, down just half a penny on the day.

The $5.440 low on Monday was significant on a number of fronts. Not only did it mark a new low for the move, it was also the lowest a front month has traded in nearly two years. The last time a prompt month traded lower was back on Sept. 28, 2004 when the November 2004 contract recorded a low of $5.380.

While the prompt month settled near unchanged, the out months finally collapsed under the downward price pressure — dropping 30 to 40 cents on the day in some cases.

“As the prompt-month dropped to new lows for the move, the real story was the out months,” said a Washington, DC-based broker. “Everything got whacked down significantly as the spread between the front month and any other month really came in significantly. The winter strip [November-March] is threatening $9.50, which is significantly under the $10 threshold that held for a while. That strip has been shedding value slowly, but it really accelerated Monday.”

As for the reason for falling winter futures prices, the broker said some forecasters have been “kicking around” the idea of an El Nino event this winter, which would bring moderate East Coast temperatures. “If that talk holds up, these winter months will continue to shed value,” he said. “Prior to Monday’s action, we had been expecting to see front month weakness while the outer months would hold up until they took over front month designation. At that point, they would sort of march off the price cliff. What we saw Monday was the back end of the cliff coming down, which could signal a change in market expectations.”

November and December futures dropped by 35 cents and 41 cents respectively on Monday to settle at $7.255 and $9.110, while the January 2007 contract closed 36 cents lower at $9.825.

The broker also outlined the ramifications of the market’s significant moves Monday. “If you bought November and sold October, which is normally a conservative spread, you would have made 30+ cents on it. That is a heck of a move,” he said. “You have those people wondering how the MotherRock hedge fund went out of business if they were smart fund guys who only traded spreads. Monday revealed the answer. The age-old saying that spreads are less volatile than outrights is true…except for days like Monday. Every once in a while the market gives us proof of its unpredictability. We trade only at the market’s mercy.”

It was reported in early August that energy hedge fund MotherRock LP was closing its doors following more than $200 million in natural gas trading losses over June and July (see Daily GPI, Aug. 10).

The broker pointed out that his firm did a lot more buying of natural gas for marketing clients on Monday than it has in a long time. “We were buying multiple strips,” he said. “There was some decent buying activity from commercial marketers who represent industrial end-users, but clearly there was not enough to pull up the back months. We will have to see if Monday’s down move sparks the more conservative-minded buyers Tuesday. We shall see if this price level is low enough to finally spark some real buying.”

He noted that the question is whether the $5.50 area will hold for the front month. “People are interested to see if there will finally be a upward turn in the market after this sustained selling pressure we’ve seen for a while,” the broker said. “If the front really breaks $5.50 decisively, then $4.50 becomes a real possibility. I don’t think it is going there, but if we blow through the $5.50 area, then $4.50 would become a number we would need to consider.”

Falling prices or not, some see an opportunity. “The operative phrase would be to hold your nose and start buying,” said Commercial Brokerage Corp.’s Ed Kennedy prior to Monday’s session. He observed that a number of end users “don’t have anything (hedge positions) on for the winter.” He noted that the winter strip should be coming in around $9.35, and although that would not be considered a “bargain,” it’s time to start laying in protective price measures to the tune of about 10% to 15% of market exposure. “What we are recommending is put your first tier on, but get something done,” he said.

$9.35 may not be music to the ears of natural gas buyers, but in Kennedy’s experience it is a number that “works” for the profit and loss statements of many end users. He added that there is virtually no load (gas or power) to speak of and that in some of the northern tier states there are frost warnings for this evening.

According to AccuWeather.com, falling temperatures seen in New England will find their way farther south. “Cool air will be forced all the way down the East Coast to the Carolinas as the same area of high pressure responsible for the chill across northern New England wedges the cool air southward,” said AccuWeather meteorologist Chris Stalcheski. He said that high temperatures will average eight to 16 degrees cooler Monday and especially Tuesday and Wednesday from New England to the Carolinas.

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