Undeterred by the three-day holiday weekend break but bolstered by news that government production figures could be revised significantly downward, natural gas futures bulls on Monday managed to hold on to last Thursday’s momentum as the May contract gained another 19.1 cents to close the regular session at $4.277.
With the prompt-month contract now gaining 40.8 cents since last Thursday’s storage report revealed a somewhat-bullish-compared-to-expectations 12 Bcf build, some market watchers are ready to reevaluate the market’s larger downtrend and where prices go from here.
“The natural gas market is seeing mixed trade, with the updated temperature forecasts still pointing to weak late-season heating demand and above-average storage injections for the weeks ahead, but the market [is] still uncertain whether Thursday’s rally indicated that the market has hit bottom,” Tim Evans, an analyst with Citi Futures Perspective in New York, said Monday morning. “We would certainly argue that there is less downside risk from the $4 level than there was from the $5.500 equilibrium from six weeks ago.”
Evans added that while the news last week that the Energy Information Administration (EIA) might issue a downward revision to its monthly gas supply data in its 914 report could end up supporting prices (see Daily GPI, March 30), he has never been a particular fan of the report since it contains data that is almost two months old when it comes out.
According to The Wall Street Journal, the EIA will make broad changes to its monthly EIA 914 report, which documents production from major producing states as well as from offshore. According to the article the director of the 914 report said there would be “significant” downward adjustments in some areas when the next monthy report is released on April 30.
“While it does provide some state-by-state breakdowns that are of interest, it lags about a month behind the U.S. dry gas production reported in the monthly Short-Term Energy Outlook,” Evans said. “Neither report is critical to natural gas traders as the weekly storage figures, which proved a more timely look at the intersection between natural gas supply and demand.”
In addition to the slightly supportive storage build reported last week, traders also believe the market rallied due to last week’s encounter with important support at $3.820. Just minutes before the fresh storage data was released last Thursday, the May contract reached a low for the larger downtrend at $3.810. The $3.820 price level is seen as important because it represents a 61.8% retracement of the September-to-January move higher from $2.409 to $6.108. Some traders believe a meaningful breach of the price level could open the door to last year’s $2.409 low (see Daily GPI, April 5).
Some traders acknowledge the bearish impact of strong production and mild weather but hint that economic strength is likely to increase industrial demand for natural gas. “We look for growing indications of economic improvement to begin taking on more assertion as a pricing consideration,” said Jim Ritterbusch of Ritterbusch and Associates. He noted that although last Friday’s employment report hasn’t been able to generate much interest from the natural gas trading community, “recent manufacturing data continues to auger in favor of industrial demand improvement as this year proceeds. While signs of such improvement remain largely anecdotal, we feel that the smaller-than-expected storage injections of the past couple of weeks have been influenced by a stronger pace of industrial off-take than had been previously projected by most observers.”
Funds and managed accounts increased the holdings of long natural gas futures and options and decreased holdings of short positions, according to government data. For the week ended March 30 the Commodity Futures Trading Commission in its Commitments of Traders Report disclosed that on IntercontinentalExchange, natural gas longs fell by 24,442 contracts and shorts decreased by 8,721. At the New York Mercantile Exchange long futures and options rose by 7,528 and shorts decreased by 4,868 futures and options contracts. When adjusted for contract size long futures and options on both exchanges increased by 1,418 contracts and shorts fell by 7,048 contracts. For the five trading days ended March 30, May futures fell 21.7 cents to $3.973.
Students of the economy were generally pleased with Friday’s employment numbers. The Labor Department reported that March nonfarm payrolls increased by 162,000, a healthy increase but below expectations of 200,000. Revisions to January and February, however, added another 62,000 jobs. The overall unemployment rate held steady at 9.7%.
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