If you don’t like the direction of the natural gas futures market, wait five minutes and it is likely to change. Proving once again that the market can be volatile, the December contract on Monday bounced higher after testing below the $7.00 support area in early trading.
After finding support in at $6.98 earlier in the session, the prompt month rebounded above the $7.00 mark, but stalled out well below Friday’s $7.176 settle. However, in the last hour of the regular session, natural gas futures rallied higher to close at $7.436, up 26 cents on the day.
What a wild journey it has been. After spiking to more than $9.00/MMBtu just two weeks ago, natural gas futures broke below the psychologically important $7.00 level early Monday, proving once again that energy futures prices can tumble just as fast as they rise.
With storage near all-time highs at 3,327 Bcf, and winter-like cold weather settling in much later than expected, natural gas futures traders had no other choice than to admit that the market price was a little rich. Giving motivation is the fact that the rest of the petroleum complex is also crashing back down to earth. In Monday trade, December crude hit a low of $45.25/bbl before settling at $46.87/bbl, while heating oil hit a low of $1.3050/gallon, before settling at $1.3431/gallon. As an indicator, December crude and December heating oil were as high as $55.65/bbl and $1.61/gallon in late October.
As prices explore support lines, the question becomes how low can we go? Support at $7.00 could hold only a few days before December heads lower, but nobody is expecting $2 natural gas to make a return anytime in the near future.
Commercial Brokerage Corp.’s Ed Kennedy attributed the rally at the end of Monday’s session to fund-buying. “There was a bit of a vacuum in the market Monday,” he said. “In addition, while crude closed down 45 cents on the day, it did rally back $1.50 from its lows. That caused some short covering by the locals.”
As to the market’s next step, Kennedy said the market still has to establish what the resistance level is. “After that, we can start talking about the consolidation area,” he said. “If you held me to an answer Monday, I would say the market would probably consolidate.”
Explaining the recent downtrend of the last week, Tom Saal of Commercial Brokerage Corp. pointed to fund activity. “The funds net long position over the month of October peaked on the nineteenth of the month, when they were net long 15,554,” he said. “Since then, their net long position has been significantly declining. They are taking profits on their long positions and getting out,” noted Saal, who has studied the high correlation between the behavior of the non-commercial “fund” segment of the market and the price of natural gas. More often that not, Saal finds that when the funds are long, prices are high. When they are short, prices are low.
If the $7.00 level only acts as a temporary minor support area for futures on their way lower, Saal said the lower prices to look at on the charts now are $6.60 and $6.33. “Another [support] level I try to monitor is the average cost of gas in the ground held by storage operators,” he said. “I estimate that number to be $5.95.”
On Wednesday, Saal will be giving a free, 45-minute teleconference discussing factors that influence gas futures prices, including:
To register for the free presentation, email firstname.lastname@example.org with your name, company, address, and phone number.
A more detailed explanation of the factors impacting natural gas prices and how to use them in managing price risk will be given on December 8-9, when Saal will be teaming with Kennedy and Sandy “Trot” Goldfarb of Energylinks Futures, LLC. The two-day workshop will take place at the NYMEX in New York and will include the opportunity to have a bird’s eye view of the gas trading pit when the weekly EIA storage data is released Thursday.
For a complete program description, or to register online for the Workshop at NYMEX, visit https://gasmart.com/workshop/ .
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