October natural gas drifted lower as traders diverted much of their attention to other markets. Volume was light and spot October was limited to a 6-cent range. At the close October had eased 0.4 cent to $3.701 and November had shaved 1.6 cents to $3.766. November crude oil fell 66 cents to $79.85/bbl while carving out a trading range of more than a $4. The Dow Jones Industrial Average rose 38 points to 10,771.
“This market remains as a sea of calm amongst a huge volatility spike across most of the commodity and financial spectrum,” said Jim Ritterbusch of Ritterbusch and Associates after the market close. “Many money managers are likely preoccupied with other commodities at the present time and as a result, [gas] price impetus was limited in either direction. While a quick glance at the charts would favor a bearish stance in this market, we still see limited downside follow-through beyond [last] week’s lows.”
Ritterbusch sees the dynamics of the price curve as suggesting future strength. “A supportive price portent is still being seen in a strengthening spread curve with the front switch stretching to a new narrow contango of around 6.5 cents in [Friday’s] trade. Although this spread strength is unlikely to be maintained into expiration next week, we are interpreting it for now as indicative of solid physical pricing that is spinning off demand for storage.
“Rolling of speculative shorts has likely been an additional contributor. For now, we are maintaining a cautious, bullish approach while emphasizing first quarter 2012 contracts. But at the same time we are still keying off nearest futures as we are maintaining a bullish approach only as long as October futures are able to close north of the $3.70 mark. We will review this stance in the light of weekend updates to the temperature views as well as the tropical storm outlook.”
At first glance the weather outlook doesn’t look all that capable of holding October north of $3.70. Forecasts for this week show heat in Texas but moderate conditions elsewhere. Commodity Weather Group in its six- to 10-day forecast shows a broad ridge of above-normal temperatures extending from North Dakota and Minnesota as far south as Texas and reaching Nevada on the west and Indiana on the east.
“Another chance at 100. Both Dallas and Houston have another shot at triple-digit temperatures this Sunday and Monday with a quick burst of stronger warming expected across the area,” said Matt Rogers, president of the firm. “The remainder of the two-week forecast period is in the normal to above-normal range, but the quick spike on days three to four could reach some records. Otherwise, the weather pattern is fairly benign for the U.S. and southern Canada with a pattern that generally results in reduced [energy] demand (warm North, seasonal South).”
Other traders are waiting for a change in momentum. “We’ve been kind of playing that range from the high $3s and high $4s and just trading it, but when we broke below $3.85, we pulled back on that,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. “On the trading side, we are pretty light right now, although we do have our hedges on. We did some rolling of our short $3.85 put options, but I want to see some momentum shift before I really want to engage much more. The whole thing is that you’ve got this trading range and you trade it until it is broken. At that point in time you can roll down or just step aside for a little.”
For those with exposure to lower prices, DeVooght advises holding hedge positions consisting of purchases of October $4.50 put options offset by the sale of a $5.50 call. He also advises holding a November-March strip consisting of long $4.75 puts countered by the sale of $7 call options for a 16- to 20-cent debit.
He added that it was “easy to re-engage on a moment’s notice in trading should momentum shift, but right now we are pretty flat on the trading side.”
At 5 p.m. EDT Friday the National Hurricane Center (NHC) said Tropical Storm Ophelia had regained some of its wind speed and was up to 60 mph. Projections showed it heading for the South Carolina coast. NHC said it was also following a low-pressure system 385 miles south-southeast of the Cape Verde Islands; it upgraded its chance of becoming a tropical cyclone in the succeeding 48 hours from 10% to 30%.
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