December natural gas rose Monday as traders covered short positions before options expiration on Wednesday. At the close December had gained 8.3 cents to $3.399 and January had risen 6.2 cents to $3.558. January crude oil fell 75 cents to $96.92/bbl.

Options on natural gas futures expire Wednesday before the extended holiday weekend, and futures terminate Monday, but Monday’s gain may have been related to the Wednesday’s end of options trading on December futures. “I don’t know if traders are going to pin this market at $3.50 or $3.25,” said a New York floor trader.

“I was thinking earlier that we would trade down to $3.25 and prices would just stay there for a while, but now it’s all up in the air. There have been shorts active in the market all along, and they may have been covering before options go off the board Wednesday.

“Overall it still looks weak, we haven’t had any cold weather and there is nothing on the horizon. We are still looking for further builds in storage and I’m looking for the market to trade down to the $3.10 to $3.20 area by the middle of next week. It looks to me that the market will continue lower and bottom out at $3.20 to $3.15 in the January contract.

In an early survey late last week Energy Metro Desk found for the week ended Nov. 18 a 25 Bcf build was the average expectation of 14 traders and analysts. Last year 7 Bcf was pulled from storage and the five-year average also stands at a 7 Bcf withdrawal.

Storage builds are likely to be encouraged by near-term weather forecasts continuing to show above-normal temperatures for vast sections of the country. Commodity Weather Group in Bethesda, MD, in its six- to 10-day outlook shows above-normal temperatures south and east of the Pacific Northwest and north and west of a line from Wisconsin to New Mexico. New England is forecast to be above normal, and the lower Mississippi Valley is anticipated to be below normal. Other major energy markets such as the Midwest and Mid Atlantic are forecast to see normal temperatures.

“The models continue to oscillate on details in the northern to eastern Pacific that affect North American weather. The pulsing pattern is causing intermittent cool-to-cold pushes to drop across the U.S., but the lack of significant blocking keeps them on the weaker side with stronger offsetting warming chances,” said Matt Rogers, president of the firm. “Occasionally, a model (like last night’s Euro operational) will develop a stronger storm with its own generated cold air to pop some patches of much-below-normal temperatures. Correctly capturing such storm-centered details is difficult. For the 11-15 [day forecast], we favored the warmer European ensembles along the northern tier. The American-Canadian ensembles leaned more areas toward just near normal again.”

Directional traders added to both short and long holdings for the five trading days ended Nov. 15. The Commodity Futures Trading Commission in its Weekly Commitments of Traders Report showed nearly a two to one preference for short positions by managed money. At the IntercontinentalExchange long futures and options (2,500 MMBtu per contract) rose by 18,558 to 327,463 and short contracts added 28,632 to 232,734. At the New York Mercantile Exchange long futures and options contracts (10,000 MMBtu per contract) grew by 10,983 to 129,764 and short holdings rose 22,255 to 275,983.

When adjusted for contract size managed money at both exchanges increased long contracts by 15,666 but short positions rose by 29,413. For the five trading days ended Nov. 15 December futures fell 34.1 cents to $3.404.

From a risk management perspective Mike DeVooght of DEVO Capital recommends to trading accounts and end-users to roll down short December $3.90 puts at 20 cents to short December $3.65 puts. Producers and those with exposure to lower prices are advised to hold a long December-March strip consisting of $4.75 put options offset by the sale of a $7 call for a 16- to 20-cent debit.

Market analysts expect the market to eventually work higher. Tom Saal in his work with Market Profile correctly suggested that December futures Monday would test last week’s value area of $3.459-3.355. There is also a second value area at $3.715-3.645, and a third at $3.837-3.765. Saal is not specific in his timing, but “typically value areas are filled sooner rather than later.”

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