As many had expected, Thursday’s big gain in natural gas futures failed to hold up a day later as the October contract gave back nearly 30 cents on Friday. The prompt-month contract recorded an afternoon low of $2.937 before closing the day’s regular session at $2.960, down 29.6 cents from Thursday’s finish but 23.2 cents higher than the previous week’s close.
Following Thursday’s 42.7-cent climb and Friday’s 29.6-cent drop, market watchers had a number of theories about what might have occurred over the two-day period. Some said Friday’s action was corrective after an overzealous buying spree Thursday, while others saw Thursday’s run-up as a round of short-covering followed by some profit-taking on Friday ahead of the weekend.
“I think the violent up-move we saw Thursday is attributable to that 17-year old trendline dating back to 1992 between $2.500 and $2.750,” said Steve Blair, a broker with Rafferty Technical Research in New York. “It has been tested a few times over the last 17 years and held up, making it a major support zone. We are not the only ones bright enough to know about this major support trendline that is in place, and the funds have been very short in natural gas. Maybe they have been short from $5, $6 or $7 and they are now running into significant support, so they took some profits Thursday by buying back their shorts. After a 60- or 70-cent rally through midday Friday, traders who took some length with a $2 handle saw the weekend coming and decided to take some money off the table.”
One of the explanations not offered for Thursday’s run-up was the arrival of a natural gas storage report that revealed that 69 Bcf was injected for the week ending Sept.4. With nearly 3.4 Tcf already in underground storage, Blair noted that there is not a lot of concern about gas, especially with some calling for 210 Bcf to 230 Bcf of additional gas to be added over the next three to four weeks. However, the broker said shut-ins become a concern at some point.
“Producers are going to start shutting in gas because they are going to have no place to put the gas,” he said. “I would not be surprised if a fair amount of shut-ins are already occurring for this reason. I think this is why it is quite possible that we’ve seen a bottom to this market. We very well could test that $2.409 low again, but I just don’t see much room left to the downside.”
Top analysts saw Thursday’s titanic gains as difficult to maintain. “While we are highly skeptical of the ability of the market to sustain this price rally, we are also forced to concede to a sudden improvement in the technical picture that would leave open the possibility of a further advance up toward the $3.370-3.430 area per nearest futures,” said Jim Ritterbusch of Ritterbusch and Associates. Ritterbusch is also not a believer that the reported Energy Information Administration (EIA) storage injection estimate of 69 Bcf, just 2-4 Bcf less than news wire surveys, was a contributing factor. “As a result, the weekly EIA report appeared to prove more of an excuse rather than a reason for the rally,” he said in a Friday morning note to clients.
Prior to Thursday’s advance other traders were skeptical as well of the market’s ability to avoid further weakness. “We’ve seen no evidence that recent advances are not just bear market corrections. Our [Elliott] Wave count shows a $1 handle for natural gas,” said a Washington, DC-based broker.
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