October natural gas futures bounced within a 20-cent range on Tuesday as traders and analysts attempted to figure out the range-bound market’s next move. The prompt-month contract ended up finishing the day’s regular session at $3.609, up 3.3 cents from Monday’s close.
October futures started the day at a high of $3.709, but moved downward during the day to record a low of $3.502 in the afternoon before splitting the difference on the close. Some market watchers have pegged the new trading range as $3.500 to $3.900.
Citi Futures Perspective analyst Tim Evans said despite the recent run of strength, he expects the out-month contract to push lower in the weeks ahead. “The natural gas market is bumping higher, but is now settled more comfortably into its recent trading range,” he said. “In the near term, we still have questions whether it can maintain current levels given the lack of tropical storm threats to production from the Gulf of Mexico and the temperature forecasts that [are] not really anything exceptional.”
Evans said he believes there’s a strong case to be made that the cash market and the nearby futures have posted a lasting low at the $2.409 trade in October futures set Sept. 4, but, particularly for the forward futures trading at $4.500 and up, that might not be that much of a consolation. “We see room for those contracts to probe the downside over the next few weeks, as storage levels continue to rise,” he said.
Speaking of storage levels, Evans said his early injection expectation for the week ending Sept. 18 is 78 Bcf, which would be much larger than last year’s 54 Bcf addition for the similar week and the five-year average build of 69 Bcf. The actual injection will be revealed Thursday morning at 10:30 a.m. EDT.
Traders looking back at the past two week’s gains are now assessing whether the recent short-covering rally is enough to deter further selling in a fundamental environment that has not changed.
Mike DeVooght of DEVO Capital admits that the supply-demand dynamics have not changed, but it has been his experience that “the news is always the most negative at the bottom and most bullish at the top. The natural gas fundamental news has been quite bleak for quite some time. The question now is — will the implosion in drilling activity, the steep decline curve and the steady demand (because prices are so cheap on a Btu basis) be enough to change the psychology of the market?
“It has been our feeling that it was just a matter of time before we would get a violent short-covering rally. Now that the rally has [occurred], and is occurring, time will tell if it will be enough to take the sellers out of the market.”
In the short run others don’t see the sellers quite out of the market yet. “Over the shorter term, this market would appear capable of a test of last week’s highs at around the $3.900 area where we would expect resistance to set the stage for a renewed significant price downturn. To the extent that we still view the fall-winter calendar spreads as a proxy for a flat price position, we will be looking for further price advances to present an opportunity in buying March 2010 [and] selling November 2009 spreads,” said Jim Ritterbusch of Ritterbusch and Associates.
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