Following a rest on Monday, the bulls were in control once again on Tuesday as September natural gas futures surged to a high of $7.040 before settling the day’s regular session at $6.940, up 14.6 cents.
Despite being rebuffed by the $7 level for a second consecutive session, the strengthening of two separate storms in the tropics on Tuesday, along with the aftermarket announcement of some precautionary production shut-ins in the Gulf of Mexico, should keep arrows in the bulls’ quiver heading into trading on Wednesday.
Tropical Storm Dean, which became the fourth named storm of the 2007 Atlantic Basin hurricane season on Tuesday, is likely to become the year’s first hurricane, while a strengthening tropical wave in the Gulf of Mexico has already produced some producer shut-ins and evacuations in the western portion of the basin (see related story).
“We don’t know where these storms are going to go. It really depends on who you talk to,” said a Washington, DC-based broker. “We really haven’t had a serious hurricane since Rita in 2005, so as a result, the market is all worked up here. With Hurricane Katrina only two years ago, the market continues to be on edge about these events. We are really getting into the belly of the beast in terms of the peak of the Atlantic hurricane season. In addition to all of the storm talk, we had a smaller than expected storage injection for the week ended Aug. 3 and we are expecting an even smaller number on Thursday when data for the week ended Aug.10 is revealed. Add heat to this already bullish equation, and it is not all that amazing that futures have been as strong as they have been as of late.”
The broker said he doesn’t see any magic in the failure to settle above $7 over the last two sessions. “If we get above $7, then the next level is $7.270, which is a 61.8% retracement of the move from the highs in the $8.20s,” he said. “If we break that, the next number we are looking at is $7.560. If we were to get to that level, then we no longer have a downtrend as far as Elliott Wave theorists go. Being bullish on this market, as far as we are concerned, the lows are in for the season down at $5.754.”
Some risk managers suggest that the current rise in natural gas prices may just represent a chance for producers and other physical market longs to reestablish short hedges.
“It’s difficult to say how long and how far the current rally will carry, but we feel the rally could very well create an opportunity to add to our small short winter positions,” said Mike DeVooght of DEVO Capital, trading and risk management firm in Colorado. “On a trading basis, we did liquidate and book profits on the balance of our short summer positions (we liquidated when the September [contract] moved above the $6.75 level). We do believe a rally of 30-70 cents from current levels represents a selling opportunity in the winter contracts.”
Citigroup analyst Tim Evans said storm threats and low storage injections will likely work together to put upward pressure on natural gas futures prices. “Between the threat of an eventual disruption in supply from the Gulf of Mexico, the stronger near-term cooling demand and the general firmness in prices, we see ongoing pressure on fund managers to cover their short positions and upside price potential to $7.50 or even $8 over the intermediate term,” he said.
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