In a quiet session by most accounts, August natural gas futures pushed higher Wednesday in a renewed round of short-covering following last Friday’s $5.470 low for the move. After reaching a high of $5.830, the prompt month ended up settling Wednesday at $5.782, up 14.9 cents on the day, which brings the week’s total hike to date to 25.9 cents.
“I thought Monday was bad, but Wednesday was really quiet for us in natural gas futures,” said a Washington, DC-based broker. “I think what happened is we had a nice sell-off late last week, and then on Monday, nobody did anything. On Tuesday, we had some nervous nellys come in concerned that the bottom was in, so we were really busy in natural gas. On Wednesday, I think people were of the opinion if they missed it Tuesday, they were going to wait.”
Even with warmer temperatures in the East, the broker noted that there has not been a whole lot of support fundamentally. “There is no question that the weather is more supportive than it has been, but there is still nothing storm-wise out in the tropics. The last couple of days has been short-covering following the sell-off last week.”
Looking at last week’s $5.470 low for the move, the broker said she wasn’t quite ready to call it a bottom. “Some day this chicken will come home to roost, but I don’t know if we are there yet. If the weather starts to moderate again in the Eastern part of the country, then I think we could see new lows. I think we need all of the hot weather we can get to hold this price level steady here.”
She said the current feeling in the market is much like that experienced during last winter. “It really almost seems like the 2005-2006 winter all over again,” the broker said. “Ahead of that winter, everyone had these dire predictions that it was going to be the coldest winter known to man and we ended up getting nothing. Coming into this summer, predictions for significant heat and another overactive hurricane season have so far gone untrue. As far as storms go, we haven’t even made it out of the ‘A’s yet. Granted, we could still see some doozys in August and September, which have been some of the most active storm activity months. We can’t say we are out of the woods yet.”
Although technical traders may suggest that natural gas futures have reached a support level, longer term analysts looking at the market from a fundamental perspective see prices continuing lower.
“The U.S. economy is starting to slow and we are starting to see new gas flow as a result of the pick up of drilling activity for natural gas,” said Mike DeVooght, president of DEVO Capital Management, a Colorado trading and consulting firm. He noted there is a distinct difference between natural gas and other members of the petroleum complex. “Unlike the (petroleum) complex, who has buyers that maintain you have to be long crude because of the international strife , natural gas is a domestic market,” said DeVooght. He noted that it is more influenced by immediate supply and demand, and when it is being produced, if there is no demand and no place to store it, the price will decline. “On a trade basis, we will continue to hold current positions. It’s cheap, but there is no reason it can’t get cheaper,” he said.
DEVO’s current positions for trading accounts consist of a spread of short September crude oil vs. a long September natural gas, end users are advised to stand aside, and producers should hold a modest short August position at $7.50 and also continue to hold short 30 to 50% of winter production established earlier at $13.95.
More technical traders see Monday and Tuesday’s trading in the August contract as setting up buying and selling zones. Tom Saal in his work with the Market Profile has identified an “initial balance” in the August contract of $5.55 to $5.85 and if prices break out of that range, he advises buyers to target objectives at $6.00 and $6.15, and sellers to look for $5.40 and $5.25.
Phil Flynn of Alaron is currently long August natural gas at $5.60 with a stop loss order of $5.20. His objective on the trade is $6.00.
Turning focus to Thursday morning’s natural gas storage report from the Energy Information Administration (EIA), industry predictions for the weekly report ended July 7 appear to be in the 75-85 Bcf injection range. A Reuters survey of 22 industry players is expecting an average injection of 76 Bcf for the week, while Golden, CO-based Bentek Energy is looking for an 84 Bcf injection. Bentek noted that an 84 Bcf injection would result in 2,699 Bcf in underground storage, which is 27.2% higher than the five-year average and 12.6% above the five-year high.
The ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus build expectation of 80 Bcf. The number revealed Thursday morning at 10:30 a.m. ET by the EIA will be compared to last year’s 88 Bcf injection and the five-year average build of 99 Bcf.
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