September natural gas futures blasted below the old low for the move downward on Monday before rebounding in afternoon trade on a round of short-covering sparked by the development of Tropical Storm Gustav. The prompt-month contract recorded a low of $7.617 before closing out at $7.825, down 1.8 cents on the day.
After taking out last week’s $7.768 low for the move with a $7.617 tick just before 1 p.m., the September contract pushed higher from there and took off to a $7.844 high following news around 2 p.m. EDT that Gustav, which was still south of the Dominican Republic, had been classified as a tropical storm.
“Following Friday’s radical drop, we continued to selloff on Monday. After we put in a new low for the move around noon, I think we saw some short-covering coming in,” said Tom Saal of Commercial Brokerage Corp. in Miami. “Looking at the charts, the big down day Friday pointed towards a continuation on Monday, which we saw in the first half of the day as people sold. But Gustav must have changed a few peoples’ minds. Some of the tracks have it getting into the Gulf, so anyone who is short needs to be a little concerned, even though September expires in two days.”
Even though Tropical Storm Fay missed the Gulf, it appears Gustav has a good chance of threatening producers. “We are coming into the peak of the hurricane season, so traders need to keep that front and center,” Saal said.
Weather forecasting firm WxRisk said one of the new popular weather models has Gustav on a west northwest track taking it to the Jamaica-Cuba gap and across far western Cuba, placing it into the southeastern Gulf of Mexico on Friday afternoon or evening. At that point the system is expected to be a Category One or borderline Category Two hurricane, according to the forecaster.
As to whether Saal believes there is any more room to the downside for prices, the broker said the hurricane season peaking makes things a little more tricky. “The Fibonacci number a lot of people are throwing around is $7.730,” he said. “We traded below it Monday, but we did not settle below it, so it is still valid. Gustav will likely help that price point hold for the time being.”
The broker explained that by using the Market Profile trading tool, he identified Monday’s value area as $7.672 to $7.778, which means 70% of the day’s trades took place in that approximately 10-cent range. The value area left over from Friday is $7.921 to $8.224. “I expect both value areas to get tested between now and Wednesday,” Saal noted.
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