Picking up right where they left off on Friday, natural gas futures traders on Monday continued to test the downside as the April contract recorded yet another new low for the move before closing out the regular session at $4.391, down just less than a penny from last week’s finish.
The front-month contract recorded a new low of $4.334 in early morning action, then traded between $4.358 and $4.447 for Monday’s entire regular session.
“The natural gas market remains quiet and soft, with prices tending to slip as traders anticipate declining demand now that the winter has largely lost its grip,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “This remains primarily a seasonal trade in our view, although the two- to five-day forecast featuring warmer-than-normal readings across key northern population centers of the U.S. also reinforces that theme.”
Weather forecasters are looking for warmth in Northeast energy markets in the six- to 10-day period. MDA EarthSat said in its morning energy outlook that “a cool trough will remain focused over central Canada through the period. Combined with high pressure at the surface, this trough will help to keep the north-central U.S. below normal. The Northeast, however, is expected to average above normal, due in large part to widespread MAs [much above normal temperatures] at the period’s onset. The West should undergo a gradual cooldown, but temps will remain above normal.”
Risk managers see no reason to deviate from their bearish stance. The main positive factor is the large number of short positions held by funds, which at some point will have to be covered. “Natural gas settled [last] week at $4.40, and the downward trend remains clearly intact. Traders continue to look for some sort of industrial demand as heating demand has slowed,” said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm.
DeVooght maintains that although equity markets show some modest strength, any indication of stock market strength, and presumably economic gains, has yet to translate into increased industrial demand for natural gas. “Fundamentally and technically, natural gas looks weak. The only real bullish sign is the large short positions held by funds and traders as a turn in the market could force some short-covering. We continue to hold our current short positions,” he said in a note to clients.
DeVooght counsels trading accounts and end-users to stand aside, and those with exposure to lower prices are advised to continue to hold the remainder of a 12-month $5-8 collar [long a $5 put option and short an $8 call] begun in August at a cost of 35 cents, as well as long a 12-month $5.50 put and short a $7.50 call initiated in December.
According to government figures, the component of natural gas futures and options open interest most concerned with the direction of gas prices moved to the long side of the market last week. For the five trading days ended March 9, April futures dropped 19.2 cents, but the Commodity Futures Trading Commission reported that managed money at both IntercontinentalExchange (ICE) and the New York Mercantile Exchange (Nymex) favored purchases over sales by nearly a two-to-one margin.
At ICE long futures and options (2,500 MMBtu a contract) increased by 21,545 contracts to 605,540 and short holdings decreased by 1,998 to 46,937. At Nymex longs (10,000 MMBtu a contract) increased by 7,979 to 148,943 contracts and shorts added 7,851 to 212,270. When adjusted for contract size, longs (10,000 MMBtu a contract) increased by 13,365 and shorts added 7,352.
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