December futures continued their relentless retreat Wednesday as traders calculated that spot futures may have almost 18 cents more room to the downside and weather forecasts moderated again. At the close December had dropped 6.0 cents to $3.344 and January had shed 5.9 cents to $3.483. December crude oil vaulted $3.22 to $102.59/bbl.
“We haven’t traded this low since last October,” said Tom Saal, vice president at Hencorp Futures in Miami, but followers of Market Profile such as Saal see an analog as to how much farther the market might fall. The Market Profile methodology defines an initial balance (price range) for the day, week, or month and according to Saal, the monthly Market Profile for October 2010 may form a useful comparison for how much lower prices may move in November 2011.
Once the initial balance is identified, breakout (higher) and breakdown (lower) targets are calculated, and Saal likened the November monthly Market Profile to the October 2010 Market profile, or in the words of “legendary” futures trader Yogi Berra, “It’s deja vu all over again.”
Monthly Market Profiles are formed in the first four days of trading and October 2010 carved out an initial balance of $3.888 to $3.689 under conditions similar to the present. There was little in the way of supportive weather and storage was filling rapidly, ultimately to record levels. Spot futures traded sharply lower with the 100%, 200% and 250% breakdown targets being met. In October 2010 spot futures traded as low as $3.212, nearly reaching their 250% breakdown target of $3.186.
Saal sees a parallel with the present market collapse. “The 100% target was $3.50 and the next target is 200% of the initial balance at $3.28. Last October we broke out to 250% of the initial balance. It was one of those extremes. The 250% number now is $3.167.”
Saal admitted that it sets up a potential short trade with December futures still nearly 18 cents above the 250% breakdown target, but “you’ve got to sell lower lows. You are one [weather] forecast away from having a short trade blow up in your face.”
Traders Thursday will not be looking for any short trades to blow up in their faces as estimates of the weekly injection report are expected to show builds well ahead of last year’s 1 Bcf withdrawal and a five-year average increase of 10 Bcf.
A Reuters poll of 23 traders and analysts showed a sample mean of 26 Bcf with a range of 19 Bcf to 35 Bcf. Industry consultant Bentek Energy predicts a build of 25 Bcf, and IAF Advisors in Houston expects inventories to rise by 24 Bcf.
Recent declines have clearly been focused on weather-related selling. “The natural gas futures market started the day off Tuesday in what looked like quiet consolidation that suggested the market might have fallen far enough to permit a trading range to develop on book-squaring ahead of Thursday’s DOE storage report,” said Tim Evans, analyst at Citi Futures Perspective in New York. “However, the market resumed its slide in the afternoon, demonstrating that it had yet to encounter enough demand to rebalance the trade flow. Warmer-than-normal temperatures east of the Rockies in the 11-15 day forecast also look somewhat more bearish than they did a day ago.”
Evans forecasts that this week’s storage report will show a stout 32 Bcf build, well ahead of historical comparisons. However, he also is looking for builds of 37 Bcf for the week ending Nov. 18 and a build of 16 Bcf for the week ending Nov. 25. The first withdrawals don’t start until the week ending Dec. 2, according to his forecast.
Even with all that gas in storage Evans advises “staying on the sidelines until we can identify a low-risk trade entry.”
Weather forecasts have been updated to reflect expectations of still greater warmth in the six- to 10-day period. WSI Corp. of Andover, MA, in its six- to 10-day outlook says that “with the exception of New England, above- and much-above-normal temperatures are forecast over most of the central and eastern U.S. Anomalies as warm as 10-12 degrees above normal are anticipated over the southeastern U.S.”
It said that the forecast for Wednesday was warmer over the north central U.S. than Tuesday.
Risks to the forecast include temperatures trending “warmer over most of the eastern two-thirds of the country than currently forecast. All models advertise the AO [Arctic Oscillation] and NAO [North Atlantic Oscillation] will transition to positive phases next week.”
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