In concert with gains in the nearby crude and heating oil pits, natural gas futures proceeded higher for the seventh straight session Friday as locals hunted for sell stops and funds covered shorts. Buying was concentrated in the winter months, which advanced an average of 22.7 cents during the session. By comparison, the 2004 summer strip languished near unchanged, down a half-cent for the day.
The prompt month November closed at $5.652, up 15.8 cents for the day and 88.5 cents for the week.
Natural gas is not the only commodity in which traders are concerned about the upcoming winter. Heating and crude oil futures, which also trade in the open outcry market at Nymex, experienced strong rallies late last week. Though it is not compared to natural gas nearly as often as is crude oil, heating oil — which can be substituted for gas in some instances in the Northeast U.S. — is experiencing the same supply-demand concerns as natural gas. Specifically, November heating oil jumped nearly 9% last week as traders bought in expectation of strong seasonal demand outstripping depleted inventories this winter. Sound familiar?
With little consensus among the various private weather forecasters, market-watchers of both commodities are even more interested in the medium-range forecast released daily by the National Weather Service. Below normal temperatures are expected across the eastern half of the country for the Oct. 16-20 timeframe, the NWS said Friday. In the West, meanwhile, above normal temperatures should keep cooling degree day accumulations up for at least another week.
However, the weather last week was relatively mild in the East and West, prompting some to suggest that the market will see an even larger storage injection than the 75 Bcf refill reported Thursday. Kyle Cooper of Citigroup calls for a build above 80 Bcf, which he notes will compare bearishly versus a build last year of 48 Bcf, a build in 2001 of 70 Bcf, a three-year average build of 48 Bcf and a five-year average increase of 51 Bcf.
“This market is not currently acting fundamentally, and we cannot say how long this situation will last,” Cooper lamented in a note to customers Friday. “Market activity [Friday] was clearly indicative of speculative winter buying with the March/April spread blowing out 19 cents.”
“Behavioral finance,” chipped in Tim Evans of IFR Pegasus in New York to explain the 18.6% increase in prompt month natural gas futures last week. “The upside remains fundamentally limited as long as there is no supportive storage trend to go along with the advance, and we can’t help wondering if the full moon doesn’t have something to do with the run higher in all of the energy markets [last week],” he joked.
George Leide of New York-based Rafferty Technical Research chose to ignore the fundamental factors last week in order to focus solely on the technical gyrations in the market. “We never filled in the rollover gap (left by the expiring October contract) down to $4.52. It was really a dynamic week from a technical perspective. Locals ran the stops and the funds covered shorts.”
Looking ahead, Leide is a little reluctant to step in front of this freight train of a market, but would cautiously liquidate longs or initiate shorts in the $5.85-88 area. If filled on that order, his objective would be a correction down to the $5.40-42 level. On the upside, a $5.96 buy stop would protect his interests should the market prove him wrong.
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