Deciding to go out with a bang on expiration, traders on Wednesday pushed December natural gas futures to a low of $7.180 before it closed out at $7.203, down 35.4 cents from Tuesday’s close. Even more interesting was the fact that the incoming prompt-month contract — January 2008 — dropped below $7.500 for the first time since summer 2005 to close Wednesday at $7.486, down 33.1 cents.
“I can’t say that I am totally surprised at Wednesday’s drop. This market might actually be doing what a lot of people think it should have done several months ago,” said Steve Blair, a broker with Rafferty Technical Research in New York. “We may actually be starting to realize that we have more gas than we know what to do with. Storage is high and the hurricane season — which was another nonevent year for oil and gas production — officially ends Friday. The weather service is looking for some colder-than-normal temperatures into early December, but most forecasters are still calling for an above-normal winter. Unless that changes, or we get some really intensive cold weather over the next few weeks, the bulls really don’t have anything to gain traction off of.”
Noting that natural gas futures have tested the major support levels a couple of times over the past few weeks but always rebounded, Blair wondered whether it was just a matter of time before the market got through those levels. “The CFTC report that came out Monday showed a pretty sizeable increase in short positions by the funds in natural gas, which might give some indication as to how the funds are feeling about the commodity,” he said. “Over the last few days, I have been hearing that there has been quite a bit of fund activity.”
Taking a closer look at the new prompt month, Blair noted that the January 2008 contract is reaching its own milestones. “The last time that contract was below $7.500 was back in June of 2005, which is quite remarkable. We are showing our major support level is down right around $7, which is probably more psychological than anything else. Minor support pops up around $7.250, but there is not a whole lot on the charts without going pretty far back. The question now that December is off the board is will January come down further on Thursday to bring itself in line. If that is the case, we should see some further downside action.”
Commenting on the recent drop in crude futures over the last few sessions, Blair said he is not yet ready to buy into the crude-natural gas relationship. “Maybe some of this move down had something to do with dropping crude prices, but natural gas certainly did not move up with crude, so why should we drop with it? I think natural gas is still pretty independent from the petroleum contracts.”
January crude continued its recent retreat with a second straight session of a $3-plus drop in value. The contract shed $3.80 to close Wednesday at $90.62/bbl.
Some traders see relatively little upside potential and expect futures to grind lower. “There will be price spikes when cold forecasts come out, but overall the trend is lower. We aren’t getting any cold weather, and it’s possible traders by mid-December could take a look around and decide there is no cold weather and sell the market down hard,” said a New York floor trader.
Turning attention to the Energy information Administration’s natural gas storage report for the week ended Nov. 23, it appears the industry is looking for a withdrawal of just under 20 Bcf. A Reuters survey of 23 industry players is expecting an average withdrawal of 19 Bcf, while Bentek Energy said its flow model is indicating a 17 Bcf pull. The Golden, CO-based analysis and research firm said a 17 Bcf draw would bring stocks 3% above the five-year high (last year) and 9.2% above the five-year average. The flow model indicates a 17 Bcf draw in the East region, a 1 Bcf pull from the Producing region and a 1 Bcf addition in the West region.
The number revealed Thursday at 10:30 a.m. EST will be compared to last year’s 27 Bcf withdrawal and the five-year average pull for the week of 29 Bcf.
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