September natural gas rose as traders suggested scale-down buying at lower levels, but said others elected to “front-run” the anticipated buying and establish early long positions. At the close September had risen 4.3 cents to $4.188 and October had advanced 3.3 cents to $4.190. September crude oil shed 81 cents to $94.89/bbl.
In spite of the day’s advance short-term traders are expecting the market to work lower in the near term. “I suspect the market will work down to the $4.05 to $4.08 range before making any move lower still,” said a New York floor trader. “There are no imminent dangers although there is hot weather, but that has been around for a while.”
The trader added that although the psychologically important $4 zone was approaching, he didn’t think there would be rapid move lower but “a grind if anything. Any selling will be met with scale-down buying. Those that are doing the scale-down buying figure they have time on their side. If weather does come in, the market could pop to $4.50 pretty easily.”
“From $4.12 on down you will see some scale-in buying. Below $4.12 the risk-reward is more favorable,” he said.
In the view of some technical analysts price could work a lot lower than $4 and still maintain their bullish luster. “[We] still peg $3.890-3.590 the most bullish case support zone for natgas, [and] This zone is well within reach for this coming week,” said Walter Zimmermann of United-ICAP. He added that $3.20 was the “must hold for the bullish case for an eventual $6.800 area.”
Directional traders were more concerned about exiting long positions than initiating new short holdings, according to data from the Commodity Futures Trading Commission. In its weekly Commitments of Traders Report for July 26 it showed reductions in both long and short futures and options holdings by managed money at both major exchanges.
At the IntercontinentalExchange total long futures and options (2,500 MMBtu per contract) rose by 16,204 to 500,185 and short holdings fell by 5,205 to 144,317. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) fell by 9,413 to 134,485 and short holdings contracted by 379 to 210,827.
When adjusted for contract size long futures and options fell by 5,357 and short holdings dropped by 1,680. For the five trading days ended July 26, September futures fell 18.0 cents to $4.331.
A top analyst suggests that any weakness may portend further losses. “One factor to note is that in years when the summer gas market is weak, often times the month of September is not kind. There have been numerous years that major lows are made in September for the October trade month,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
DeVooght does see the current weakness as a trading opportunity. “The market did break below $4.15 on Friday, which allowed us to sell a little put premium for September gas. We will continue to use rallies into the mid to high $4 level as a selling opportunity, primarily utilizing collars and selling call premium. If we break back under $4.15, we will book profits on the short calls and sell put premium.”
Friday’s weak September settlement at $4.145 allowed DeVooght to sell puts late last week, but he admits that this is “not exciting, but the best way (in our opinion) to trade this market until we get a break of the range. We will continue to hold our current collars and will look to sell calls and cover our short puts if we trade back above $4.60-4.70 or sell puts if we break below $4.15.”
Tropical Storm Don weakened to a tropical depression before it made landfall Friday evening on the Texas Gulf Coast, and at 2 p.m. EDT Monday the National Hurricane Center was watching a low-pressure system east of the Lesser Antilles and said “environmental conditions remain conducive for a tropical depression or tropical storm later tonight or Tuesday.” It gave the system an 80% chance of becoming a tropical cyclone in the next 48 hours as it moves to the west-northwest at 15 to 20 mph.
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