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Traders Sell Into Strength as February Rallies Sharply
February natural gas futures staged a double-digit advance Wednesday as traders factored in incrementally colder forecasts in the 11- to 15-day period shown by popular weather models. At the close February futures rose 13.6 cents to $4.561 and March added 13.0 cents to $4.576. February crude oil fell 52 cents to $90.86/Bbl.
“There are some strongly supportive weather models for February, and the persistent cold is going to linger,” said a New York floor trader, but he added that there were a number of nay-sayers with “good offers in February up to $4.52 to $4.53. However the $4.56 settlement raised an eyebrow or two.”
In the trader’s view a number of players were putting on short positions, but “they are vulnerable to a rise to $4.75.”
Other traders echo the assessment of a near-term weather-driven advance but nonetheless are poised to initiate short positions as well. “[T]he primary source of support to this market remains the below-normal temperature expectations across the eastern half of the country that still extends through month’s end, according to most observers,” said Jim Ritterbusch of Ritterbusch and Associates, a Galena, IL-based energy consulting firm. “We look for values to be supported roughly above today’s $4.40 lows until some indication of a warming trend begins to show up in the one- to two-week outlooks.”
Ritterbusch admits that his assessment of $4.60 resistance could be breached and expects a “choppy, sideways near-term trade. However, our previously stated overhead resistance at the $4.60 level is beginning to appear vulnerable in view of updates to the cold weather views. Nonetheless, we will continue to favor fresh shorts within the $4.60-4.70 zone for accounts willing to risk to above the $4.80 level on a close-only basis.”
Thursday’s inventory report is likely to play an important role in trader assessments of the near-term price outlook. Expectations for the week ended Jan. 14 are that the 10:30 a.m. EST report by the Energy Information Administration will show a withdrawal well above 200 Bcf. A Reuters poll of 25 traders and analysts revealed an average withdrawal of 225 Bcf with a range of 190 to 250 Bcf. Ritterbusch is looking for a pull of 240 Bcf and IAF Advisors expects a draw of 232 Bcf. These will be compared to last year’s date-adjusted 248 Bcf pull and a five-year average pull of 133 Bcf.
Forecaster WSI Corp. of Andover, MA, is calling for below- to much below-normal temperatures in its most recent six- to 10-day outlook for much of the eastern U.S. Locations south and east of a sinuous line from Maine to eastern Minnesota to New Mexico are forecast to be cold. “Below- and much below-normal temperatures are expected to encompass most locations south and east of Minneapolis. Anomalies between three to eight degrees below normal are anticipated in most locations. Warmer-than-normal temperatures are forecast to grip the West Coast.
WSI points out that not only do the forecasts continue to call for unrelenting cold, but Wednesday’s forecast is cooler over most of the central U.S. than it was Tuesday.
Cold weather forecasts have garnered most of the market attention recently, but under the radar are indications of an improving economy and increased demand for energy. Thursday traders will get a chance to study not only the natural gas inventory report but also recent energy demand trends with the holiday-delayed release of petroleum inventory figures.
Historically this time of year has shown increases in crude and products, but according to figures from IAF Advisors in Houston, this week is likely to show draws, indications of demand significantly greater than the five-year averages. Kyle Cooper, principal of the firm, predicts that for the week ended Jan. 14, crude stocks fell 500,000 bbl, gasoline will be unchanged, and distillates are expected to show a decline of 500,000 bbl as well.
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