June natural gas futures rose in modest trading Monday on the New York Mercantile Exchange. Although traders see no change in the fundamentals that would suggest any kind of bull move is imminent, there are short-term opportunities on the long side in the current market environment.
At the close June futures rose 8.6 cents to $4.398 and July gained 8 cents to $4.489. June crude oil continued its losing ways dropping $1.53 to $70.08/bbl., but the Dow Jones Industrial Average managed a small gain.
“I’m a cautious bull as long as on a pull-back it stays above $4.29. I expect a little profit-taking [Tuesday], but as long as stays over $4.33, that should provide enough support for traders to take it higher,” said a New York floor trader.
Others see a less than inspiring market. “Fundamentally the natural gas market still looks quite bearish. So for hedgers we are going to continue to hold our current short positions,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.
Although he counsels producers to hold on to current short hedges, DeVooght also sees a short-term trading opportunity on the long side of the market. “For traders we nibbled on the long side of the gas market. We did so by buying the calls.” DeVooght is not saying that somehow there is a change in fundamentals, but “it has been our experience that when all of the news is negative and you have a large number of spec traders making the same trade, a small piece of bullish news can create a very violent rally. For instance a popular trade has been to short natural gas and go long crude oil. The break in crude oil could be the catalyst to kick off a powerful short-covering rally in the gas market. So, the trade we are doing, is to profit from a squeeze if it should occur without taking much risk. As a producer, you might use a spike as a selling opportunity because with the current fundamentals it is unlikely that we will see a sustained bull market in the near future.”
DeVooght says that traders should hold on to the long October call options purchased for 38 to 45 cents and end-users should stand aside. Those with exposure to falling prices should hold the remainder of 12-month $5/$8 collar purchased last August for 35 cents and should also continue to hold the balance of a 12 month $5.50 put and short a $7.50 call that was initiated in December.
Others aren’t betting on any short-covering rally and have shifted to a bearish outlook. “A week ago we were suggesting a bullish stance in anticipation of a run at the April highs where profits should have been accepted. We have subsequently shifted to a bearish trading posture, one in which price rallies in the July contract back into the $4.50-4.55 zone should be viewed as fresh selling opportunities,” said Jim Ritterbusch of Ritterbusch and Associates.
Ritterbusch contends that there is “difficulty building a strong argument for a price move of much more than 40-50 cents in either direction through the balance of the shoulder period and into the summer months.”
According to government figures, a large contingent of traders have recently exited the market, on both the long and short side of the trading ledger. Data from the Commodity Futures Trading Commission (CFTC) for the week ended May 11 shows managed money exited both the long and short sides of the market.
In its weekly Commitments of Traders report, however, the CFTC reported nearly a three-to-one margin of shorts exiting the market relative to long liquidation in its managed money segment. At IntercontinentalExchange long futures and options positions (2,500 MMBtu) fell by 25,550 to 347,459 and shorts dropped 6,988 to 47,022. At the New York Mercantile Exchange long futures and options (10,000 MMBtu) declined by 1,111 to 152,522 contracts and shorts fell by a whopping 26,680 to 227,973 contracts. When adjusted for contract size long futures and options on both exchanges fell by 7,498, but shorts skidded 28,427. For the five trading days ended May 11, June futures rose 11.8 cents to $4.131.
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