Moderating weather, low storage withdrawals and price-negative technicals were more than natural gas traders could handle last week as they increased their short positions and pressured prices to new lows. The February contract was the hardest hit by the selling, shedding 50 cents last week to carve out a new life-of-contract low at $2.25. Even a slim 0.7-cent gain to $2.275 on Friday, did little to dissuade the bears who look for more weakness this week.
Heading into Friday’s session, several traders polled by NGI were cautiously optimistic that the market would rally following three straight losing sessions. However, revised weather forecasts calling for moderating temperatures this week kept traders in a selling mood, and the market failed to rebound. In fact, after bouncing off Thursday’s low at $2.26 early in the session, the market broke lower in the last 30 minutes of trading Friday to extend its all-time low to $2.25.
According to Reliant’s Weather Sensitive Gas Load Indices, temperatures across the nation during the January 5-11 timeframe will be 10% warmer than the 10-year average and 9% warmer than last year. This comes on the heels of the blast of cold air last week, which Reliant calculated to be 27% colder than the 10-year average, but 4% warmer than last year.
However, the forecasted warming trend was not the only price-negative factor last week. Also a wet blanket on prices was the latest storage report announced Thursday, showing supplies are being depleted at an extremely slow rate. According to the AGA, 124 Bcf was pulled from underground storage facilities during the week ending Dec. 28. In addition to falling short of most market-watcher predictions centered in the 120-150 Bcf range, the net withdrawal was well below last year’s 209 Bcf figure. By comparison, the five-year average withdrawal for last week is 146 Bcf. U.S. storage is now 87% full at 2,856 Bcf. Over the past eight weeks, the year-on-year surplus has increased from 352 Bcf to an all-time high of 1,127 Bcf, and during that time the February contract has tumbled more than 80 cents.
The outlook for prices, both for natural gas itself and for the stock of companies that produce natural gas, “remains negative,” says Thomas Driscoll of Lehman Brothers in New York. Looking at the 1,127 Bcf overhang, he predicts natural gas prices will be “capped” at the natural gas equivalent of competing fuel oil prices of $2.50/MMBtu for the next three to six months. On the downside, he looks for prices to fall back to the $1.75 level of six weeks ago. Moreover, a fall to that price range by the commodity would have a more profound effect on the stocks of natural gas companies now than it did six weeks ago. “Now that half of winter is behind us (measured by heating degree days), a fall in the gas price would likely lead to continued weakening in the forward prices, which we believe would drag the stocks down as well,” Driscoll wrote in his weekly natural gas update.
On the other hand, Peter Hattersley of New York-based Rafferty Technical Research hedges, saying the market may be approaching a bottom. “We are right in the middle of our split targets at $2.11 and $2.42. Although I would not look to be a buyer right now, I might begin to cover some shorts as we get a little closer to $2.11,” he said. After the market moves lower, options might be the right tool to take advantage of the potential rebound, he continued. Accordingly, Hattersley will look to simultaneously buy an August $4.00 call and sell an August $3.00 call. The net cost of these options, currently priced at 20.2 cents and 7.1 cents respectively, of about 13 cents is a small price to pay considering the market’s high volatility. When the market does rally, this would capture the move nicely, he reasoned.
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