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Weak Technicals, Hefty Rig Count Pummel Futures; November Tumbles
November natural gas retreated Friday as traders saw the market in an unstable technical environment and rig count figures showed another double-digit increase in gas drilling. At the close November had careened lower by 11.7 cents to $3.481 and December had fallen 9.6 cents to $3.820. November crude oil rose 39 cents to $82.98/bbl.
“Going into Friday’s trading I think traders had the intention to push the market under $3.50. The [storage] number came out as expected [Thursday] but there was a knee-jerk reaction to the upside. I think it was only an excuse to sucker in more buyers so sellers could get back in,” said a New York floor trader.
“There’s plenty of gas going into the winter, and it could be a new record. There is no reason for the market to stay up and traders are dragging longs into the market so they can take them out. Technical resistance is in the $3.66 to $3.73 area, but we are not really getting there. not even on the pop higher Thursday. The market was meant to fail Friday since it couldn’t test market resistance higher.
“I love this [price] area here from the mid $3.20s to low $3.50s because the market always seems to act similarly against these technical levels. I look for support at $3.46. If it breaks under that, it breaks into the $3.30s, but it is already on its way to the $3.20s. I think a couple of bounces and we are down to the $3.20s.”
Others looking at major drivers capable of changing the market’s direction find themselves eyeing tropical developments. “The way we keep building up storage it doesn’t look like there is anything bullish out there. There is nothing on the radar in terms of tropical weather,” said Steve Blair, an analyst with Rafferty Technical Research in New York.
“The farther we get into October the less the odds that we will have a major hurricane in the Gulf. Even though hurricane season can last for a while [Nov. 30], the water temperature cools and becomes less and less conducive to development. To me unless we get some major tropical development in the next few weeks, the next supportive factor may not come until we get some winter weather.”
Bears got some more ammunition for their arsenal in the form of another double-digit increase in the gas-directed rig count. Baker Hughes reported that for the week ended Oct. 7, rigs drilling for gas rose by 12 to 935. This comes on top of the previous week’s 11-rig addition and puts the total close to year-ago levels of 971. The number of horizontal rigs rose by 13 to 1,148, well above the 929 in operation a year ago, and the total number of rigs in the U.S. reached 2,012, up by 22, a full 20% higher than one year earlier.
Analysts see a reasonably strong price analog to last year. “[P]rices could still be on a similar track to a year ago, when nearby futures slipped as low as $3.212 ahead of the November contract expiration before encountering enough seasonal heating demand and an early winter cold snap that lifted nearby futures to a $4.637 peak in early December,” said Tim Evans of Citi Futures Perspective in New York.
“Similar storage levels and similar seasonality may not translate into similar price levels, but some variation on last year’ price pattern seems like more than a possibility.”
Weather may have the last say in how that scenario plays out, and forecasters in the near term see a large infusion of warmth. MDA EarthSat in its six- to 10-day forecast predicts a mammoth ridge of above- to much-above-normal temperatures bounded on the east by an arc from North Carolina to Louisiana and on the west by an arc from eastern Montana to Southern California.
“Like most of the changes this past week, the shift was in the warmer direction again today [Friday]. Most of this change was found during the latter half of the period, when a resurgence of warmth should spread from the Southwest into the central U.S. This comes after only a minimal cool-down in the wake of a storm system departing the East. At least in this period, there is still little support for any more than a day or two of cooler weather in the eastern half,” MDA EarthSat said.
“The forecast remains largely driven by the MJO [Madden Julian Oscillation], +EPO [Eastern Pacific Oscillation] and -PNA [Pacific North American pattern], all of which favor keeping the ridge over the eastern half of North America.”
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