September natural gas futures drifted lower as formerly supportive fundamental weather factors started to lose some of their bullish luster Friday. The September contract fell 1.6 cents to settle at $6.090 and the October contract skidded 2.4 cents to $6.292. Floor traders noted a fundamentally soft tone to the market.
“For the first time in a long time the only news I can see on the horizon over the weekend is bearish,” said a New York floor trader. He noted that there was no hurricane likely to “pop up” and nothing in the Gulf expected to become any kind of tropical threat. “The weather forecast could be revised to cooler temperatures, and all the short-term weather trends are negative.” The trader said had it not been for the fact that traders generally do not like to carry a short position over the weekend, the market would have likely settled lower. He said he would not be surprised to see the market open right around the $6 area Monday morning.
AccuWeather senior meteorologist Jim Andrews noted that the week’s heat wave has led to some of the highest temperatures of the year thus far in the Northeast corridor, but “Saturday, shifting weather patterns will begin a temporary and modest lessening of the heat. It will remain hot with highs of 90 degrees and above across the Mid-Atlantic region and southern New England. The modest cooling that will begin farther north will settle into the Mid-Atlantic region Sunday. The day-to-day drop in high temperature will be five to 10 degrees, and locally even more.”
In other weather-related developments, forecasters William Gray and Philip Klotzbach of Colorado State University lowered their Atlantic hurricane forecast for this year. They revised the number of major hurricanes down to four from the five they had forecast in May. Those four are part of the eight intense storms expected to hit the Gulf of Mexico, Caribbean or Atlantic shore. The earlier forecast called for nine. So far this season there have been three named storms.
Analysts who follow the seasonal movements of natural gas prices suggest that prices will head lower much like they did last year when the spot futures contract bottomed at $4.05 in late September. “It is very clear that July and September are the two highest probability bottoming areas for the Q3 seasonal cycle low,” said Walter Zimmerman of United Energy. He did admit that there are more bottoming dates that cluster around July than September, and that July 15 is the average bottoming date for all July-area seasonal lows.
“Our thinking on natural gas is that the market puts in some kind of modest rally as a bear market correction before making a major move lower into September. Today is a good example of the overall weakness in the market. There is ideal weather for the bulls, hot weather in major energy markets, and the futures sell off,” he said.
It is not clear if the recent advance is the end of the bear market correction, and Zimmerman conceded there is still room for the September contract to advance before succumbing to seasonal factors and heading lower. He uses Elliott Wave analysis to determine just how high a bear market correction might take the market.
“In wave count terms, from the $5.754 low of last week our minimum upside target for the expected bear market correction was the $6.700 level. If the brief pop up from $5.754 to $6.684 (reached July 31 in overnight trading) is all the bear market correction that this market is capable of, then the bulls are in very deep trouble indeed.” In order for the bear market correction to maintain viability, September futures need to hold $5.920 to $5.950, he said.
Market rallies aside, in the bigger picture Zimmerman contends that the bear market began May 18 when spot natural gas futures peaked at $8.23. If Zimmerman’s wave-driven analysis is correct, futures prices should decline by 33% from the peak to an average low of $5.51 by September.
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