Capping a four-day rally in which prices rose nearly 30%, the natural gas futures market tumbled Friday as producers’ selling mixed with profit-taking from speculative accounts. January finished at $6.135, down 20.2 cents for the day, but still up more than $1.20 for the week. At 83,751, estimated volume was relatively light for the session, evidence that funds had backed off their scorching buying pace of earlier in the week.
“What we saw today was the market taking a breather,” said Ed Kennedy of Miami-based Commercial Brokerage Corp. “Call it what you will — consolidation, retracement — the market needed to cool off a bit.”
Kennedy continued by noting that the market’s fate on Friday was sealed early — when the market tried but failed to break to new highs. “Producers were big sellers again [Friday],” he assessed. “Everyone else out there — including the funds — opted to wait for fresh weather forecasts [Monday].”
According to the latest six- to 10-day forecast released Friday, the National Weather Service calls for below normal temperatures across roughly the bottom half of the nation later this week forward through this weekend. At the same time, the NWS continues to call for above normal temperatures in the Northeast, despite its having botched that forecast for much of the heating season thus far (see Daily GPI, Dec. 3).
That being said, one of two scenarios could play out as the market heads into winter’s historically chilliest period. If temperatures moderate, producers will take the bird-in-hand approach and continue to sell against any and all prices above the $6.00 level. and that pressure will cap prices at or near current levels. If, however, temperatures continue to buck the NWS forecasts in the Northeast and if the NWS is correct in forecasting cold for the southern states, the producers will back off and let their profits ride. In that case, funds would continue to bid the market higher and reverse their short holdings in favor of long positions.
According to the latest Commitments of Traders Report issued Friday by the Commodity Futures Trading Commission, non-commercial “fund” traders were net short 41,766 as of last Tuesday, down from nearly 49,000 from the week prior. And while it is safe to assume that fund traders covered a portion of those shorts during the rally that extended on Wednesday and Thursday, it goes without saying that they still have a ways to go in order to be flat. Under a bullish scenario, these funds would look to initiate long positions once their shorts are covered, traders agree.
Having identified that the market has turned lower in the short run, Craig Coberly of GSC Energy in Atlanta looks for a retracement down to support at $5.92, $5.72, $5.51, or $5.22.
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