November natural gas continued its march lower Monday as traders pointed to a pervasive technical downtrend, and the weather outlook suggested more mild temperatures across the Midwest. Positive economic figures were not enough to halt the trend. At the close November had fallen 4.9 cents to $3.617 and December had given up 3.4 cents to $3.928. November crude oil dropped $1.59 to $77.61/bbl.
Traders utilizing technical trading models have never deviated from a bearish posture since July. From a longer-term perspective “the trading model went negative on the 18th of July,” said an Oklahoma City analyst. “It hasn’t been above the moving average line since. The market has approached it several times, but has never been above it or settled above it.”
The analyst added that he would have been rolling contracts since the July negative signal and stayed short ever since. “The moving average is at $4.05, so you would stay short right up to that point. It’s hard to sell at this level, but you would certainly sell any kind of bounce until the market closed above $4.05. The moving average has been falling and will continue to decline as the market works lower.”
The analyst noted that crude oil has been much easier to trade since it was closely following equity markets, but “natural gas is in its own little world. I haven’t found anything that gives me a lead like the Dow [Jones Industrial Average] does with crude oil.”
However, directional traders, those typically represented by managed money, for the moment don’t see continued lower prices as such a sure thing. The Commodity Futures Trading Commission showed in a report that managed money exited both long and short positions in approximately equal numbers. For the five trading days ended Sept. 27, the Commitments of Traders Report disclosed that managed money at IntercontinentalExchange reduced their long futures and options (2,500 MMBtu per contract) by 3,246 to 283,371 and short positions rose by 3,038 to 187,784. At the New York Mercantile Exchange (10,000 MMBtu per contract) long futures and options fell by 8,780 to 117,694 and short holdings fell by 9,610 to 244,270.
After adjusting for contract size, long futures and options at both exchanges fell by 9,591 and short positions contracted by 8,851. For the five trading days ended Sept. 27 November futures fell 1.0 cent to $3.875.
Analysts also see the weak economy playing more of a role in driving prices. “The gas market continues to be pressured by both more-than-adequate supplies and flat to slowing demand because of a slowing U.S. economy. At this time, the forces that have been pressuring the market seem to be getting more negative rather than getting better,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. “It seems that we are going to have to cut supply, which is unlikely to happen at current price levels. Or we have to get a significant rebound in the U.S. economy, and that does not look likely in the short term. So, unless something significant changes, the gas market will likely continue under pressure.
“On a trade basis, we have been trading the range by selling calls and the puts. At this time we are short the puts. Normally, we roll the puts down if they trade in the money by the amount we sold the option for. But at this time, if we trade below $3.60 on the spot month we are going to cover the short puts and sit on the side for a bit. For hedgers, we will continue to hold our short positions,” he said in a weekend note to clients.
Bulls got some support with a better than expected reading on economic strength with the 10 a.m. EDT release of the Institute for Supply Management manufacturing index for September. A Bloomberg survey revealed an expectation for an estimated 50.3 reading, down slightly from August’s 50.6. The actual figure came in at 51.6. A reading of 50 is the boundary between economic expansion and contraction.
The near-term weather outlook, however, does not look supportive for prices. MDA EarthSat in its six- to 10-day forecast predicts a ridge of above- to much-above-normal temperatures extending from Wisconsin to South Texas and from North Dakota in the west to Maine in the east. “The forecast has turned warmer [Monday], especially across the Upper Midwest, where much-aboves appear likely to last through the period. Most of the models are in fairly good agreement on this continued warmer outcome, which has certainly shaved off some HDDs [heating degree days] since late last week.
“The Northeast is also a bit warmer at mid-period when the core of the ridge shifts eastward. This warm look to the pattern overall is well supported by the MJO [Madden Julian Oscillation], +EPO [Eastern Pacific Oscillation], and a decreasing trend in the PNA [Pacific North American pattern], all of which favor a ridge over the eastern half. The West should stay mostly on the cooler side.”
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