Natural gas futures remained an uncharacteristic beacon of stability and suffered only a modest setback as other markets cascaded lower in volatile trading. At the close September natural gas had retreated 0.6 cent to $3.935 and October gave up just 0.5 cent to $3.957. November through June 2012 posted modest gains. By contrast the Dow Jones Industrial Average fell 635 points to 10,810 and September crude oil tumbled $5.57 to $81.31/bbl. Gold rose $70 to $1,722/oz, a record, and the yield on 10-year treasuries zoomed 20 basis points to 2.37%, the highest one-day move since May 2009.
With the bulk of its activity limited to North America, natural gas demonstrated its resilience to broader petroleum and equity market gymnastics. Analysts were able to focus on the market’s relevant factors. Tim Evans of Citi Futures Perspective in New York noted that early market weakness reached his $3.86 profit objective “on updated weather forecasts that look relatively benign. The Atlantic Basin is currently free from tropical storms or hurricane activity and the temperature outlook has moderated across the northern U.S. Warmer-than-normal temperatures will persist across much of the southern U.S. but the overall air conditioning demand is moderating. Overall we see the potential for the market to slip somewhat lower in the near term, but more as a gradual erosion in values rather than any more dynamic plunge.”
To the extent that both natural gas and oil are energy molecules, a long-term erosion of oil prices hardly seems to bode well for natural gas. Currently Evans sees oil markets, however, as part of the broader universe of equities, debt, currencies and metals, and suggests that turning around the petroleum complex would require a geopolitical event.
“Although S&P’s decision to downgrade U.S. debt was a further inducement to investors to review a much wider range of investments, the overall impulse to deleverage and cut risk exposures was already on display last week. Interestingly enough, while S&P sees U.S. debt as less safe than before, the flows into cash have driven some near-term issues to a negative yield, while the U.S. 10-year yield was falling through 2.6%. So far, the flight to quality has had a greater impact than any doubts about the long-term ability of the U.S. government to service its debt,” he said in a note to clients.
“For the oil markets, the further drop in prices exposes the lack of physical tightness to limit the downside…As with a range of other markets, we don’t think the problem is so much that recent data has been any more compelling than earlier numbers, so much as it has been the cumulative impact of eroding demand performance. It would seemingly now require some kind of fresh bullish shock — most likely on the geopolitical front — to give the market any real potential to reverse quickly back to the upside. Otherwise we see the markets as having more to go on the downside.”
From a financial perspective troubles began when credit rating agency Standard and Poor’s on Friday lowered the country’s “AAA” credit rating to “AA-plus” after a contentious Congress finally agreed to spending cuts designed to cut the deficit by more than $2 trillion.
The markets’ reaction was swift and furious. Before trading opened in New York Monday Dow Jones futures were already down 228 points at 11,174; 30-year Treasuries jumped; and December gold had soared $56.20 to $1,708/oz.
In the eyes of analysts the natural gas market has problems of its own. Jim Ritterbusch of Ritterbusch and Associates notes that following Thursday’s greater-than-expected storage injection, “important chart support levels were violated and the price weakness became self perpetuating as fresh selling spurred additional selling. Surprisingly, the funds appear to be pressing the short side with some assertion below the $4 level, a likely indication that most institutions are not yet fully positioned…Last week’s chart deterioration forced us to revise our expected near-term trading range lower to the $3.75-4.25 zone, extending a view out over the next couple of weeks.”
On the weather front, hot temperatures are expected mainly over Texas, Oklahoma and the southern Plains. “Above-normal temperatures are forecast over the southwestern and south-central U.S.,” said forecaster WSI Corp. of Andover, MA. “Anomalies as warm as five to eight degrees above normal are anticipated over the southern Plains. More seasonable readings are expected to encompass the eastern U.S.
“Temperatures may trend warmer over most of the central and eastern U.S. than currently forecast as the strongly negative AO/NAO [Arctic Oscillation/North Atlantic Oscillation] pattern is expected to weaken in late August.”
The National Hurricane Center at 2:05 p.m. EDT reported no tropical cyclones, but it was watching tropical waves at 18N 23W, 17N 46W, and 19N 69W.
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