The natural gas market has been surprisingly strong of late, even in the face of milder temperatures and relatively high levels of gas in storage (1564 bcf as of last Friday according to the EIA"s release today). The May contract went off the board today at 7.508, just a nickel under the April settlement, and four cents under March. Arguments for the contract staying up here range from an anticipated active hurricane season, to nuclear maintenance that will fuel demand for natural gas as an alternative in electricity generation, to increased demand in ethanol production, to declining imports from Canada (blamed in part on high levels being consumed in the oil sands project) but in my opinion the market is ignoring the underlying fundamentals, which in the short term I view as bearish. One explanation I have heard offered is that the cash market has been very strong and it has has been suggested that this too has helped prop up the screen....but why such cash strength? Longer term I am more bullish, but due to current and anticipated mild weather, record LNG imports (the UK market is around 3 dollars compared to our 7.50 market) and storage in the ground that is 233 bcf over the 5 year average, over the next few weeks I anticipate a rather hefty selloff, at least down to the low 7.00 area if not 6.80 or even the mid 6 dollar range. I wondered what others could offer for forecasts or rationale as to why the June contract might be trading at such a historically inflated level given the current outlook, or perhaps even offer technical explanations for where we are currently trading and where we might be headed.
Natural Strength
- Thread starter PJKIII
- Start date
I and others agree with your outlook entirely.
That said, you are looking for explanations why the market is where its at:
1) Big players want it to expire at certain price points ?? (ie expiry of remainder of large spread positions [outrights] desired at certain places)
2) Everyone is short this market. You know how that ends.
3) Anticipation of summer power demand and hurricanes are helping elevate it. Additionally, I know the crude:ng relationship is a stretch at best (being 6:1), but right now we're at 8.6:1. So there's still upside in that angle.
4) We've seen that even in a warm winter, a few cold weeks can make all the difference. So perhaps the storage situation is being somewhat discounted. Despite that, we had a runup on the noreaster AND Iran worries (remember that crude spike that took gasoline, NG, and heating oil all up?)... That explains somewhat how we are here as well.
So ... Now that withdrawal season is done, what upward catalyst do we have left?
I can only think of four ...
1) huge net short interest in the market
2) early hurricanes starting to come in Jun.
3) geopolitical stuff (sympathy movements w/ crude)
4) weather (scratch that, what weather is there in May?)
If we get down to 6.80, I'm buying with all hands and fists. Until then I'll try to take bites...
I have no clue when it comes to fundamentals and I am reading this conversation in appreciation and awe.
When it comes to technicals - June contract - on my 120 minute charts I see that a bullish failure swing triggered Friday that should propel the market for a day at least. At the 8.00 level we would be setting up for a bearish Gartley222 formation (ABC correction) and at that level we would be near the top of multi month highs and expect resistance.
The huge trading range on the daily will be resolved either by fundamentals or crisis. I am scalping Crude but the NG market may be most suitable for swing trading until it breaks out of the range (which may be another contract)
The Oil seasonals are up into mid May.
The NG seasonals are weak into summer, at least as I read it at:http://www.seasonalcharts.com/
Regards,
GC
When it comes to technicals - June contract - on my 120 minute charts I see that a bullish failure swing triggered Friday that should propel the market for a day at least. At the 8.00 level we would be setting up for a bearish Gartley222 formation (ABC correction) and at that level we would be near the top of multi month highs and expect resistance.
The huge trading range on the daily will be resolved either by fundamentals or crisis. I am scalping Crude but the NG market may be most suitable for swing trading until it breaks out of the range (which may be another contract)
The Oil seasonals are up into mid May.
The NG seasonals are weak into summer, at least as I read it at:http://www.seasonalcharts.com/
Regards,
GC
Looks like scriab's #2 came into play on Friday with short sellers running for cover on top of the Saudi terror plot foil.
I definitely agree with the OP that the fundamentals point to a bearish situation for the June NG contract, but if you look at CLM6/NGM6 and CLM7/NGM7 contract it's clear that there is much more correlation this year than last year, for reasons unknown to me, which is worrisome for any NG shorts since a very bullish situation is set up for CLM7 in terms of refineries coming back online over the next month and refinery utilization increasing into the 90's.
Last year we had NG take a run to $8.50 on hurricane noise and then collapse to $6 as builds were quite large and fundamentals trumped noise. I'll let history be my guide
I definitely agree with the OP that the fundamentals point to a bearish situation for the June NG contract, but if you look at CLM6/NGM6 and CLM7/NGM7 contract it's clear that there is much more correlation this year than last year, for reasons unknown to me, which is worrisome for any NG shorts since a very bullish situation is set up for CLM7 in terms of refineries coming back online over the next month and refinery utilization increasing into the 90's.
Last year we had NG take a run to $8.50 on hurricane noise and then collapse to $6 as builds were quite large and fundamentals trumped noise. I'll let history be my guide
Fitting time to start such a thread only to have the market take off inexplicably the next day. Many of the posters have made very good points, and I am well aware that there doesn't have to be any fundamental reason for markets to move, but it feels better when you can put some logic behind the way things are trading and perhaps try to get some insight from others....but sometimes the only logic is that there is no logic, as strange as that sounds, and that may well be the case here. The market seems to be ignoring the near term bearish fundamental picture and instead is focusing on moves in the petroleum complex and the many bullish longer term forces at work for natural gas (hurricanes, hot and dry summer, nuclear maintenance, and reduced imports from Canada to name a few).
In reading a Reuters article about the Bank of Montreal natty trading losses recently (blamed on reduced volatility and liquidity), I took a few lines out that were potentially of interest to readers of this thread:
NEW YORK, April 27 (Reuters) - The Bank of Montreal's warning Friday that it will lose more than $300 million in its fiscal second quarter on natural gas trading served as another reminder that betting on that commodity can be treacherous.
"I've been trading 40 years, and natural gas is by far the most volatile commodity on the planet, and the hardest commodity to trade," said Tony Kolton, president of Logical Information Machine, a Chicago-based data provider to energy firms, hedge funds and financial institutions.
Kolton said implied volatility for natural gas, a measure of how much the market thinks future prices will change, has slid to about 40 recently, but its average volatility above 60 for the past eight years makes it number one globally.
By contrast, crude oil, the second most volatile commodity, was rated at 38, with soy beans at 24 and gold at 19.
The volatility numbers are quite staggering, and even after the recent slowdown still keep NG in first place. As for me, I would venture to guess that the slowdown in volatility is a blip on the radar screen and that the volatility we know and love will be back upon us before long...
In reading a Reuters article about the Bank of Montreal natty trading losses recently (blamed on reduced volatility and liquidity), I took a few lines out that were potentially of interest to readers of this thread:
NEW YORK, April 27 (Reuters) - The Bank of Montreal's warning Friday that it will lose more than $300 million in its fiscal second quarter on natural gas trading served as another reminder that betting on that commodity can be treacherous.
"I've been trading 40 years, and natural gas is by far the most volatile commodity on the planet, and the hardest commodity to trade," said Tony Kolton, president of Logical Information Machine, a Chicago-based data provider to energy firms, hedge funds and financial institutions.
Kolton said implied volatility for natural gas, a measure of how much the market thinks future prices will change, has slid to about 40 recently, but its average volatility above 60 for the past eight years makes it number one globally.
By contrast, crude oil, the second most volatile commodity, was rated at 38, with soy beans at 24 and gold at 19.
The volatility numbers are quite staggering, and even after the recent slowdown still keep NG in first place. As for me, I would venture to guess that the slowdown in volatility is a blip on the radar screen and that the volatility we know and love will be back upon us before long...