Weather Forecasts May Be the Key to the Next Move in Natural Gas Prices
Fundamentals
A chilly start to 2010 has Natural Gas bulls starting to warm up to a futures contract that has been mired in a bear market since the middle of 2008. This past Thursday, the Energy Information Administration reported that 266 billion cubic feet (bcf) of Gas was removed from storage the week ending January 8th, just missing the all- time record draw of 274 bcf that occurred in January 2008. This was well above last year's 88 bcf draw and has helped to cut into the record amount of Gas held in storage going into the winter. Supplies now total 2.852 tcf, or 3.7% above last year's totals. However, old habits tend to die hard, as traders reacted to the EIA figures by selling Gas futures, as weak longs were "disappointed" that the draw did not reach record levels. In addition, some private weather forecasts are calling for a warming trend to enter the Midwest and Northeast, with above-normal temperatures expected to last through the last week of January. Although lead month Natural Gas futures prices have doubled since the lows were made back in September of 2009, some traders remain skeptical that prices will rise much higher until we see industrial demand improve. The December non-farm payrolls report did little to negate these feelings, as the Labor Department announced that 85,000 jobs were lost last month. Since it appears that a robust economic recovery is not imminent, it might be the weatherman who will be the focus of energy traders' attention in the first quarter of 2010.
Trading Ideas
Many traders spend their time trying to predict where prices are heading. However, sometimes it might be easier to try to figure out where prices are not likely to go! This is the strategy of option sellers who try to collect option premium by selling out-of-the-money options in hopes that the options will expire worthless. In the March Natural Gas contract, there appears to be good chart support at the recent lows near the 4.550 area. Some traders who believe that this support point might hold may wish to consider selling puts below this support point. An example of this trade would be selling the March Natural Gas 4.45 puts. With March gas futures trading at 5.643 as of this writing, the puts could be sold for about 0.31 points, or $310 per option, not including commissions. The premium received would be the maximum potential gain on this trade, and given the inherent risk in selling naked options, traders should definitely have an exit strategy in place in case the trade moves against them. Some examples would be closing out the trade if the futures move through some key chart point, such as the support at 4.550 in this example. Other traders may choose to close out the trade if the option premium moves some set percentage of the premium received, such as buying back the put if the option premium trades at 3 times the amount of premium received for originally selling the option. No matter what method a trader chooses to utilize, strong risk management techniques are critical to the survival of an options selling strategy.
Technicals
Looking at the daily chart for March Natural gas, we notice a potential ascending triangle formation. This is normally viewed as a bullish chart formation, which is confirmed if prices break out above the upper trendline once the current consolidation phase has ended. The 20 and 100-day moving averages are bracketing recent daily price ranges, which confirm that prices are still in a consolidation mode. The 14-day RSI is also reading a very neutral 51.94. Support for March Natural Gas is seen at 5.327, with resistance found at 6.027.
Mike Zarembski, Senior Commodity Analyst
