Running Out of Patience?
Fundamentals
That is most likely the mood of Natural Gas bulls, as neither a hot spell in the northeastern portions of the U.S. nor a below average injection into storage last week could keep prices from testing recent lows. Yesterday's weekly EIA gas storage report showed that only 37 billion cubic feet (bcf) of gas was put into storage last week, which is well below the 63 bcf put into storage this time last year and also below the 5-year average of 39 bcf, as demand for cooling has increased sharply given the hot weather seen in the Midwest. Gas in storage now stands at 2.985 trillion cubic feet, or nearly 5% below levels this time last year. However, gas prices sold off after the report, as traders continue to fear a slowing economic recovery, which could lead to even less industrial demand in the coming months. Some private weather forecasters are predicting a return to more seasonal temperatures in the Midwest next week, which if true, could help to lower electricity demand from the highs seen this past week. With September fast approaching, which is the peak month for tropical storm activity in the Atlantic, many gas bulls are hoping for a "weather premium" to be built into Natural Gas futures prices, as any major interruptions in gas and oil production in the Gulf of Mexico has the potential to send prices sharply higher. However, there is little fear among gas bears, especially large speculative accounts, which are holding a net-short position of nearly 84,000 contracts according to the most recent Commitment of Traders report. Small speculators are net-long Natural Gas, and many of these so called "weak hands" are beginning to liquidate their positions as prices have once again failed to sustain a rally. Although the trend is definitely favoring shorts in Natural Gas, this bearishness could set the stage for a sharp rally should a production disruption occur.
Trading Ideas
Trend-following traders who are short Natural Gas futures must feel pretty confident in their positions, as prices are trading near the lows seen back in May of this year. However, the memory of 2005 and the massive run-up in prices following Hurricane Katrina likely should remain embedded in traders' minds as to the potential violent price swings capable in Natural Gas. Some traders looking to protect a short position in Natural Gas futures may wish to investigate the purchase of out-of-the-money calls in Natural Gas options to help mitigate potential losses, or even profit should Natural Gas spike higher due to weather disruptions in the Gulf. With October Natural Gas trading at 4.311 as of this writing, the October 5 calls could be purchased for about 0.089, or $890 per option, not including commissions. If Natural Gas futures were to surge above 5.000 before expiration in late September, a trader holding a short position in October Natural Gas would be able to exercise the call and cap his potential loss to the strike price plus the premium paid. More aggressive traders may wish to purchase additional out-of-the-money calls which could, potentially, lead to a profitable trade should gas prices skyrocket.
Technicals
Looking at the daily chart for October Natural Gas, we notice the market making its 4th attempt to break below 4.250 since March of this year. Prices remain well below both the 20 and 200-day moving averages, and the 14-day RSI is weak, with a current reading of 37.76. Should 4.250 give way, the next major support is seen at 4.000. If prices once again hold, a run to the 20-day moving average near the 4.600 area would not be out of the question.
Mike Zarembski, Senior Commodity Analyst
