Is Punxsutawney Phil a Natural Gas Trader?
Today's Idea
A glance at the daily chart for April Natural Gas shows what may be a significant top put in place back on January 24th, when prices rose to nearly 6-month highs, but then fell sharply to close near the lows of the day. Since that time, the April futures have been range-bound, with prices holding within a narrow band between 4.500 and 4.250. Some traders looking for the 4.800 highs to hold for the next few weeks may wish to explore selling calls in April Natural Gas options with a strike price above 4.800. For example, with April Natural Gas trading at 4.342 as of this writing, the April Natural Gas 5.000 calls could be sold for about 0.035, or $350 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in late March should the April futures be trading below 5.000. Given the risks involved in selling naked options, some traders may wish to have an exit strategy in place should the position move against them. One such strategy would be to buy back the short calls before expiration should the April Natural Gas futures close above 4.8000.
Fundamentals
Although there are over 20 inches of snow outside my window here in the suburbs of Chicago, Punxsutawney Phil and Natural Gas traders are already seeing signs of Spring, as April Natural Gas futures closed at 1-week lows on Friday, as gas bears focus on weather forecasts calling for a warm-up in parts of the U.S. next week. Not even a larger than expected draw from storage last week could spark a rally in prices. On Thursday, prices fell sharply after the Energy Information Administration reported that 189 billion cubic feet (bcf) of gas were drawn from storage last week. Although this was a slightly larger draw from storage than the pre-report estimate, many traders seemed disappointed that the draw was not even larger, given the cold temperatures seen in January. Total gas in storage is near the 5-year average for this time of year, standing at 2,353 bcf. Weather forecasting models seem to be calling for above-normal temperatures in the eastern and southern regions of the U.S. by mid-February, which if accurate could start a trend of lower than expected draws of gas from storage as the calendar moves closer towards Spring. Given the amount of Gas currently in storage as well as expected increases in Gas production, it appears that unless we experience another major outbreak of cold weather this winter, the U.S. should have more then adequate supplies of Gas in storage, which may thaw any rally attempts as spring approaches.
Technical Notes
Looking at the daily chart for April Natural Gas, we notice that despite the sharp decline in prices since the January 24th highs, Natural Gas futures have made a series of higher highs and higher lows. This technical action is normally viewed as bullish for prices, but some traders will need to see the 4.800 high taken out soon or Natural Gas bears will begin to gain some confidence. Also notice haw quickly prices fell back below the 200-day moving average in late January and that since that time, they have also fallen back below the 20-day MA as well. Momentum as measured b the 14-day RSI has moved to a bearish/neutral reading of 46.02. 4.800 looks to be major resistance for the April futures, with support seen at last week's low of 4.274.
Mike Zarembski, Senior Commodity Analyst
