September Natural Gas soared on Friday, settling at a one-month high, near 50% of its June/July range of 5.011 to 4.012 at 4.511. The rebound following a test of the developing double-bottom at 4.012 was impressive, but based on the recent Commitment of Traders’ Report, was most likely short-covering rather than new buying.
Weather was the driving force behind the rally on Friday as short-traders abandoned their positions ahead of forecasts for a continuing heat wave throughout the Midwest and expectations of more hot temperatures for the East Coast next week.
Hot temperatures drive up demand for natural gas because of increased electricity use. This triggers a rally because more fuel is needed to run power-plants. Initially the weather underpins the market, but eventually the forecasts become strong enough to cause short-traders to scurry for the exits. It is estimated that natural gas fuels about a quarter of U.S. electricity generation.
Technically the market is trapped between $4.00 and $5.00. Although a rally seems imminent, the market is likely to stall as it approaches the upper level of the range since there is plenty of supply around. This is further support that last week’s rally was produced by short-trader profit-taking and position covering rather than bottom-picking buyers.
Although most of the rally was triggered by speculation of hot weather, the news that the U.S. may be increasing exports of natural gas to Mexico was also supportive. According to the Energy Information Administration (EIA), its Short Term Energy Outlook forecasts exports to Mexico and Canada to reach 4.2 and 4.3 BCF/d in 2012 and 2013 respectively.
These figures are up from the 3.1 Bcf figure in 2010.
As long as the hot temperatures continue to blanket the Midwest and East Coast, expect natural gas to find support. Traders have to remember that this is a short-term, weather driven move and is not expected to last. High production is expected to continue to pressure this market and any rally near $5.00 is likely to attract fresh selling as bearish traders have been waiting nearly a month for prices to reach current levels.
Traders should watch the long side of the market to move with the weather, however, any sign of a let-up in temperatures is likely to attract fresh selling pressure.
Factors Affecting Crude Oil This Week:
• Weather. The six to ten day forecast is for extremely hot temperatures across the Midwest and the East Coast. Any increase in the duration of this forecast could trigger further short-covering. Unexpected relief from the heat or a shortening of the forecast would weaken prices.
• The early forecast for Thursday’s inventory report is for an increase in supply. The excess demand caused by the weather is not expected to reach inventories until next week. However, traders should be prepared for any surprises. Any bullish reaction will add to the weather-related price increases. A bearish reaction is likely to be short-lived.
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By. Commodities Mansion
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