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FMX Natural Gas Daily – May 3, 2010

May 3 2010, 09:35

Natural Gas & Utility Generation

Nymex

Natural gas prices lost another six cents on Friday, and it turns out that there were more than 28,000 new contracts added on Thursday, when prices were hammered. They had had a technical failure to break decisively above $4.334.

On Thursday, prices advanced as far as $4.386, in a classic bull trap, catching some technical traders leaning too early towards the upside. Instead of using “close-only” stop buy orders or waiting for a second day of prices above $4.334, these traders placed buy-stops above the previous high, probably just above $4.35, and they got long just before heavy hedging and new selling entered the market and pushed quotes back down, again. As we have noted here recently, there are plenty of fundamental reasons to want to hedge this market at “higher levels.” As it turned out, those levels were reached last Thursday. Prices had had trouble breaking to new highs earlier in the week, posting highs above $4.29 on Monday, Tuesday and Wednesday. As it turned out, Thursday was precisely the worst possible day to anticipate higher prices, because the EIA underground storage figure immediately brought heavy fundamental selling into the market. Once managed money accounts saw hedgers coming in on the short side, they stopped covering shorts and buying and turned into sellers themselves.

Managed money accounts had been the guiding hand behind declining prices down to $3.81. At that figure, though, there was better combined buying by end-users, producers, swap dealers and commission houses than there had been selling by funds. The result was a rally, and it built momentum as funds covered shorts and some went long. But, once prices got near their recent highs, the fundamental traders could no longer stomach the idea of buying. Technical traders took prices over the previous high (at $4.334), but producers jumped all over those levels and sold into the advance, trapping those who had bought into the apparent breakout..

Courtesy Peter Beutel

Technical Recap