Under normal market conditions, it is common for natural gas prices to rally in early US autumn as wholesale distributors accumulate inventory to meet winter heating demand needs.
As we all know by now, we are not under normal market conditions.
Natural gas prices did pull back into late summer as is typical with the seasonal supply/demand flows of the commodity. However, instead of strengthening into early fall, prices just kept on falling. Hedge funds unwinding positions, a rapidly ascending US dollar and a general liquidation trend in commodities were enough to override the autumn rise in wholesale demand.
However, traders looking to buy cheap at today’s “bargain” prices may want to think twice. Seasonal tendencies tend to reverse in late October and Natural Gas tends to come under cyclical price pressure during the fourth quarter of the year. Combine this with the market’s existing bearish fundamentals and price outlook for natural gas appears fairly weak into late 2008.
The EIA predicts US natural gas in storage will total 3.373 trillion cubic feet (tcf) on November 1st. This is 1.5% above the five-year average. The National Weather Service is forecasting warmer than normal temperatures across most of the US into early 2009. With adequate natural gas in storage, supply constraints are unlikely unless the US were to experience a prolonged stretch of extremely cold temperatures in the early winter of 08.
Supplies have been allowed to build quickly as a result of lower industrial demand through mid 2008. This has largely been a result of slowing US demand. In addition, new supply flows from non-traditional sources (such as onshore shale formations) have helped to build stockpiles. The EIA projects total marketed natural gas production in the US will increase by 6.7% in 2008 and 4.2% in 2009.
If we are truly heading into an economic slowdown, the trends in waning industrial demand and deflationary price pressure on commodities should set natural gas in a fairly weak price posture and make it a promising candidate for call sellers. Because of the volatility in prices right now, calls can still be sold at strikes nearly 80% above today’s futures price with attractive premiums.
Energies in general are oversold as of Friday’s close and conditions for a correction are favorable. However, the existing fundamentals should limit upside potential and we would view any limited corrections as short term and thus, call selling opportunities.
We at Liberty Trading will be working with client portfolios in the coming weeks in positioning.
Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.
James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group
Optionetics.com ~ Your Options Education Site
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