Gas Petrospective – August 3, 2010

Natural gas prices advanced above $5.00 per million Btu yesterday, buoyed by the general rise in equities and commodities and by forecasts for more hot weather. The formation of a tropical depression in the mid-Atlantic also brought short-covering into the market. But posting another advance, after a full week higher last week, proved to be too much for natural gas traders. After seeing prices gain as much as they had at yesterday’s highs, there was a natural desire to book profits and that helped push quotes back down.

Prices were too overbought and were overextended on the upside, and that made an advance beyond the resistance at $5.00 a step too far for this market. Traders remembered that heavy production levels and ample amounts in storage have not gone away, and producers decided that yesterday’s highs represented a good place to lock in future selling prices. Swap dealers took profits and commission houses initiated fresh shorts even while taking profits on fresher long positions. It was simply a matter of trying to break $5.00 too soon, after generous gains last week.

Of course, any genuine improvement in economic conditions is going to help natural gas futures. Yesterday’s return to risk convinced funds to re-enter their long oil and short natural gas positions, but they still make no sense. If the economy does recover, demand for natural gas, from factories, is likely to show up well before any new hires start to drive to work, again.

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