Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
What is the Deal With $3.91 Natural Gas?
May 17, 2013
Natural gas prices moved lower yesterday to support at $3.912. That figure is proving to be a sweet spot for the June contract and despite a few solid attempts to break through, $3.91 has been a hangup level for downside action.
The last time we saw a top at that level was March 14 and the contract has been on a tear ever since, testing support along the way. We observed a strong downside move yesterday and advised subscribers to keep an eye on June natural gas for a move below $3.91. But as it has so many times before, June natural gas found springy support there and moved higher, once again.
Given that strong level of support, downside potential is limited, and today notes that very thing as the contract spiked back above four dollars to $4.06. From the corner office, Chip Flory wondered out loud, "Why didn't we buy that yesterday?" I assured him the contract will be back to $3.91 one day soon, but we may come to realize that natural gas has found a firm near-term bottom at that level.
The tale is told in volume. Trader activity spiked yesterday after the sharp falloff from $4.06 to $3.93. Since then, action came to a standstill and futures moved sideways until late Friday afternoon when natural gas moved 12 cents higher -- once it did, trader interest piqued and another round of profit taking was underway.
Strength in the stock market has diminished interest in the raw commodity sector as a whole and we have seen crop prices suffer as a result. But natural gas has been a trader's playground with tops and bottoms as obvious as Everest.
There is security in understanding, and Wall Street seems to think it has this market figured. That being the case, we can figure it too. I still believe that nattie will break to the downside and I would like to see a violation of support at $3.91. But if traders have come to terms at their 'bread-and-butter' level and feel secure enough to mold this market like play-dough, opportunities to book natural gas will become more clear in the coming weeks.
As always, examine your appetite for risk. If you need to book some natural gas for dryers, or for anything else for that matter, the next move to $3.91 may be the best opportunity you will see until traders find another yard to play in.