Irene a Negative for Natural Gas Prices?

Today's Idea

The lack of a hurricane "risk premium" has made near-term Natural Gas options appear inexpensive, especially considering the potential for a disruption to Natural Gas production in the Gulf. Some bullish traders may wish to explore the purchase of just-out-of-the-money calls in Natural Gas futures options. With October Natural Gas trading at 3.865 as of this writing, the October Natural Gas 4.000 calls can be bought at 0.098, or $980 per option, not including commissions. The premium paid would be the maximum potential risk on the trade, which has a breakeven point at option expiration of the strike price of the call plus the premium paid.

Fundamentals

Normally a hurricane threat to the US is a bullish influence for Natural Gas prices, but Hurricane Irene, which made its way up the east coast of the US last week, has actually caused prices to fall at the beginning of the week. The huge number of power outages along the coast has caused demand for Natural Gas used for power generation to fall by nearly 2 billion cubic feet during the past several days. The total demand may fall even farther should the outages last into next week. In addition, many of the East Coast refineries preemptively shut down production ahead of the storm, which further curtailed industrial demand. Weather forecasts for the next 7 to 10 days are calling for normal to below normal temperatures for the Midwest and eastern half of the US, which is also cited as a negative factor on prices. As we move into the peak Atlantic hurricane months of September and October, we would normally see many traders factor a "risk premium" into prices due to the fear that a storm could shut down Gas production in the Gulf of Mexico. However, with huge increases in US Gas production out of the Marcellus, which the US government underestimated the size of by 42 times, and Barnett Shale formations, the effects of a temporary production outage out of the Gulf are much more muted than would have occurred only a few years ago, and it appears that many traders no longer fear a spike in Natural Gas prices should a hurricane reach the Gulf. Whether this is shortsighted thinking or not remains to be seen, but it does appear that unless we see stronger industrial demand, Natural Gas prices may continue to hover near current price levels.

Technical Notes

Looking at the daily chart for October Natural Gas, we notice prices rebounding sharply after making new contract lows on Tuesday. There is a bullish divergence forming in the 14-day RSI, that may be signaling that the sell-off has run its course. We would need to see prices close above the 20-day moving average in order to generate some short-term momentum buying. Support is found at Tuesday's low of 3.780, with resistance found at the recent high of 4.159 made back on August 11th.

optionsXpress