Coal Exodus Props Up Natural Gas Prices

NEW YORK ( TheStreet) -- Natural gas prices ended a two-day rally Wednesday, but were expected to be propped up by a switch to natural gas from coal and tropical storm activity.

November futures were slumping 0.8% to $3.872 a million British thermal units as speculators cashed out of their positions after prices hit an intraday high of $3.926 the previous day.

To maximize their gains, speculators will often resort to buying back contracts when the market rises -- forcing it as high as possible -- and producing a short-covering rally.

Once the market achieves key resistance levels of between around $3.80 to $3.90, speculators will take profits and reinstitute short positions to try to take prices down as low as possible on heavy momentum -- as exemplified by Wednesday's move. All part of the strategy to make money off of a commodity that has really flat-lined since the markets became inundated in shale supply over the last three years and much of the speculative "froth" was driven out by the Commodity Futures Trading Commission and Dodd Frank rules.

"If you have a commodity that is just flat-lining and not doing anything ... your risk reward potential is very ambiguous," says WeatherBELL Analytics' energy analyst Alan Lammey.

Over the last few weeks, natural gas prices have plummeted to 10-month lows -- but they've not yet hit rock bottom given the support they're been receiving from the big switch among electricity generators to natural gas from coal, as well as an extra hurricane risk premium.

"We typically see natural gas prices hit almost their lowest points of the year during the fall," given that it is that mildest season of the year, says Lammey. "So from that perspective, you typically will see these providers trying to lock in what they are paying to run their facilities. This is good time to hedge the fuel costs."

"When you have cheaper fuel that is knocking down emissions, they will start doing this switching," leading to some bullishness for natural gas. Natural gas has also been more attractive for electric generators across the eastern and northwestern U.S. -- where most of them are concentrated -- given that it's a clean-burning fuel.

The potential for more hurricanes late in the tropical storm season is also lending support, providing natural gas with a risk premium that won't go away until the threat completely disappears.

"There are still a few bullets left," says Lammey.

Cameron Hanover analysts on Wednesday said that "prices remain oversold and the Bollinger bands technical indicator suggest that prices can move higher again .... prices had gotten so oversold, on both daily and weekly charts, that a rally had become more or less inevitable. Once prices return to the upper Bollinger band, we should expect to see prices sell off."

And once big storage numbers come out over the next few weeks amid milder demand in the fall months -- a near-triple digit injection is expected for tomorrow -- there could be a sizeable knock down to support levels. Lammey predicts that natural gas will hold at the $3.75 to $4 trading range for November futures before a bigger drop to the major support area of $3.65. Any move below this could be the catalyst for a drop to $3.45.

Energy stocks were trading mixed. Chesapeake Energy ( CHK) was climbing 3.7% to $28.71; Devon Energy ( DVN) was falling 0.3% to $58.45; Kinder Morgan Energy Partners ( KMP) was down 0.4% to $70; Kinder Morgan ( KMI) was down 0.5% to $26.90; Rex Energy ( REXX) was gaining 3% to $14.28; Southern Union ( SUG) was flat at $40.88 and Energy Transfer Equity ( ETP) was falling 0.5% to $42.80.

-- Written by Andrea Tse in New York.

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