While a number of market participants believe that noncommercial traders are responsible for natural gas futures price spikes and the high level of volatility swirling throughout the market, Tom Saal, a broker with Commercial Brokerage Corp. in Miami, believes the allegations are false.
Speaking at the 19th annual GasMart in New Orleans Wednesday, Saal said that by overlaying historical spot natural gas points onto a chart showing the total open interest positions held by large noncommercial traders, proof of innocence can be found.
"On the overlaid chart, the noncommercials' open interest was low when natural gas futures prices spiked in the past," Saal said. "Clearly, the data shows that they are not responsible for the super high prices."
Saal's research suggests that the threshold for noncommercial shorts is the 40,000 contract mark. "When they get above this level, it will not be long before they turn and start buying back their positions. What we have seen in the past is that they become very motivated buyers." Saal, who went on the record in calling for higher prices back in December when the funds were very short and the April contract was trading at $6.40, notes that it was difficult to convince his customers of the very real potential for higher prices.
"When [noncommercials] got down to -40,000 to -60,000 contracts, I put out a big buy recommendation" to customers. In response to his urgings, Saal said his clients told him '1.3' repeatedly, referring to the sizeable 1.3 Tcf that could be left in storage after the withdrawal season comes to a close. "All they kept telling me is that we are headed for 1.3 Tcf and prices should be headed lower," Saal said.
And though the market appears to be on track to finish the withdrawal cycle with a hefty 1.3 Tcf in the ground, Saal cautioned against trying to pick the market's direction using fundamental factors alone. To prove this statement, Saal pointed to the publicly available Energy Information Administration's (EIA) Forecast Evaluation, which shows the administration's average absolute percent error for a myriad of fundamental variables.
He noted that while the EIA has done an acceptable job of forecasting natural gas consumption and production (average error of between 4.4% and 6.5% for the 1982 through 2003 period), the administration has fared quite poorly at forecasting the wellhead price over the same period (average error of 57.3% during the same time frame).
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