Commercials Have a Lot to Learn from Speculators
Even the most seasoned commercial gas futures trader is no match
for the speculator these days. These little known futures players
with no physical presence in the market have shown a real knack for
triggering major market moves and making big profits. They have a
great track record of buying futures at the market lows and selling
at the highs, while the commercial traders historically have
stumbled into their buys near the top of price increases and
mistakenly sold near the bottoms - "exactly the opposite way to
trade if you want to make any money," noted Susannah Hardesty of
Energy Research and Trading Inc.
Clearly there's something to be gained from examining the
behavior of the speculators and attempting to use their
ever-growing presence in the futures market to your advantage,
according to Hardesty and Tom Saal of Pioneer Futures, two
panelists at GasMart/Power '99 in Dallas, TX.
"What do they do to you. I've heard that they create volatility,
that they move the prices away from where they ought to be
fundamentally, and they also do this:...they suck money out of your
wallet and put it in theirs," said Saal.
The market currently is chock full of them. As of May 4,
according to the Commitment of Traders report by the Commodity
Futures Trading Commission, the non-commercials, the speculative
funds, held 15.7% of the total long positions in the market, or a
net long of about 48,029 contracts, which is only about 2.3
percentage points off their record peak. Their long positions have
ranged from a minimum of 2-3% to a maximum of 16-18% of total open
interest historically. "And when they peak out and are starting to
sell or close out of their long positions, generally speaking,
almost every time the market is at its top," said Hardesty.
Where they go from here will play a large roll in where futures
prices end up, but the jury is still out on the June contract. The
funds could roll their positions into July, Saal noted.
"They are very aggressive, dynamic traders and they really make
lots of profits in the natural gas market," said Hardesty. "They
can sometimes even control natural gas prices much to the chagrin
of industry users when fundamentals and the weather situation tells
us that prices ought to be going down and you look and they're
skyrocketing instead as they did in the late summer of 1997."
The market has been on a bull run for several weeks now, but
commercials foolishly have been on the wrong side to profit.
"[Commercials] had their maximum long positions at the bottom of
the market in January and February... Remember when prices got to
$2.10-$2.15 in March, there were so many commercials that started
to hedge and sell at that point because we were up so much higher
than we had been at the $1.65 level that they thought this was
great. But that was just the first peak of my spring high. It was
just a trigger point. If $2.10 or $2.15 was a good price to sell,
[then] $2.30, $2.40 would be even a better price to sell. What are
Hardesty said one thing speculators are very good at is
identifying the breakout of a sideways trading pattern, like the
one the market went through in December, January and February.
"When the market enters a long, choppy sideways "congestion phase,"
in which prices remain within a 20-cent trading range for an
extended period (35 trading days or more)., spec funds stay on the
sideline and wait for an opportunity to jump in when prices move
Historically, when futures have moved in lengthy sideways
congestion phases they have broken out and increased at least 45%,
she said, sometimes even as much as 164%. "It's like you build this
huge vacuum and nothing is being done and suddenly prices start to
move, you get the spec fund activity in there, you get commercials
starting to buy at a later point, but it creates a tremendous
up-move coming out of these congestion phases. Spec funds know it,
and they profit from it."
Despite the growing presence of speculators in the market,
Hardesty said they have not significantly altered the historic
cyclical patterns she has identified in the market. "I have
identified in natural gas futures prices four major seasonal
moves.[that have been present] since the beginning of [gas] futures
trading." These include a winter low, a spring high, a summer low
and a fall high. Hardesty said currently the market is near the
second peak of the spring high, which she predicts will come in
between $2.40 and $2.51/MMBtu. "Now should spec funds come in at
the expiration of this current June contract and really come in
with a burst of strength and cause a squeeze on the short positions
of the commercials, spec funds have the capability of driving that
high as high as $2.90. I don't know if it's going to occur, but I
made sure all my clients are long.. We're totally positioned to
take advantage of it whether it peaks at $2.40 or continues higher
into the expiration of this contract."
She also expects a final peak of the spring high with a price
range from $2.40 to $2.60, but she said spec funds could take it up
to $3. The timeframe for the final peak is from June 7 to June 25.
For the summer low, Hardesty sees prices reaching a downside target
of $1.80 before rebounding on a strong hurricane season early next
fall to between $2.50 to $2.85. She expects the final peak of the
fall high to be anywhere from $2.80 to $3.40, but with spec fund
participation similar to what occurred in the winters of 1995, 1996
and 1997 "we could have highs in the [near-month] futures contract
anywhere from $4 to $5. This is the influence that spec funds can