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Short-Covering, Hurricane-Hype Buoy Futures

Short-Covering, Hurricane-Hype Buoy Futures

After slipping more than a dime Thursday, the futures market continued lower Friday morning as traders continued the process of lightening their long positions. The July contract carved out a $2.325 low before 11 AM. That, however, was about all the selling pressure the market would tolerate and scaled down trade buying lifted the market throughout the rest of the day. July finished at $2.378, up 2.3 cents. Estimated volume was light, with only 45,070 contracts changing hands.

"A rejection of the follow-through lower," is how one trader described the market's inability to tack on additional losses after breaking through and settling below significant support at $2.36 Thursday. However, he remains skeptical of further gains. "Storage is 52% full with 21 weeks left in the injection cycle. Injections only need to average 69 bcf over that period in order for the market to enter the winter with a full 3.2 Tcf in the ground." He went on to dismiss the notion that supply is down. "Despite the hot weather we have had this week, cash prices have maintained a discount to the futures screen. That means that not only is current supply enough to meet current demand, but also enough to satisfy storage players who have an obvious incentive to arbitrage the [June cash versus July futures] spread." According to Houston-based Baker Hughes, the U.S. rotary rig count as of June 11, was 547, down 8 from the week prior and 321 less than year ago figures.

On the other hand, a Gulf Coast trader believes a lot can be learned by looking at the Nymex open interest figure, which notched a new all-time high of 344,889 Thursday before retreating back to 339,681 on Friday. "It shows there was fresh buying Wednesday on the move up to $2.47 ahead of the storage report. That buying, he continued, quickly turned to selling in Wednesday evening's Access session and continued on Thursday." Analysts and traders agree that a falling market and decreasing open interest signal long liquidation while a falling market and increasing open interest usually mean fresh selling was entering the market.

Of the types of selling, Ed Kennedy of Miami-based Pioneer Futures feels long liquidation is more benign and should not be taken as seriously as fresh selling. Will the market trend lower now that open interest has hit a record high? Not necessarily, says Kennedy. "Utilities are becoming more active in the market thereby increasing the amount of trading activity and open interest. If natural gas futures market was more mature, like for example the [S & P 500] futures, then you could make the argument that open interest has a ceiling. Looking ahead Kennedy looks for the bulls to regroup today for a retest of the $2.40 level.

"Just another typical Friday," joked a Southeast trader who found it odd that futures prices have moved higher despite falling cash market prices the past two Fridays. "Today's run-up was due to short-covering ahead of the weekend mixed in with some early season hurricane-hype," he said. That's right, the North Atlantic Hurricane Season kicked off on June 1, and it already has its first contestant. As 5 PM Friday, Tropical depression one was located 540 miles off the Southeast coast of Bermuda and forecast to strengthen into a tropical storm by today.

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