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Futures Test $8 as Frigid Cold Hits the East

As the northern Plains, the Great Lakes and the Northeast continued to suffer through an arctic cold wave with temperatures as low as 42 below zero, the natural gas futures market on Monday recorded modest gains while watching the cash market soar to near record highs at some points (see related story). March natural gas futures finished Monday's regular session 15.8 cents higher at $7.634 after putting in an overnight high at $8.030.

"Its pretty cold out there, but you have to remember we are trading March," said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. "That is the key element, because 90% of the time March is a lower demand month than February. So, the effect of the brutally cold air is really more of a cash market phenomenon. To a lesser extent it is a futures market phenomenon. Of course cash prices will pull the board up, but we put an eight in front of March futures prices in overnight trading and the selling immediately came in. This proves that the producers are willing to sell it up at those prices. I think we can expect to see this continue in the near term."

Kennedy added that while the weather is expected to remain cold, there just isn't a whole lot of time left for winter. "Because of the cold, the downside in futures will be limited," he added. "AccuWeather says another blast of Arctic cold could hit late this month. While some are forecasting a warm-up in the near-term, they are talking about a warm-up from brutally cold to below normal temperatures. We should continue to have very good demand, but winter isn't going to last forever. This winter got off to a late start."

As traders in eastern energy markets shiver under an arctic blanket, many were mulling the duration of the freezing weather. Weather bulls are back in the driver's seat. According to AccuWeather, the northeastern corner of the nation has gone from a very mild weather pattern straight into the deep freeze. "With the jet stream pouring in from northern Canada, cold air continues to be reinforced," said AccuWeather meteorologist Bob Tarr. He went on to say that a powerful storm over eastern Canada will be slow to clear away, so breezy to windy conditions will continue. "Compounding the difficulties is that the cold air will stay lodged across the Northeast and Great Lakes for nearly the entire week ahead."

Top traders note a curious, perhaps ominous divergence between the petroleum markets and natural gas. "Unlike the complex which continued to rally right to the week's close, natural gas was unable to hold above last weeks highs," noted Mike DeVooght, president DEVO Capital, a Colorado trading and risk management firm. In a memo to clients prior to Monday's trade, DeVooght noted that the cold weather is expected to affect much of the U.S. for the next week to 10 days. Other traders noted that the futures are currently in a "tug-of-war" between ample supplies and cold weather, and prices could be vulnerable should the forecasts hint at a break in the arctic influx.

Goin into Monday's session, DeVooght suggested for producer clients to look closely at selling the April-October summer strip at $7.27, and said he sees "costless collars," the simultaneous purchase of put options at $6.50 and sale of call options at $8.50 for the summer strip, as attractive as well.

The upper $7 range for the March futures is something of a sore point for local and short term traders. Last Tuesday the March contract sported an 80.3-cent gain to settle at $7.740, yet that strong finish faked out a lot of traders and eventually led to Friday's soft finish at $7.476. "When prices hit $7.74 three days ago, the entire ring bought and they got smoked. It was almost a psychological point for them, plus there was a lot of scale-up selling between $7.75 and $7.95," a New York floor trader said Friday.

Market insiders were also still discussing the New York Mercantile Exchange's (Nymex) decision to add an hour to open outcry pit trading (see Daily GPI, Feb. 5). In an effort to bolster open-outcry trading volumes, Nymex last Thursday moved up its opening bell to 9 a.m. from 10 a.m. EST.

"The extra hour of floor trading is increasing volume a little bit, but not from the expected corners, such as the public, the funds and the producers," Kennedy told NGI on Monday. "The locals are trading longer for their own accounts, so we are getting a little volume bounce. The real increase in volume is Globex. I am beginning to get the impression that there is going to be an erosion process on pit trading. While electronic trading is the least efficient market in my opinion, it seems a lot of people want to go that way. While I expect floor trading to erode, I don't think it will go away all together. I don't see traditional trading becoming extinct, but we are definitely going to see less people in the pits" (see related story).

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