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Futures Spike 14% on Bullish Storage Data
Since coined by Federal Reserve Chairman Alan Greenspan back in 1995 to explain investors' love of stocks, "irrational exuberance" has come to typify the stock market and its unprecedented bull rally. But last week as stock prices plummeted again, the phrase was a more apt description of the natural gas futures market, which spiked 14% amid bullish technicals unpinned by concerns over a tightness of supply this summer and next winter.
When all the dust had settled and the orders tabulated in the data room at Nymex, the numbers were staggering --- the June contract rose a whopping 47.1 cents last week to finish at $3.825, just below the 31-month high of $3.85 notched back in October 1997. Total estimated volume last week in the pit was 410,425, an average of more than 80,000 contracts traded each day.
While the stock market's rise in large part has resulted from market hype, natural gas can point to something a little more tangible. "It's supply, plain and simple," a Houston-based risk manager said. "There is just not as much gas out there as has been in the past."
Production and deliverability concerns have been a fundamental part of the market's precipitous rise from the $2.08 low put in back in November of 1999. An NGI report released in April (see Daily GPI, April 27) showed an average production decline of 3% in the first quarter compared to the first quarter of 1999. The results came from a sample survey of 16 major and large independent producers.
And while the market has known about this shortness of supply for some time, it was just last week that it reached panic mode. In a price spike that will not soon be forgotten by bull or bear, the spot June contract vaulted 24.1 cents higher or 6.5% in just over an hour Wednesday afternoon, following the release of fresh storage data.
According to the American Gas Association, 46 Bcf was injected into underground storage facilities in the week ending May 12, bringing total working gas to 1,163 Bcf or 35% full. Although the report covered a week in which temperatures set record highs in key gas-for-electric-generation cities along the East Coast and thus was expected to show a small injection, the figure fell significantly short of nearly all preliminary market expectations. Most of those predictions were focused on a 50-70 Bcf refill, which if realized, would have fallen in line with last week's 58 Bcf injection and short of both the six-year average at 83 Bcf and last year's 79 Bcf refill.
"We struck out on all counts," a Houston-based risk manager said after learning the injection figure fell short of all comparisons. "This market entered May with the prejudice that we could catch up on the year-on-year deficit this month. Now we are falling further behind and there is no end in sight."
For Tom Riley of West Virginia-based Riley Natural Gas, an injection of anything less than 60 Bcf would have been bullish. "[2000 storage levels] have dropped below the six-year average and show no signs of turning," Riley said. Storage is currently 100 Bcf less than the six-year average and almost 400 Bcf below last year's levels.
However, for some market watchers, the move higher may be a bit irrational. "This market is in pure panic mode," said Susannah Hardesty of Indiana-based Energy Research and Trading. For historical perspective, Hardesty took a look back at three other periods when prices rose to these levels or higher. In December 1995, the January (1996) contract hit a $3.74 high in expiration-related short covering, and then in December of 1996, the January (1997) contract notched the all-time high price at $4.60 in a severe weather short squeeze. In October 1997, the market peaked again ($3.85), but that time it was driven more by perception, as the market prepared for a well-publicized El Nino winter, she said.
Following the Wednesday rally, prices traded aimlessly on either side of $3.70 for much of the session Thursday, finishing up a scant 2.1 cents at the close. But like a monster at the end of horror movie that refuses to die, the market sprung back to life again Friday. June gapped higher at the open and then erupted 11.5 cents to close at $3.825.
"You wouldn't think there could be many shorts at the end of a week like this, but short-covering is exactly what we saw out there [Friday]," a trader said. Those shorts, he continued, were initiated Thursday by traders looking to take advantage of some pre-weekend, profit-taking. "When we gapped higher on the open, they were forced to cover."
Although the market checked lower just long enough to fill in the chart gap down to $3.74, the bulls had already set the tone for the day. Locals were seen as active buyers Friday, sources said.
Whether continued buying was a result of the market's auspicious open or just delayed follow-through on the heels of Wednesday's 24-cent spike, there is little doubt that traders will be watching Monday's open very closely, and for good reason. Friday's $3.84 high, notched moments before the closing bell, is significant because it falls just short of the $3.85 high reached back in October 1997. For many traders, prior highs offer good levels of resistance. If breached, however, they can turn into springboards as the prices trip buy stop loss orders placed just above resistance in an attempt to protect traders' short holdings.
"We are in an interesting position up here. It seems ludicrous to get long up here, but there is the real chance we will not only gap higher on the open Monday, but also gap above the resistance at $3.85," said Ira Hochman of New York-based Trot Trading Corp. "This market is ready to test $4.00 and $4.31."
"We have formed a good base down between $2.50 and $3.20. We could go much, much higher in the next couple months. There was a lot of activity in January $8.00 [call options] over the last couple of days. The bulls are really coming out," he said.
In daily June technicals, support exists at previous highs of $3.73 and $3.74. Resistance is seen first at the $3.85 high ahead of the psychologically important $4 level. A 100% extension of the $2.08-$3.195 trading range that bounded the market from November 1999 to the beginning of May offers another layer of resistance at $4.31, according to Hochman.
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