Astrology could have the answer for why gas prices rose to $3 this week. At least it looks like Virgo called it right today. Virgo says “lie low, play the waiting game, focus on power.” Gas prices fell sharply after the storage report was released at 2 p.m. by the American Gas Association (AGA). Maybe the astrologers are on to something.

Explanations are getting pretty hard to come by these days. Tim Evans, futures analyst at IFR Pegasus, has been saying this a lot lately: “In the short-term, futures prices can go anywhere.” He, along with just about every cash trader and gas consumer out there, thinks the market is about $1.25 overvalued right now.

There’s the near record warm winter just ending. Heating degree days are expected to end up 18% below last winter and 11% below normal, according to the Energy Information Administration (EIA). Storage is still 49% full with 1,608 Bcf of working gas in the ground, compared to only 22% full at the same time last year and an average of 34% over the past five years. Storage levels are 897 Bcf above year-ago levels, according to AGA data. And EIA expects the industry to end the winter with 1.5 Tcf of gas in storage, compared to 0.7 Tcf at the end of last March.

There’s very little there to support a bullish forecast and $3 gas. Furthermore, there’s not a blazing hot weather report driving prices higher. We’re talking about April, not July. How in the heck did near-month futures jump to three bucks after being only $2.30 a week and a half ago and $1.90 a month and a half ago?

“Let’s ask ourselves ‘where is this thing going?'” said Evans. “Are we already on our way back to $10. Are we going to do this now in the spring when heating demand this week is going to be at the lowest level since the first week of December? And it’s not coming back up from that level; it’s March. The shoulder months are upon us here.

“I think when the market ultimately does turn lower, people are going to be equally surprised by how far it goes on the downside as they have been over how far it’s gone on the upside,” said Evans.

Evans noted that there is more gas in storage now than in 1995 when prices fell to $1.25. “I look at the storage levels and say ‘come on!’ Maybe the future [production] prospects warrant some higher price level than $1.25, but there’s just an awful lot of storage gas there. I think it’s a long road back to a bull market. The fundamentals just don’t flip like a light switch.” Technicals, however, apparently do, or did.

According to many technicians, the stars aligned just right over the last few weeks. One thing few people may have noticed was the enormous accumulation of speculative non-commercial short positions in the futures market, as noted by the Commodity Futures Trading Commission’s Commitment of Traders report. By Jan. 22, speculative fund groups were net short 62,643 contracts. That’s about double the prior peak on Sept. 18, 2001 of 35,278. By comparison, when gas prices were screaming higher back in 2000, the peak in long accumulation on Sept. 19, 2000 was 24,809 contracts. What was big in the past didn’t come close to the recent net short position.

Funds accumulated such a large net short position during the persistent down trend in prices last year. They were betting that down trend was going to continue based on technical factors and in light of the warm winter and the enormous amount of gas in storage. In essence, that massive short position represented future demand for Nymex paper contracts, and that demand was unleashed over the past couple weeks.

What ended up triggering a short covering event apparently was the relatively minor cold weather. It was just enough to allow cash prices to rally. There was physical demand that contributed to the rise. Some evidence of that is in this week’s AGA storage report of a 140 Bcf withdrawal, the third largest withdrawal of the heating season. It may sound like a lot, but there have been plenty of weeks in prior winters when more than 210 Bcf was withdrawn. There were 170 heating degree days last week compared to a normal number of 166, not exactly the beginning of the ice age.

Although it wasn’t a wellhead freeze-off scenario, it apparently was just enough for people to start thinking about lower supply availability.

Jay Levine of Advest Inc. also believes there’s a significant “fear factor” that’s been built into this market because of the high prices last winter. Signs of a economic recovery, the declining rig count and production short-falls have prevented prices from cratering and making the fresh lows so many were expecting, says Levine. “Although storage is at record levels, it’s impossible to predict what kind of summer we’ll have and there is still, in my opinion, a fear premium built into prices across the board.”

Other sources attributed the run up to a wide variety of factors that triggered a short-covering rally. “It was way overdeveloped on the downside. It was just a matter of when it was going to blow,” said Ira Hochman of New York City-based Trot Trading. “On [Wednesday March 6], there was nothing but buying in the market. Even before the [storage] report, every half-hour bar was higher than the previous one. There were no sellers in the market. Once it got above the $2.51 area, it was sayonara.”

Other fundamentals contributed, such as the rally in the nearby hydrocarbon complex due to potential military movements against Iraq and the favorable reports on the economy recovering.

“Natgas, along with the rest of the energy complex, resembles a runaway freight train, and it’s tough to be anywhere but on board,” said Levine. “Better to be watching from the station than standing on the tracks.”

It was a herd mentality that set this thing in motion and it took $3 to make it stop. Many observers are now expecting prices to come back down to earth. Speculative short positions have been reduced so there’s not as much potential demand in the market. Evans believes the next CFTC Commitment of Traders report will show a much smaller net short position of less than 10,000 contracts.

Ed Kennedy of Pioneer Futures said he’s expecting prices to fall nearly as rapidly as they have risen, which they apparently started to do Wednesday following the AGA report. “It’s going to be a profit-taking type correction. But I doubt you are going to get much below $2.50, to be honest with you, on any correction. I know that sounds like blatant heresy with everyone being so bearish out there, but the market is telling you the bear market is over.”

Evans, however, thinks many observers might be in for just as much of a surprise on the downturn as on the rally to $3. “Today’s price action was an indication that something is changing here in terms of either the short vulnerability or perhaps producer patience. I say that because we did get a bullish AGA report because 140 Bcf was the top of the range of expectations. It was higher than last week’s number and almost double the withdrawal from a year ago. And yet, prices sank to a new low. This bearish reaction in spite of bullish news, I think, is a warning sign that maybe the run to the upside is over, and now we have to figure out what the gas is actually worth. I do think it’s going to come down hard.”

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