After spiking to a new, all-time high Tuesday, natural gas futures reversed lower Wednesday as spread- and options-related selling pressured March futures lower on their expiration day. March ended its tenure as prompt month at $9.133, down 44.4 cents for the session and $2.766 off its $11.899 high notched just 30 hours prior.
But while the March contract exhibited an up-then-down price action over the last two days, the April contract was a mirror image. April finished at $7.39 Wednesday, up 80.6 cents for the session.
Traders were quick to point to spread trading as a primary reason for the topsy-turvy trading activity at Nymex Tuesday and Wednesday. After trading as tightly as 25 cents during the past week, the March-April spread blew out to $3.10 Tuesday morning, local trader Eric Bolling noted.
“The spreads have been absolutely unbelievable,” he said. “Traders sold the March-April hard in overnight Access trading. By the time the regular session opened Wednesday, the market looked like it was reeling from a hangover. [Locals] have been beat up and are worn out. There was no leadership in either direction [Wednesday]. Just choppy trading.”
Also of influence Wednesday, traders agreed, was options-related futures selling as holders of exercised call positions liquidated their futures length. That influence came in stark contrast to the options-related futures buying seen Tuesday as sellers of those same options bought futures to delta hedge their suddenly in-the-money call options.
Noting that he has never seen a market like this in 20 years of futures trading, Bolling did not pretend to know which way the market is heading. While, the gains in the April contract were impressive, he tends to believe they were just an expiration-day phenomenon. Accordingly, he is willing to bet that the spreads will continue to contract and squeeze the more than $1.00 differential that exists between April and May. To put his money where his mouth is, Bolling holds an April-May-June butterfly spread, which means he is short one April and one June contract and long two May contracts.
Part of his rationale for being short April and long May stems from his sense that fund traders — in an effort to minimize their margin requirements — typically roll their prompt month positions into the next month during the fifth through tenth business days of the month. If he is correct and funds do sell April and buy May, it could help to narrow that spread, which ended Wednesday at $1.16.
Looking ahead, however, spread- and options-related machinations will take a back seat to good old fashioned supply data when the Energy Information Administration releases its latest storage report Thursday morning. Expectations ahead of that report call for a net withdrawal of about 160 Bcf, which would easily exceed both the year-ago figure of 73 Bcf as well as the five-year average of 82 Bcf. At 1,168 Bcf, storage is currently 868 Bcf less than at the same time last year and 436 Bcf less than the five-year average.
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