After blasting to a price level not seen in the nearly 13-year trading history of natural gas futures, the March 2003 contract sifted lower Tuesday in another session marked by hyper-volatility and 20+ cent bid-ask spreads. March futures closed at $9.577, up 44 cents for the day, but down almost $2.50 from its new all-time high at $11.899.

At 134,305, estimated volume was extremely heavy on March’s penultimate trading day. The contract will expire at 2:30 p.m. EST Wednesday.

Fueled by high cash prices, low storage levels, pipeline OFO’s and options-related buying, the market blew through its previous high mark of $10.10 set in December 2000 en route to its new $11.899 peak notched in early morning computer-only Access trading. However, the gains in the prompt month came at the expense of losses in the summer strip as spread traders bought March and sold the April through November contracts. April, which will become the prompt month at 4 p.m. Wednesday tumbled $1.038 to close at $6.584. Depressed by losses in the rest of the out months, the 12-month strip fell 55.6 cents to close at $6.031.

Traders were quick to point to strong cash prices, which continued higher at nearly all pricing locations Tuesday. Add to that the combination of a seldom-seen OFO on Transco pipeline and an ominous storage OFO effective March 1. on Texas Eastern and traders had plenty of reason to keep the March contract from suffering the same fate as the out months (see related story).

Also propping up March futures was options-related buying by sellers of $7.00, $8.00, $9.00 and $10.00 March calls, added Tom Saal of Miami-based Commercial Brokerage Corp. “A person selling a $7.00 call option a couple weeks back might have thought there was a one-in-five chance of it being exercised and would not have bought March futures. As the market moved higher, however, they would have been forced to delta hedge their option position by buying futures… As the days to the options expiration increase, the amount futures contracts you need to offset the options position increases,” Saal explained.

Looking at the open interest for March options, Saal may have a point. Combined, the $7.00, $8.00, $9.00, and $10.00 March calls were a lightening rod for activity with a combined open interest of more than 22,000. “As the market moved higher, sellers of those calls were forced into the market as futures buyers,” he continued.

Now that the option-related buying has run its course, however, Saal would not be surprised if there was a whip-saw effect as the proud new owners of their long March futures positions look to liquidate those positions ahead of expiry Wednesday.

On the bullish side of the market, is the potential that some traders will favor taking futures contracts to delivery this month because of the firmness of the Nymex contract.

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