Boosted by what may be the most bullish weather forecast to hitthe industry in years, natural gas futures spiked dramatically inmultiple buying surges last week as traders pressed the envelope oftheir long exposures.

When all the dust had cleared, orders tabulated and heartmedication taken, the numbers were staggering. The January 2001contract gained $1.911 last week to close at $8.584, the highestsettle in the commodity’s 10-year history. A new all-time high wasalso achieved last week, when prices spiked to $9.539 ($9.00 if youinclude only the regular open outcry sessions) in Access tradingearly Thursday morning. In fact, the price action was so dramaticthat twice last week Nymex was forced to raise margin requirementsto keep pace with the escalating price level. Then on Thursday,Nymex changed the rules pertaining to trading halts that areinitiated when the market moves too much, too fast in onedirection.

According to esteemed industry weather forecasters Jon B. Davis andMark Russo of Salomon Smith Barney, the myriad of computer modelsMonday morning were pointing to a massive Arctic air mass surging fromthe Polar regions down into the U.S. [this] week. “This air mass isextremely impressive and is expected to be in the range of about 1050millibars (the standard unit of measurement for atmospheric pressure)when it moves into the Northern Rockies…. Keep in mind that we havenot had an Arctic air mass this strong move into the lower 48 duringthe past four winters,” they wrote last Monday in SSB’s daily EnergyWeather report aimed at heating oil and natural gas markets (see DailyGPI, Dec. 5).

In an update Friday, the Salomon Smith Barney meteorologistssaid their forecast remained unchanged. “Everything is the same.The bulk of the cold remains across the western and central U.S.The East Coast will get it on the outer fringes,” Russo told NGI.The frigid temperatures will hit the West first, and then moveSouth and East “as you go through the week.”

To go along with that bullish demand-side outlook, the supplyside was not much better last week. According to the American GasAssociation, 73 Bcf was pulled from underground storage facilitiesthe week ending Dec. 1, bringing working gas levels down to 2,429Bcf, or 74% full. Compared to the 70-100 Bcf range of expectations,the draw-down was on the bearish side. However, for the majority oftraders it was construed as bullish because it outdistanced the 69Bcf net takeaway seen last year at the same time causing theyear-on-year deficit to surpass the 500 Bcf mark for the first timesince February.

Looking ahead, Susannah Hardesty of Indiana-based EnergyResearch and Trading has raised her price objective for the Januarycontract from the $8.00 to $10.00 range to the $11.00 to $13.50range contingent on the current weather forecasts holding for theupcoming two weeks. Her forecast is based on an extrapolation ofhistorical price moves that came during comparable winter weatherin 1995 and 1996. “..we need to be on constant vigil foridentification of the D3 high. My best guess is that it will comeshortly after Jon Davis and Strategic Weather Service confirm areversal in the jet stream to a more zonal pattern allowing weatherpatterns to abate for the short term. Best guess is that by thetime we get technical confirmation, the market could have dropped$1.00. So, with that in mind we will want to sell a portion as wethink we are near or at the top, and the remainder when we getadditional confirmation that the top was made.

Jerry Rafferty of New York-based Rafferty and Associates is alsobullish, but does not rule out a move lower in the short-term. “Themarket might easily fall, but it has a long way to go before wewould throw in the bullish towel. We have no problem sellingcontracts to buy them back at lower levels. If there is ashake-out, we want to be buyers against the better supportnumbers… Basically, after making a new high, natural gas closedlower. Many times these signals become signs of key reversals. Thismove up has been so steep [that] a correction, even a sharp one, ishardly unexpected. We can take a chance at the sell side, risking aviolation of 9.00, but as long as the major support numbers hold weremain bullish.”

In this world of high price volatility and $9.00 futures pricesit was only fitting that on Friday traders were rolling the dicethat prices would more than double. A Houston-based risk managerwas astounded by the interest (volume of almost 6,000) in $20.00call options. “For two cents, you could buy a call [Friday] of morethan twice the current market value with a very short time decay.This is the closest thing the energy market has to a lotteryticket. a very expensive lottery ticket,” he mused.

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