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Winter Storm, Cold Spooked Futures, Local Trader Says

The spike in natural gas futures prices to record levels Thursday can be directly attributed to the fact that major energy markets are experiencing their first real winter storm of the season with sustained cold, according to Sandy "Trot" Goldfarb, one of the largest natural gas local traders in the pit at the New York Mercantile Exchange.

Speaking at noon on Thursday at NGI's Natural Gas Futures workshop at Nymex, Trot predicted the futures market's afternoon path. "This market could go up on this move to between $15.020 and $15.280," he told attendees around noon EST. "A couple of the big players are caught way short and the market is going to find a way to [draw them out]." The traders had gone short based on earlier market predictions before the winter storm showed up.

In the last half-hour of trading in Thursday's regular session, the January contract hit a new all-time prompt month high of $15.100, unseating the old record of $14.750 that was set by the November 2005 futures contract on Oct. 5. January natural gas ended up settling at a new all-time prompt month high settle Thursday at $14.994, up an incredible $1.294 for the day.

Despite recording another new prompt month high of $15.200 on Friday, the January contract ended up retreating significantly to settle at $14.312, down 68.2 cents from Thursday's close.

Trot said that PIRA Energy issued a report a week-and-a-half-ago indicating futures were going to drop $2 to the $9 dollar area, "but we got the first big winter storm and that's kind of like the first hurricane -- it always tends to drive the market up," he said. "This market's behavior is typical for the first big cold front of the year."

Trot said the Energy Information Administration (EIA) storage report early Thursday, which was slightly bearish, was really a nonfactor because "the weather trumped storage." He added "you can be long and wrong, but if you're short and wrong, you are out of a job." Because of the very tight supply/demand situation, "natgas is the high-rollers table, and the last two years have been the toughest. The volatility is insane. There's a war down there (in the trading pit) every day."

The EIA reported Thursday morning that 59 Bcf was withdrawn from underground natural gas stores for the week ended Dec. 2. The number, which was well within the industry's expectations, was considerably smaller than the 76 Bcf pull that was recorded for the same week last year and the five-year average pull of 74 Bcf.

Looking at how high the market might go this winter, Trot told attendees at the NGI workshop the next move could be $15.49 then $16.46 and then $17.20. "There is no way to predict" it, he said. The problem with forecasting is that the higher you go, the thinner the market becomes. This increases the volatility, he added. Part of the problem is the loss of physical traders following the Enron debacle. There are not enough physical traders to balance out the speculators. "There's a lack of people to take the other side." Traders backed by physical [product] today simply do enough futures to hedge their production, rather than the multiple trades the marketers used to do.

Looking ahead to the rest of the winter, there are two other factors that could spook the market higher. Any sort of supply side shock such as a pipeline outage, allocation or constraint could lead to higher prices. The other would be a pure financial move pushed by margin calls, where short traders would be forced to either meet the additional margin requirement or buy back their shorts.

Trot understands that it is easy to get caught in the emotion of the market. It is for this reason that he has a trading system that he sticks to. "You have to be disciplined," he said. "You have to go into the trading day with defined levels and positions." For Trot, the tool of choice is Market Profile, a technical trading system developed by legendary stock market technician Peter Steidlmayer. Market Profile attempts to predict a market's fair value using its recent history of price action plotted on a graph versus time.

For Trot, the benefit of Market Profile is in its simplicity. "There is only one way to read it," Trot said. "It sends well-defined signals. Other systems can be read differently by different people.

As for why he doesn't study fundamentals, Trot believes that fundamental information out there is already priced into the market. Essentially, it is old news as soon as it is released, he said. Plus, Trot typically talks to approximately 15 people before the open each morning. "Any time there are 12 or more who agree on where the market is going, the market never fails to move in the opposite direction. It's uncanny."

Meanwhile, in the underlying scheme of things, "it's not about fundamentals," according to veteran commodities trading advisor Tom Saal with Commercial Brokerage Corp. "Supply, demand and storage don't matter. People's behavior causes price changes. As long as there are more motivated buyers out there prices will go up." Saal pointed to the 50,000 net short positions of non-commercial traders in the report that came out Dec. 2, saying "those are motivated buyers." And it appears some of them must have bought on Thursday.

Saal, one of the main instructors at the workshop held in the Nymex building at the tip of Manhattan, attributed the "very powerful income effect" which shows up as increased demand and higher prices because people are willing to pay more for their natural gas, and electricity and are building bigger homes requiring more energy. "The economy has been driving electric power and is driving natural gas use. People believe they can afford to pay more. We'll find out when the winter heating bills come in" whether they actually can or not.

Another measure of price is what is the cost of gas. The most expensive gas is gas in storage, Saal said, and the cost of that -- including carrying charges -- now averages about $8.25/MMBtu. "I think eventually we will come back to that level."

As for behavior, Saal produced a chart showing which months of the year had the most recorded yearly highs and lows of spot futures prices from 1990 through 2004. The most annual highs during that time period occurred in December, while January and September were tied for the most annual lows. Just to be confusing the spot crude oil contract showed the most annual highs in January and the most annual lows also in January and in December.

Doug Burns, director of training and development at Nymex, and several local traders took NGI workshop attendees through an after-hours simulated trading session in the "pit." Burns also narrated while attendees watched the natural gas pit trading the next morning as the storage number was announced.

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