The gas futures market toppled its Berlin Wall last week, atechnical downtrend that has confined trading since December 1996.A number of fundamental factors, including tightening supply andpeaking cooling demand, and some very significant technicalindicators conspired to boost the near month contract up 34.1 centsto $2.528/MMBtu and the 12 month strip up 19 cents to $2.60 fromthe previous Friday.

“I’ve got to say on a short-term basis we were a littlesurprised by the magnitude of this move up,” said John Saucer ofSalomon Smith Barney. “[Thursday] was kind of a wow, but [Friday]was kind of what you would expect. Anytime a market breaks out ofrange like that with that type of range expansion and at that typeof volume, it’s pretty impressive.” On Friday, Nymex gas futuresvolume for the Henry Hub contract set a new record with anestimated 198,806 contracts. The previous record of 168,057contracts was set Sept. 26, 1997, nearly two years prior.

Clearly there was a general realization last week that bullishmarket fundamentals and technical indicators were aligned. On thefundamental side, “I think people are now recognizing the market isa couple of Bcf/d tighter than last year,” said Saucer. “Theaverage size of the gas market is about 60 Bcf/d so taking 2 Bcf/dout of the market causes a huge change at the margin. I thinkpeople are a little bit more concerned about the winter.”

The price gains were not limited to the front months. In fact,the 12-month strip went up 15 cents in two days, Thursday andFriday, to $2.60. “This is not just a short squeeze on the frontend,” said Saucer. “It’s a market where the whole curve is movingup. The winter contracts are quickly closing on $3. You haveJanuary hitting $2.90 and December in the high-$2.80s. I think thefundamentals will be extremely tight even if we just have a normalwinter. I’m not going to suggest the highs will occur during thewinter. You may see them sooner than that. Concerns about thewinter may yield highs long before they are dealing with thewinter.”

Although few if any observers predicted the launch that occurredon Tuesday, there were quite a few bullish factors that presentedthemselves early last week. Crude oil futures played a supportingrole in the rebound despite falling off late in the week. And thehot weather and record power demand triggered significant energymarket jitters.

Many of the nation’s largest power utilities hit demand records.Chicago-based ComEd reached all-time peak demand of 19,940 MW at 4p.m. Thursday, beating Wednesday’s peak of 19,714 MW. But theutility said it did not have to implement any voluntary curtailmentprograms. Power send-out records also were reported by Dayton,OH-based DPL Inc., and Columbus, OH-based American Electric Power.AEP said its three million customers in seven states set a newsummer load record of 19,795 MW. North Carolina-based Duke Powercustomers set a demand record with 17,982 MW Thursday after arecord the day prior of 17,683 MW. Cinergy and PJM power priceswere astronomical at between $350/MWh-$750 MWh.

Meanwhile, most eastern gas cash prices started the week anickel higher. By Wednesday Henry Hub was a dime higher than theprevious Friday and by Friday had jumped well into the $2.40s. NewYork went from $2.38 to $2.60 Friday to Thursday.

“You come into this week and you have hot weather, super strongpower prices, gas cash market prices above index, and that lays theground work for a strong start. Then you have a technicalcomponent,” said Saucer. On Thursday, the August contract gappedhigher at the open and then pulled back. After being unable to fillin the chart gap, it easily held the low-$2.30s. At that point, asudden and tremendous amount of buying occurred. “A lot of it mostlikely was short covering, and that carried us all the way to $2.40Thursday,” said Saucer.

A futures technician with New York-based Trot Trading Corp.agreed the rally was fueled by short-covering but said the battlewas decided earlier in the week when sellers could not retest the$2.10 low from July 12, 1999. “There was hardly anyone willing tosell the market from $2.11-2.17 and that enabled long-term buyersto push their orders higher with confidence,” he said. Long-termbuyers, he explained, represent a combination of commercial andspeculative traders who attempt to capitalize on trends rather thandaily market moves.

“Locals tried and failed three times last Friday, Monday andTuesday to push the market past $2.25,” a Gulf trader added. “Notuntil [Wednesday] was the market able to punch through stubbornresistance there.”

On Thursday, there was a major price-range expansion, whichoccurred on a high-volume of trading with over 100,000 contractschanging hands. “It wasn’t some thinly traded day,” said Saucer.”The sharp rally came on very brisk activity. You would expect tosee some upside follow-through just on the technicals alone, butthen cash broke to $2.45-2.46 [Friday] morning. We had a gap on theopen and this thing was on a tear.”

On Thursday, the contract crossed a major technical threshold atabout $2.38, breaking a downtrend that has existed on the futurescharts since December 1996. Prices escalated from there in waves.”I think [Friday] there were a lot of people who were selling theinitial push up to $2.49,” said Saucer. “They thought ‘oh $2.50,that’s a pretty good number; It’s already too high, blah, blah,blah. Cut it short.’ Then the market came off to $2.43-44. But itwent right back up, and guess what happened when it crossed $2.50?They were covering their shorts, and their buying helped push it to$2.55. Same thing happened this afternoon at $2.55; people startedselling it, and it sold back down to $2.50. But guess what, itbounced back and made new highs at $2.58. I think people have beentrying to sell this because they have been thinking it’s too high,but that’s always a relative way of looking at the market. Gas cantrade anywhere to $1.05 to $4[-plus].”

Despite the major price increases late last week, tradersremained in disagreement on direction this week for the expirationof the August contract on Wednesday. Some feel it might cool off astraders take profits into the settle. However, Tim Evans of NewYork-based Thompson Global Markets believes it is too soon for thisrally to fade. He believes the futures market might try to repeatthe past.

In order to try to pin down a potential top for this rally,Evans takes a look back to the week ending March 19, when pricesbegan to climb from a $1.67 low. By the end of April, prices hadcompleted a 74-cent move to notch a $2.415 high. “Add that to lastweek’s $2.10 low and you’re talking about a potential for themarket to rally to the $2.84 level,” he said.

Evans said if the buying power was there once, it will be thereagain. “Although the market is now statistically overbought in theday market, the speculators are not even close to the maximumamount of long positions they will hold,” he said.

Saucer wouldn’t make any specific price target predictions. “ButI would tell you to go back and look at what happened in 1997during the exact same period of time. 1997 has pretty much been amirror image of this year, both in the ups and the downs, basicallyfrom the first quarter until now. It’s really pretty amazing. InAugust 1997, it went ballistic and traded well above $3.

“If you’ve got good fundamentals and good technicals and thefunds are buying” the sky’s the limit. “[The speculative funds]certainly still have room to buy. Whether they are now still short[is questionable], but remember between February and May they wentfrom being short to being long 50,000 contracts. They certainlyhave the wherewithal to buy a lot of contracts. As of last Tuesdaythey were short 10,000, so if they rebuild their long positionthat’s a lot of buying.”

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