Double-Digit Decline Brings Bears Out of Woodwork

Following on the heels of Thursday's losses, natural gas futures gapped lower on the open Friday as traders took profits on their long positions in sympathy with similar selling in the crude oil pit. October crude finished down 5% on the day at $33.63 per bbl while October natural gas slipped 2.4% to close at $4.880. OPEC was scheduled to meet over the weekend in Vienna to discuss possible production increases (check back with for breaking news later Monday morning).

Also weighing on natural gas futures prices late last week were moderating temperatures across much of Texas, Oklahoma and Arkansas, which diminished gas demand for electric generation. Slipping more than a dime for weekend delivery, Henry Hub cash prices gave futures traders an added incentive to take profits Friday, sources agreed.

"Once temperatures dip below 95 degrees, gas demand decreases exponentially," said Ed Kennedy of Miami-based Pioneer Futures. "The most inefficient electric generators are the last ones to be fired up during hot temperatures and they are also the first ones to be taken out of service when temperatures are moderate."

And because temperatures moderated so considerably from the record-setting Labor Day weekend heat last week, Tom Saal, also with Pioneer Futures, looks for this week's storage injection to be in the 60s. "We have a new seller in the [futures] market," he continued. "Storage operators, who have not been very active in the cash market lately, will use this period of lower demand to buy gas for storage while hedging by selling futures. We're back to a forward carry market, after being in backwardization since May. Finally, it makes economic sense to put gas in the ground," he said. Backwardization is the term used to describe a futures market in which successive months in the future have descending value, which discourages storage injections. Because money has a time value and also because there is a holding cost associated with most commodities, futures markets typically have ascending values for successive delivery months. This is called a forward carry or contango market. At the close Friday this was true for the rest of the 2000 strip as December was at a dime premium to November, which in turn, was at a dime premium to October.

However, even if a 60-something injection is announced by the American Gas Association Wednesday, it will fall conspicuously short of last year's 81 Bcf addition and the five-year average of 79 Bcf, thus renewing concerns that storage is not keeping pace with historical levels. Over the past four weeks, those concerns have been no small matter, and the prompt month has reacted by rising an average of 13.6 cents in trading on Wednesdays.

Looking ahead, technicians target trendline support at $4.84 as the first test to the downside. While that level stemmed Friday's price erosion, sources agree it will likely be retested again this week. For one Houston-based risk manager, however, the middle to upper $4.60s is the breakpoint for this market. "There are plenty of people that are long at an average cost in the upper $4.80s basis the prompt month. Right now those positions are just about even. However, if this thing keeps falling, they will gradually stop out and I expect that selling to intensify once they are down 20 cents or more."

All Night Trading Kicks Off Without a Hitch

The first all-night Access trading session for natural gas futures at Nymex went smoothly last week according to sources. Total volume was 3,832 in the overnight session that ran from 4 p.m. Thursday afternoon until 9 a.m. (EDT) Friday morning. In fact, the only noteworthy feature was the gap lower open on the daily chart Friday, but traders were quick to attribute that to falling cash and crude oil prices rather than anything that happened overnight.

"It is still too early to tell," said Saal. "You can break it up into three trading periods: afternoon, night and morning. Of the three, I expect the morning session, from between say 6 a.m. and 9 a.m. to be the most active, when traders will likely use Nymex rather than the over-the-counter market. It will be interesting to see how much volume increases."

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