In Concert with Oil, Gas Futures Funnel Lower into Bidweek

Amid easing concerns over a heating oil crisis this winter and softer crude oil prices, natural gas futures were lower for the third session in a row Friday as longs headed for the exits ahead of the weekend.

November crude oil was off $1.32 or 3.9% at $32.68, while October natural gas slipped 15.6 cents or 3% to close at $5.131.

After peaking at nearly $38 earlier in the week, crude oil tumbled lower under heavy selling pressure as traders got the news it was highly likely the U.S. would tap into emergency reserves of oil. After the markets closed Friday, President Clinton released 30 million barrels of oil from the Strategic Petroleum Reserve.

For Tim Evans of New York-based Pegasus Group, there are two ways to look at Friday's announcement. From a psychological standpoint, he fears the announcement might be bullish in the short run. "This is a perfect example of sell the rumor, buy the fact. The market has sold off on the expectation of this announcement. For local traders that thrive on chaos, this might be an opportunity to try and take the market higher only to turn around and sell it lower. You also have to ask yourself how does the 30-million-barrel release compare to what was already factored into the market, and the answer to that has to be that it [30 million] was on the low side of expectations. The New York Times coverage [Friday] had it that Secretary of Energy Bill Richardson was advocating a release of 60 million barrels."

However, from a fundamental standpoint, he admits it will likely have bearish implications in the intermediate term as the oil is released on the market over the next month. "You are taking 30 million barrels of oil and adding it to the current API inventory of 285 million barrels. This uptrend in inventory can only have one effect on prices. I would look for the price of oil to reach an intermediate low sometime in the next month at between $28 and $30 per barrel."

While historically the correlation between crude oil and natural gas prices has not been exceptional, lately the two have been trading almost 1 to 1, as both commodities recently hit 10-year highs last week (all-time high for natural gas) before losing ground ahead of the weekend.

"These markets are in phase right now, not only from a fundamental and a seasonal perspective, but they are also in sync technically," adds Evans. And while he is right that both commodities are heading into their key demand period with limited supply, sporting strong uptrends on the charts, there is one key difference that was crystallized in a response by Senate Energy Chairman Frank Murkowski, a Republican, to the President's move Friday.

"My question for the Administration is what political ploy do they intend to perpetrate when the American public realizes there is no strategic petroleum reserve for natural gas? Yes, there are 10 million homes in this country that heat with fuel oil, but there are 56 million homes that heat with natural gas. Natural gas supplies are lower than fuel oil and prices are even higher. Residents will pay from 25-40% higher prices this winter. What will the Administration answer be to these families when they realize natural gas supplies can't come from the Organization of Petroleum Exporting Countries? I suppose it will be 'big natural gas' that will have to be investigated next."

However, now that bidweek is upon the natural gas market, it may be susceptible to other factors than crude oil sympathy buying and selling. First and foremost is the last three-day settlement period, which runs from Monday through the October expiration on Wednesday, and has historically been a period that has seen waves of buying and selling from commercial traders.

"Trade typically waits for the 3-day to either liquidate positions or cover shorts. That way, they can more closely replicate the last three-day average." In this case, Evans believes the pressure will come in the form of selling as traders that have propelled futures higher over the past month, liquidate their holdings ahead of expiry.

On the technical front, Peter Hattersley, of New York-based Rafferty Technical Research notes the October contract is perched precariously just above key technical uptrend support, which Friday came in at $5.125. A break of that level, would likely result in a test of a tight support line drawn on the weekly chart at $5.07. Resistance for October is seen at the contract's high of $5.385.

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