Urging market participants to move beyond the traditional risk management tools when trading natural gas futures, Tom Saal, of Commercial Brokerage Corp., said Wednesday that it is important to develop new techniques for identifying price trends and market timing. One pretty good way of identifying a “buy” signal recently has been simply observing how short the funds, or noncommercial traders, are.

Speaking at Natural Gas Intelligence’s two-day natural gas futures workshop held at the New York Mercantile Exchange, Saal said, “When the funds get short 20,000 to 40,000 contracts, buy it.” He said that over the past few years, when the funds have held significant net short positions, natural gas spot prices have usually headed higher.

As examples, Saal pointed to January and May of 2005 when noncommercial traders reached peak net short positions of 55,490 contracts and 45,334 contracts, respectively. Prompt month futures prices in both instances began to climb as noncommercials began to cover their shorts.

Following the significant short position in late January, prompt month futures reached a high of $7.850 on April 4. Likewise, following a similar net short position in late May, prompt month futures began climbing higher, reaching $7.800 on June 20.

The latest futures price increases might not be over yet. Funds and managed accounts represent a potential reservoir of further buying inasmuch as they are still holders of a significant number of short futures contracts. The Commodity Futures Trading Commission (CFTC) reported on Friday in its Commitment of Traders (COT) report that as of June 14, noncommercials were net short 31,753 (futures only) contracts. This is only a minuscule decrease from the 32,957 contracts held a week earlier.

In looking at price prediction, Saal said there could be a little more room to the upside as speculative traders could be motivated buyers. In fact, Saal looks forward to seeing fresh COT data this Friday, which includes market activity through June 21.

“I wouldn’t be surprised if funds covered 15,000 to 20,000 of their short positions on Wednesday, Thursday and Friday,” he said. During those three days last week, July natural gas climbed 46.2 cents.

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