Despite bullish over the counter dealings and a constructiveopening, the natural gas futures market shuffled lower Monday asshort-term traders sold off newly acquired long positions. TheNovember contract notched a $3.02 high shortly after the open thenproceeded lower to its $2.86 low for the session. A late rallybolstered prices near the closing bell to $2.92, a 5.5-cent loss onthe day.

Several traders were surprised by the market’s downward movementat the beginning of a week that is expected to see temperaturesdrop in many gas-demand sensitive Northeast and Midwest markets.However, bulls were somewhat placated by the ability of theNovember contract to make a higher high and a higher low on thedaily charts. Even though we didn’t make a higher settlement, thetechnical picture looks promising, an analyst remarked.

Tom Saal of Miami-based Pioneer Futures agrees that thetechnical picture is looking up following Friday’s 14-cent spike.By settling above $2.81, the November contract pushed above a keylevel on the weekly continuation chart, he told NGI. And while thatundoubtedly gave many discretionary speculators the green lightFriday, Saal believes a portion of the buying may have been done byinflationary hedge funds, irrespective of technical or fundamentalconsiderations. “Ever since natural gas was added to the CommodityResearch Bureau index of inflation back in December of 1995, therehas been a new element in the market, the people who hedge againstinflation. It brought a new type of trader into natural gas, andthese people are either a little long, or a lot long.”

With inflation remaining largely in check lately, Saal, whoreceived his Masters in Economics from the University of Houston,estimates that inflation hedgers have probably only been only alittle long, but that may be changing. Friday, the CommerceDepartment said The Producer Price Index (PPI) rose a whopping 1.1%last month, its biggest jump since September 1990. “Annualized thatis more than 13% in a market that has come to expect growth of2-4%. We have not seen double digit inflation since the JimmyCarter years. I’d say these hedge funds were in the market Fridayand will continue to add to their long positions as long as thereis the threat of inflation.”

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