Even the most seasoned commercial gas futures trader is no matchfor the speculator these days. These little known futures playerswith no physical presence in the market have shown a real knack fortriggering major market moves and making big profits. They have agreat track record of buying futures at the market lows and sellingat the highs, while the commercial traders historically havestumbled into their buys near the top of price increases andmistakenly sold near the bottoms – “exactly the opposite way totrade if you want to make any money,” noted Susannah Hardesty ofEnergy Research and Trading Inc.
Clearly there’s something to be gained from examining thebehavior of the speculators and attempting to use theirever-growing presence in the futures market to your advantage,according to Hardesty and Tom Saal of Pioneer Futures, twopanelists at NGI’s GasMart/Power ’99 in Dallas, TX.
“What do they do to you. I’ve heard that they create volatility,that they move the prices away from where they ought to befundamentally, and they also do this:…they suck money out of yourwallet and put it in theirs,” said Saal.
The market currently is chock full of them. As of May 4,according to the Commitment of Traders report by the CommodityFutures Trading Commission, the non-commercials, the speculativefunds, held 15.7% of the total long positions in the market, or anet long of about 48,029 contracts, which is only about 2.3percentage points off their record peak. Their long positionshistorically have ranged from a minimum of 2-3% to a maximum of16-18% of total open interest. “And when they peak out and arestarting to sell or close out of their long positions, generallyspeaking, almost every time the market is at its top,” saidHardesty.
Where they go from here will play a large roll in where futuresprices end up, but the jury is still out on the June contract. Thefunds could roll their positions into July, Saal noted.
“They are very aggressive, dynamic traders and they really makelots of profits in the natural gas market,” said Hardesty. “Theycan sometimes even control natural gas prices much to the chagrinof industry users when fundamentals and the weather situation tellus that prices ought to be going down and you look and they’reskyrocketing instead as they did in the late summer of 1997.”
The market has been on a bull run for several weeks now, butcommercials foolishly have been on the wrong side to profit.”[Commercials] had their maximum long positions at the bottom ofthe market in January and February… Remember when prices got to$2.10-$2.15 in March, there were so many commercials that startedto hedge and sell at that point because we were up so much higherthan we had been at the $1.65 level that they thought this wasgreat. But that was just the first peak of my spring high. It wasjust a trigger point. If $2.10 or $2.15 was a good price to sell,[then] $2.30, $2.40 would be even a better price to sell. What arethey doing?”
Hardesty said one thing speculators are particularly adept at isswing trading, i.e., identifying the breakout of a sideways tradingpattern, like the one the market went through in December, Januaryand February, and jumping in and “getting the biggest bang for theshortest time commitment.”
“When the market enters a long, choppy sideways “congestionphase,” in which prices remain within a 20-cent trading range foran extended period (35 trading days or more)., spec funds stay onthe sideline and wait for an opportunity to jump in when pricesmove up.”
Historically, when futures have moved in lengthy sidewayscongestion phases they have broken out and increased at least 45%,she said, sometimes even as much as 164%. “It’s like you build thishuge vacuum and nothing is being done and suddenly prices start tomove, you get the spec fund activity in there, you get commercialsstarting to buy at a later point, but it creates a tremendousup-move coming out of these congestion phases. Spec funds know it,and they profit from it.”
Despite the growing presence of speculators in the market,Hardesty said they have not significantly altered the historiccyclical patterns she has identified. “I have identified in naturalgas futures prices four major seasonal moves.[that have beenpresent] since the beginning of [gas] futures trading.” Theseinclude a winter low, a spring high, a summer low and a fall high.Hardesty said currently the market is near the second peak of thespring high, which she predicts will come in between $2.40 and$2.51/MMBtu. “Now should spec funds come in at the expiration ofthis current June contract and really come in with a burst ofstrength and cause a squeeze on the short positions of thecommercials, spec funds have the capability of driving that high ashigh as $2.90. I don’t know if it’s going to occur, but I made sureall my clients are long… We’re totally positioned to takeadvantage of it whether it peaks at $2.40 or continues higher intothe expiration of this contract.”
She also expects a final peak of the spring high with a pricerange from $2.40 to $2.60, but she said spec funds could take it upto $3. The time frame for the final peak is from June 7 to June 25.For the summer low, Hardesty sees prices reaching a downside targetof $1.80 before rebounding on a strong hurricane season early nextfall to between $2.50 to $2.85. She expects the final peak of thefall high to be anywhere from $2.80 to $3.40, but with spec fundparticipation similar to what occurred in the winters of 1995, 1996and 1997 “we could have highs in the [near-month] futures contractanywhere from $4 to $5. This is the influence that spec funds canhave.”
Rocco Canonica, Dallas
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