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Enron’s Absence Helps Prop Up Futures, Cash Markets
Many observers have been scratching their heads lately over the inability of the futures and cash markets to show significant declines despite overwhelming fundamental reasons to do so. There’s been very little cold weather to speak of this heating season and gas storage levels are at record highs with 37% more gas in storage than at the same time last year, yet January gas futures remained in the mid $2.60s on Tuesday, down only 2.9 cents on the day to $2.657.
The near-month futures contract did dip to $2.635 and closed near its low for the second day in a row, indicating further weakness is likely. However, with so much bearish weight hanging over this market, you have to wonder why prices haven’t crashed back to the $2 level or lower by now.
According to Ed Kennedy of Florida-based Pioneer Futures, there are a few unusual problems that are holding up prices and they all relate to Enron’s collapse.
“We’ve lost some liquidity in the futures market with Enron going belly up,” said Kennedy. Enron was the energy industry’s largest risk management company, and all of its customers are out looking for a new company to provide futures brokering and risk management. In the meantime, less business is being done.
“That’s a situation that’s going to rectify itself very shortly as the people Enron was doing business for establish new lines of business with other [futures brokers] or marketers such as El Paso, Dynegy or Duke or whoever,” said Kennedy. “It’s significant if you’ve been trying to get orders done on the Nymex over the last few weeks.”
But that doesn’t explain why the cash market is holding up so strongly. Nevertheless, there is something similar going on in cash, said Kennedy. “We got word on this at the end of last month,” he said. “A lot of producers and marketers didn’t want to sell Enron gas because they were worried about being paid. That mushroomed into Enron turning around and canceling a lot of their baseload contracts with the utilities. Those people are in the market now trying to compensate.
“Up north, their load so far this winter is down about 45% from last year. They didn’t need great quantities of gas, but they needed some quantities of gas, so that’s artificially propped the market up.”
The other factor Kennedy mentioned apparently has begun to get worse recently. The fallout from Enron’s collapse has been much worse than many expected. It’s hitting every corner of the industry, and the cash market certainly is no exception. But the impact has been far from clear until recently. With energy stock prices plummeting and several other large marketing and generation companies under much closer scrutiny on Wall Street and in Washington, DC, buyers, including utilities across the country, are not pulling anywhere near what they did last year from storage. Weather certainly is a major part of the reason. However, confidence in future gas supplies is another part, Kennedy said. “They are still not comfortable on the guarantee of supply for the rest of the winter because of the financial situation with the marketers, so the incremental demand has been building in cash.
“This is a situation, I think, that is temporary,” he said. “As soon as they start pulling again from storage and realize they still have 3 Tcf in the ground — and by the end of this month, I’ll bet you dollars to green apples we’ll have 1 Tcf more in storage than we had at the same time last year — [prices will fall further]. I think we are going to have to wait until after the January expiration for all those reasons to go away,” he added. “Then I think this market becomes incredibly vulnerable to the downside.”
He predicts January will expire between $2.40 and $2.50 next week. But $2 or lower is a “distinct possibility” for the February contract, he said.
In the immediate term, the market will have to weigh the effects of a likely bearish storage report on Wednesday with new weather forecasts from the National Weather Service (NWS) calling for colder than normal weather across the eastern two-thirds of the nation through the beginning of the new year. Tim Evans, a futures market analyst with International Finance Review, is predicting a 50-60 Bcf withdrawal. Lehman Brothers’ analyst Thomas Driscoll said he’s expecting 60 Bcf. Jay Levine of Advest Inc. has heard estimates ranging between 20 and 80 Bcf with most around 70 Bcf. He’s predicting an 85 Bcf draw. But you could make it 120 Bcf and it still would be far short of the 158 Bcf of gas withdrawn during the same week last year. “Most everyone still expects the market will crater,” Levine said. “I just don’t see it that way, even though it is fundamentally justified. It is the timing, in my opinion, that is off. Psychologically, coupled with everyone expecting the market to get trashed, it is still a bit too early in the season.”
He said Tuesday evening prior to Access trading that he sees initial support in the $2.59-62 area and sees $2.69-72 as an area of initial resistance. “[The] bias remains down, but [I] would be on alert for [a] surprise, catching (bears) napping waiting for the shoe to drop. It should drop, but [I] doubt it will be tomorrow. Any quick move, particularly after AGA, will be brief, and holiday market activity should flatten out any substantial move either way, and I continue to advocate selling what volatility is left in January,” he said.
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