With one eye transfixed on this week’s expiration of March options and futures, natural gas traders played it cool Friday as they lifted the market off its early lows to post the week’s fourth straight session described by a higher high and higher low on the daily chart. The March contract closed at $2.449, up 2.4 cents for the session and 24.3 cents for the week. As it had been all week, volume in the gas pit at Nymex was heavy Friday, with an estimated 96,779 contracts changing hands.

Traders polled by NGI were quick to point to cash prices, which for the most part resisted a downturn ahead of the weekend, as a contributing factor to the futures strength Friday. NGI‘s Henry Hub price on Friday averaged $2.40, up a penny from Thursday. Although much of the East was still basking in above normal temperatures Friday, that is expected to change this week. Cool air is expected to invade the northern and central Plains on Monday, and by Tuesday blue and pink will dominate weather maps of the U.S. Further out on the horizon, the National Weather Service expects the arctic air to stick around through the first week of March before being pushed out to the Atlantic by a more seasonal air mass.

Looking back at the week that was, one seasoned risk manager was impressed by the market’s ability to rebound in a 30-cent move off the $2.155 low notched Feb. 15. “Considering the overhang in storage and the quantification of the slowing economy, this is not a bad move — especially considering you are entering a shoulder period. There are a tremendous number of folks out there that keep in the back of their mind that the low for the last five to seven years has been realized in the first quarter.”

Although weather certainly helped to set it in motion, the rally last week was augmented in no small part by continued short-covering by the speculative fund segment of the market. According to the latest Commitments of Traders data released Friday by the Commodity Futures Trading Commission, non-commercial funds had decreased their short holdings by a net 12,755 positions during the week ending Feb. 19. The group is now net short 27,687 positions, less than half the peak exposure of 62,643 held just four weeks ago. “By violating the four-day moving average we have put the funds’ short positions in distress and that certainly forced them to cover a certain percentage of those positions this week,” the risk manager said. After opening the week below its 40-day average, the March contract quickly moved above it and proceeded to spend the rest of the week above that important technical level. On Friday, the 40-day moving average for March was $2.267, nearly 20 cents below the market.

However, the funds were not the only market-movers last week. Also a factor, traders agreed, was UBS Warburg, which began trading energy this month with its staff of ex-Enron traders and its EOL-reincarnated online trading platform. “You can feel them…Heck, I could almost smell Warburg out there in the market this week,” the risk manager continued. “They were pulling some old Enron shenanigans….making their move in non-volatile, low-liquidity periods, pushing prices through some key technical levels in Access trading — either early in the morning or late at night. Knowing that if they push the market by a certain amount, it will spawn a wave of follow-through the next morning when people with certain risk profiles are forced to react. We haven’t really had any of that for the month or month-and-a-half that [Enron] was out of the market. Now, through talking with 10 or 12 counterparties that are up and running with Warburg, it is clear that they are back in the ring.”

Now that the Enron factor has resurfaced, traders believe there exists the potential for the March contract to gap above $2.52 on Monday. Because there are more 10,000 $2.50 calls, a move above the $2.50 level would prompt the sellers of those calls into the futures market to delta hedge their option positions. “The opportunity is too ripe for them not to try and push it. The only thing that could intercede is if the weather forecasts are revised between now and then,” the aforementioned risk manager said.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.