After starting the week on Monday with a 37.8-cent rally, the September natural gas futures contract finished the week Friday with a continuation of Thursday’s selling spree. The front-month contract shaved another 6.9 cents off its value during Friday’s regular session to close at $3.674, up only 2.1 cents from the previous week’s close.

Following Monday’s mercurial climb back above the psychological $4 pivot point, some traders were wondering whether the rally would be the one to actually take. After it hovered in Tuesday and Wednesday action, traders got their answer Thursday when a larger-than-expected 66 Bcf build led to a 29.9-cent drop.

Crude futures likely helped natural gas find its way lower as September crude on Friday dropped $1.01 to close at $70.93/bbl. However, even with Friday’s decline, front-month crude futures still finished the week $1.48/bbl above the previous week’s finish.

“Crude could have had something to do with the drop in gas futures, but gas really had no business being above $4 to begin with,” said Steve Blair, a broker with Rafferty Technical Research in New York. “It really does not surprise me. The storage picture has not changed and there are no Atlantic tropical storms to talk about. The fundamentals do not support the market rallying. Everyone was surprised by the jump higher on Monday. People are still trying to figure out what happened. I’ve heard everything from it being a huge market order, to it was a huge market order placed in October but meant for September, which ran the market into stops. Another of the rumors was that it was a huge fund liquidating. I’m not sure any of these really fit.

“From a technical perspective major resistance appears to be up around $4.380 and $4.600, but before we get there I think we are back in the range that we’ve had for sometime between $3.500 and $3.900. I see more of the same until the time we see some sort of tropical activity. There are forecasts for some cool weather to come into the East early next week, which could increase the downward pressure on this thing. There just is no reason for a rally right now.”

Discussing the recent hearings in which the Commodity Futures Trading Commission (CFTC) has been considering the institution of position limits to rein in excessive speculation in the energy futures markets (see Daily GPI, Aug. 6a; Aug. 6b), Blair said the whole situation is very interesting.

“It’s actually pretty funny. All of the different players like Goldman Sachs, Sempra, JP Morgan and so on say they are all in favor of the CFTC imposing speculative position limits, but on the other hand they are saying, ‘It’s not us, don’t put the onus on the voice brokers, put it on the actual holder of the position.’ I don’t think that is what the CFTC is after here. It’s a tough call. I think the biggest problem is with the market makers like the ones I already listed. They have these index funds that are being granted hedge exemptions, when they are not hedgers in the true sense of what we know a hedger to be.

“There has to be some sort of delicate balance put into place. I think I know what the problem is, but I don’t know how to solve it. The CFTC has to be very careful with what they do here because the speculation creates the liquidity in the market. Without speculators, the true commercial hedgers would not have a liquid market in which to hedge in. I’ll be very interested to see what they choose to do.”

Tom Saal, a broker with Hencorp Becstone Futures in Miami, said it’s hard to know what the ramifications to the markets might be. “I’m from Missouri on this one, which is the ‘Show Me State.’ We have to wait and see what the final ruling from the CFTC is. Word is we might have to wait until this fall for clarity. If they reduce the position levels for speculative traders, I’m not sure we’ll see much of a change in the futures markets. It could decrease intraday volatility, if that is all the CFTC does. However, if the government curtails the speculators in other ways as well, that could actually increase volatility due to the lack of overall liquidity. We’ll have to wait and see how it all shakes out.”

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