The January gas futures contract on Monday opened 46.1 cents lower than where it settled on Friday and ended the day down 26.7 cents at $6.954, helped in large part by the capture of Saddam Hussein and the subsequent decline of the entire petroleum complex. But the day’s futures trading left more questions than answers.
January gas futures still ended the day up 39 cents from the low of $6.56 reached in prior Access trading. The contract also settled only 8.6 cents off its daily high of $7.04 and ended 21.4 cents up from its daily low of $6.74.
It’s really hard to tell what to make of this market, said Tim Evans of IFR Pegasus. “At least this was a little bit of a quieter session in terms of range,” he noted. “We’re chopping sideways around this $7 area, which suggests that we may have reached at least a temporary equilibrium in this market.”
Evans also noted that much of the fuel that produced the soaring prices last week may have been expended. The non-commercial traders, or funds, as of Dec. 9 were net short 16,721 contracts with a weekly change of 25,045. The net short position of the funds has dropped from a Nov. 18 peak of 52,684 contracts, which was the highest net short position since January 2002.
“That was a heavy short position and if you’re running a Senate investigation of what happened here certainly that Commitments of Traders information is a big piece of the equation,” he said (see Daily GPI, Dec. 15). “These funds were heavily short and…ran a foolish risk for this time of year [and lost].
“What the recent experience would suggest is that these people [the funds] are basically stupid animals who only pay attention to price trends, and so because the price trend in their view was still to the downside they were willing to hold these massive short positions right to the brink of winter.”
He noted, however, that the funds weren’t all holding short positions. In fact, as of Dec. 9 they also increased their long positions. It remains to be seen if they will go net long with prices already at $7 and with frequent 60-cent daily trading ranges. It might be wise to reevaluate the market’s direction over the next week or two before taking a position. In fact, that’s exactly what some brokers are telling their commercial clients to do right now.
“It’s perfectly OK to sit this one out,” said Jay Levine of Advest Inc. “Unless and until you get a better handle on what’s happening — direction — or unless you have to be in the market (most of my clients do), take a breather as the market grapples with winter weather, Congressional inquiries, Saddam Hussein and the next round of storage releases. Whatever your opinion, the early trend is showing colder-than-normal temps coupled with larger-than-expected withdrawals. That combo might lead to further investigations, but it might just as well also lead to sharply higher prices, fundamentally justified or not.”
Although prices have soared to phenomenal heights already this winter, there is significant uncertainty regarding the winter going forward mainly because there is no consensus on the weather forecast. There are still equal chances for a warmer than normal or a colder than normal winter for most of the country, according to the National Weather Service. So far the winter has had 9% fewer heating degree days than normal.
“It’s too soon to tell where we are going this winter,” said Evans. “It’s a dice roll for the market.”
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